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What is Bank Guarantee?
A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee 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. It enables the customer (or debtor) to acquire goods, buy equipment, or draw down a loan. Types of Bank Guarantee:-
1. Performance Guarantee: It is regarding the performance of an act in the contract. If the applicant cannot perform as per the contract, the loss to accrue to the beneficiary will be recovered by the issuer bank.
2. Financial Guarantee: This guarantee is used in those contracts where the applicant must furnish security to the beneficiary. Thus, the applicant provides the beneficiary with a financial guarantee when financial security is given.
Need for Bank Guarantee Draft Format
A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity. There are different kinds of bank guarantees, including direct and indirect guarantees. Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary. Direct guarantees apply when the bank’s security does not rely on the existence, validity, and enforceability of the main obligation.
Tt is considered to be important owing to the following reasons: –
- It is a security for the beneficiary since his funds flow from the applicant are secured.
- When small vendors deal with larger business players, they must furnish a bank guarantee. Thus, to ensure business, it becomes necessary for them.
- Getting a security issue shows a bank’s trust in the applicant. Thus, his credibility increases.
FAQs for Bank Guarantee
Q1. What is the advantage of a Bank Guarantee?
Ans – A bank guarantee is an assurance to a beneficiary that the bank will uphold a contract if the applicant and counterparty to the contract are unable to do so. Bank guarantees serve the purpose of facilitating business in situations that would otherwise be too risky for the beneficiary to engage.
Q2. What are the types of bank guarantees?
Ans – Types of Bank Guarantees
- 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 Bank Guarantee. etc
Q3. What is the Bank Guarantee validity period?
Ans – Usually, the limitation period for Bank Guarantees in India is 12 months over and above the Expiry date of the bank Guarantee If a claim is not filed on a Bank Guarantee within this period, it expires. Its expires under one of the following conditions: It is not invoked within the validity period of the guarantee.
Q4. Is the bank guarantee refundable?
Ans – As soon as the applicant pays his/her dues to the seller within the stipulated time frame, the bank guarantee becomes null and void.
BANK GUARANTEE SAMPLE FORMAT
B. G.No _____
Date:_____
M/s. ______
Dear Sirs.
In consideration or M/s. ________________________________________ having its registered office at __________________________________________________________ having agreed to pay M/s. _____________________________________________________________ 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. ______________________________________________ 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. _____________________________________ 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. ___________________________________________ the amounts due and payable under this Guarantee, without any demur, merely on receipt of a written demand from M/s. __________________________________________________________ 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.________________________________________________________ _____ 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. ____________________________________________ 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. ______________________________________________ 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. ___________________________________ serves upon us a written Claim or Demand on or
before ________
Date: _____
Place: _____
SEAL:
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