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What is Bank Guarantee?
A bank guarantee is a type of financial backstop offered by a lending institution. The BG means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer (or debtor) to acquire goods, buy equipment, or draw down a loan.
KEY TAKEAWAYS
- A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.
- Parties to a loan choose direct guarantees for international and cross-border transactions.
- The guarantee provides additional risk to the lender, so loans with such a guarantee will come with greater costs or interest rates.
Need for Bank Guarantee
- When large companies purchase from small vendors, they generally require the vendors to provide a guarantee certificate from banks before providing such business opportunities.
- Predominantly used in the purchase and sale of goods on a credit basis, where the seller is assured of payment from the bank in case of default by the buyer.
- Helps in certifying the credibility of individuals, which in turn, enables them in obtaining loans and also assists in business activities.
Though there are lots of uses for a BG for the applicant, the bank should process the same only after ensuring the financial stability of the applicant/business. The risk involved in providing such a guarantee must be analyzed thoroughly by the bank.
FAQs for Bank Guarantee
Q1. What is a bank guarantee and how does it work?
Ans -Its refers to a promise provided by a bank or any other financial institution that if a certain borrower fails to pay a loan, then the bank or the financial institution will take care of the losses.
Q2. What are the types of bank guarantees?
Ans – Types of BG –
- Performance Guarantee. Performance guarantee is used as collateral in transactions involving a buyer and a seller. …
- Bid Bond Guarantee.
- Financial Guarantee.
- Advance Payment Guarantee.
- Foreign BG
- Deferred Payment Guarantee.
Q3. What is the bank guarantee validity period?
Ans – Usually, the limitation period for BG in India is 12 months over and above Expiry date of the bank Guarantee If a claim is not filed on a Bank Guarantee within this period, it expires. A Bank Guarantee expires under one of the following conditions: It is not invoked within the validity period of the guarantee.
Q4. Can banks refuse to pay the bank guarantee?
Ans- Once it’s issued, the Bank must uphold the BG. It’s an irrevocable commitment to pay the Favouree if claimed upon.
BANK GUARANTEE SAMPLE FORMAT
B.G. No________________________
Date:__________________________
M/s. PM……………………………………………..
Dear Sirs.
In consideration or M/s. PM…. having its registered office at _________________________________ having agreed to pay M/s. CM having its registered office at _________________________________ (hereinafter called the “Contractor”) an advance amount of Rs _______________ under the terms and conditions of the contract No ___________________ dated ___________________ for the supply, of work, (hereinafter called the “Contract”) for the due fulfillment by the contractor of the terms and conditions contained in the Contract on production of a Bank Guarantee of Rs_____________
We, the Bank ____________________ hereinafter called the “Bank”, at the request of the contractor do hereby undertake to pay to M/s. PM on receipt of their written demand an amount not exceeding Rs __________________ against any loss or damage caused to or suffered or would be caused to or suffered by M/s. PM… by reason of any breach by the contractor of any of terms and conditions contained in the contract.
We, the Bank, do hereby undertake to pay to M/s.PM.the amounts due and payable under this Guarantee, without any demur, merely on receipt of a written demand from M/s. PM… stating that the amount claimed is due by way of loss or damage caused to or suffered or would be caused or suffered by M/s. PM..by reason of breach by the contractor of any of the terms and conditions contained in the contract or by reason of the contractor’s failure to perform the said contract. Any such demand made on the Bank on or before _____________________ shall be conclusive as regards the loss or damage and the quantum of amount due and payable under this guarantee, subject however, our liability under the Guarantee shall be restricted to an amount not exceeding Rs______
We, the Bank, undertake to pay to M/s. PM. any money so demanded notwithstanding any dispute or disputes raised by the Contractor in any suit or proceeding including Arbitration proceedings pending before any Court of Tribunal relating thereto and our liability under these presents being absolute, unequivocal and irrevocable.
The payment so mad by us under this Guarantee shall be a valid discharge of our liability for payment there under and the Contractor shall have no claim against us for making such payment.
We, the Bank, undertake not to revoke this guarantee during the currency of this guarantee except with the previous consent of M/s. PM in writing.
Notwithstanding anything contained hereinabove:
1. The liability under this Bank Guarantee shall not exceed Rs ______
2. This Bank Guarantee shall be valid up to______ .and
3. The Bank is liable to pay guarantee amount or any part thereof under this bank Guarantee under and only if M/s. PM serves upon us a written Claim or Demand on or before ______.
Date: ______
Place: ______
SEAL:
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