Bank Guarantee
July 6, 2022
The bank guarantee implies that the lender will make sure that the liabilities of a debtor are met. If the party or debtor fails to settle a debt, then bank will cover it. A bank guarantee enables the customer (or debtor) to amass goods, buy equipment, or draw down a loan. In other words, A bank guarantee refers to a promise provided by a bank or the other establishment that if a particular borrower fails to pay a loan, then the bank or the institution will be sure of the losses.
Bank Guarantee or letter of guarantee may be a fee-based credit facility extended by the banks to their customers. The non-fund based facilities are the letter of guarantee or letter of credit by the banks wherein banks get fee income and Since there’s no immediate outflow of funds from the banks they’re also referred to as the non-fund based facility. However within the case of non-fund based credit facility, the bank should discharge the financial liability of the contract agreed to the guarantee or documentary credit, if as per terms of the contract is not performed by the customer.
Types of bank guarantee
Various forms of guarantees are issued by the banks on behalf of their customers. Bank Guarantees (BG) is additionally referred to as Letter of Guarantees which might be broadly classified as:
1. Financial Guarantees (FBG)
2. Performance guarantees. (PBG)
3. earnest Deposit guarantee
4. Bid Bond Guarantee
5. Guarantee for Payment of duty (specific or continuing).
6. Advance Payment Guarantee (APG).
7. payment Guarantee (DPG).
8. Shipping Guarantee.
9. Retention Money guarantees.
Are a number of the prominent sorts of guarantees issued by the banks.
Performance Bank Guarantee
Performance Bank Guarantee are issued by the banks on behalf of a Service Contractor, who needs to effectually perform all the conditions of the contract between him and therefore the department/company that awarded the contract. The bank must discharge the financial liability of the contract agreed within the guarantee, if the contract is partly or fully not performed by the customer. Such variety of guarantees issued by the bank is termed Performance Guarantee. many an time the terms of the contract is also of highly technical in nature and bank is usually not expected to understand the technical aspects of the contract.
Therefore the bank always assumes financial liability of the contract. Since the issuance of performance guarantee is more complicated and risky, before issuing performance guarantees, the bank must make sure that the customer has sufficient experience within the line of business and he has capacity and means to hold out the duty under the contract.
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