Letter of comforts/Letter of undertaking/ earmarking

[dinesh chouhan]

With growth of the large industry and with concept of lead banker in consortium a/c, to monitor the project effectively all the tranasaction are routed through TRA account maintained with lead bank (specifically for long infrastructure projects).

In this cases consolidated letter of credit or bank guarantee is issued by lead bank, supported  by other member banks so called earmarking/LOU/LOC etc.

The similar case also happen in the case of working capital finance the member banks issue the earmarking/loc/lou to the LC issuing banker, if the limit short fall for opening of large value LC from one bank.

 

Now my question is as under:-

1. Whether there should be only a letter from earmarking issuing bank or it should be on stamp paper and in the form of counter indemnity.

2. When the LC will be issued from one bank and other bank will issue earmarking, whom exposure it will be counted.

3. Whether LC issuing bank and earmarking issuing bank both will have to make provision for capital charge on this tranastion.

4. On what portion charges should be taken by LC issuing bank.

5. Earmarking issuing bank should take both commitment and usance charge or only one of that.

Example: LC issued from SBI for Rs 100 cr by detail as under:

SBI own limit: 50 Cr.

PNB earmarking: 20Cr.

OBC earmarking: 20 Cr

EXIM Bank earmarking: 1o Cr.

Please comment

 

[dinesh chouhan]

Please guide on the matter and give your suggession for the same.

I think both the bankers will have to make capital provisions for the exposures, for earmarking banker it will be exposure on the customer and will attract capital charge accordinly, and for LC issuing bank it will be exposure on that particular bank and the capital charges treatment will be accordinly.

I also think that earmarking given on the simple paper has no legal validity, and the same should on the prescribed counter indemnity form.

I also think that in every LC there are two type of charges one is commitment and second is usance, some bank also charge handling charges, and as the earmarking issuing bank has only commitment to pay and all other responsibilty to take first risk, to comply with the guidelines and handling of documents lies with the LC issuing bank, so the earmarking issuing banker should take only commitment charges and the LC issuing banker should recover usance + handling charge of the earmarking amount.

 

Please guide whether I m wrong or right