Basically, a bank issues Bank Debentures as an acknowledgment of debt. Nevertheless, Bank Debentures should not be mixed up or mistaken with Bank Guarantees or Letters of Credit. They are examples of private and confidential notes and they are not publicly traded.When a bank issues Bank Debentures, the Bank Debentureholder becomes creditors for the bank.
In return, the bank pays interest at a fixed and predetermined rate to the Debentureholder. Bank Debenture is a form of debt security instrument. Hence, the Bank Debentureholder does not hold any voting rights.
Since Bank Debentures are more risky compared to Bank Loans (loans given to banks), the rate of return in case of a Bank Debenture is also high compared to a Bank Loan. The banks issue Bank Debentures according to the rules and regulations or in conformance to the law for the purpose of raising funds and the credit extension can either be long term or medium term.
For issuing Bank Debentures, a bank has to file an application to the competent authority. The bank has to submit the application duly completed in a specified form along with the necessary documents mentioned in the application form.
The application for issuing Bank Debentures shall receive approval if the competent authority does not have any objections with that application. For receiving the approval, the Banks have to wait for a certain period of time from the date of submission of the application.
Unfortunately, there are many fraudulent organizations who gives assurances of higher returns in a short time period. They provide "Bank Guarantees" which have been issued by prime banks (the 100 leading banks) and declare that value would be manifolded by multiple numbers of trading. This is termed as a "roll program". The objective of this kind of a scam is to get the money of the investor sent to a foreign bank on which the swindler has control or dominance. The money of the swindled person is then utilized by the fraudulent organization or it is used for money laundering.