2. Bank Guarantee
A contract to perform the promise or discharge of
liability of a third person in case of his default.
“An important criterion for judging the soundness of a
banking institution is the size and character, not only of its
assets portfolio but also, of its contingent liability
commitments such as guarantees, letters of credit, etc.”
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3. Bank Guarantee
“Bank guarantee is the commitment given by the issuing
bank (Guarantor) to the beneficiary. If the claim is made
by the beneficiary within the guarantee period and as per
the terms and conditions of the bank guarantee, then the
bank should make the payment without fail and also
without any delay.”
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4. Bank Guarantee
Banks issue guarantees on behalf of their customers
for various purposes.
The guarantees executed by banks comprise both
performance guarantees and financial guarantees.
The guarantees are structured according to the terms
of agreement, viz., security, maturity and purpose.
Courts will not interfere in the functions of a banker
with regard to bank guarantees issued by them.
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5. Ghosh Committee Recommendations-
Shri A.Ghosh – the then Dy.Governor ,RBI
Bank Guarantees should be issued in serially
numbered security forms
While forwarding the BGs to the
beneficiaries, caution them to verify the genuineness
of the guarantee with the issuing bank.
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6. Constituents of Bank Guarantee
Three parties to the guarantee :
Party gives guarantee – Surety
Party on whose behalf guarantee is given – Principal
Debtor
Party in whose favor guarantee is given –
Creditor/Beneficiary
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7. Advantages of Bank Guarantee
The cost of servicing guarantees is significantly less than
the cost of bank lending
The expansion of company’s foreign trade operations
opens new international markets and enlarges the circle
of foreign partners
Bank guarantees provide favourable conditions on which
to work with the suppliers — receive or extend payment
deferments from manufacturers, increase the
procurement volume of goods and receive additional
discounts for purchased products.
Reduction of risks inherent in transaction.
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8. Types of Guarantee
Direct Bank Guarantee - issued by the applicant's bank (issuing bank)
directly to the guarantee's beneficiary without concerning a correspondent
bank
Indirect Bank Guarantee - with an indirect guarantee, a second bank is
involved, which is basically a representative of the issuing bank in the
country to which beneficiary belongs.
Financial Guarantee – e.g. –Tender Deposit, Sales Tax
Payments, Retention Money
Performance Guarantee - one of the most common types of bank
guarantee which is used to secure the completion of the contractual
responsibilities of delivery of goods and act as security of penalty payment
by the Supplier in case of non delivery of goods.
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9. Types of Guarantee
Advance Payment Guarantees - mode of guarantee is used where the
applicant calls for the provision of a sum of money at an early stage of the
contract and can recover the amount paid in advance, or a part thereof, if
the applicant fails to fulfil the agreement.
Credit Card Guarantee - issued by the credit card companies to its
customer as a guarantee that the merchant will be paid on transactions
regardless of whether the consumer pays their credit.
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10. Bank Guarantee Used In :
Foreign Airlines/IATA -on behalf of Indian agents of foreign
airline companies who are members of International Air Transport
Association (IATA), in favour of foreign airline
companies/IATA, towards their ticketing business.
Service Importers
Commodity Hedging -hedging of his commodity exposures in
overseas markets
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11. Safeguards to be followed for Bank
Guarantee
Issued in security forms from serially numbered to
prevent fake guarantees
Should not be issued to customer who do not have
credit facilities with the bank but only maintain
current account
Should be issued in Triplicate
Copy to Branch ,Beneficiary , Head Office
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13. Guidelines for Guarantee Business
No bank guarantee should normally have a
maturity of more than 10 years , though in some
fields, it has been allowed to extend beyond 10 years.
While issuing such guarantees, banks are advised to
take into account the impact of very long duration
guarantees on their Asset Liability Management.
Further, banks may evolve a policy on issuance of
guarantees beyond 10 years as considered
appropriate with the approval of their Board of
Directors.
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14. Guidelines for Guarantee Business
Bank Guarantees (BG) comprise both performance
guarantees (PG) and financial guarantees (FG) and
are structured according to the terms of agreement
viz., security, maturity and purpose.
As a General Rule, bank guarantees shorter
maturities and leave longer maturities to be
guaranteed by other financial institutions.
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15. Precautions for issuing guarantees
Avoid giving unsecured guarantees in large amounts
for medium and long-term periods and such
commitments to particular groups of customers
and/or trades.
For individual constituent, unsecured guarantees
should be limited to a reasonable proportion of the
bank’s total unsecured guarantees and constituent’s
equity.
Banks can give deferred payment guarantees on an
unsecured basis for modest amounts to first class
customers in exceptional cases.
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16. Can a Bank give Bank Guarantee to
another Bank?
A bank can give BG to another bank on behalf of a client of the beneficiary
bank. Also ,a Bank can give BG to a beneficiary on behalf of another Bank.
For example:
Suppose a client in USA does not accept a BG from an Indian Bank.
What will the Indian supplier do then if he doesn't have an account in a
reputed foreign bank ?
The client will approach an Indian Bank for the BG. The Indian Bank will then
approach a reputed foreign bank for the counter BG. The foreign Bank will
issue a BG in favour of the client on behalf of the Indian Bank.
Alternatively, the foreign bank, instead of issuing a BG, can stand guarantee to
the BG issued by the Indian Bank to the client in USA
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17. Bank Guarantee in Export Business
The issuing bank issues a letter of credit reflecting the
terms of the sales agreement and forwards it to the
confirming bank.
The confirming bank checks it for authenticity, adds its
own guarantee and forwards it to the exporter.
The exporter collects documents proving that he shipped
confirming goods -- such as an inspection certificate
issued by a shipping company -- and presents them to the
confirming bank along with the letter of credit.
The confirming bank pays the exporter, the issuing bank
pays the confirming bank and the exporter pays the
issuing bank.
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18. Co-Acceptance of Bills
Under this facility banks accept commercial usance bills
drawn on their constituents which would enable the latter
to enjoy credit which otherwise the seller will not be
willing to extend.
In this facility the banks add the strength of their name
and no finance is envisaged
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19. Co-Acceptance of Bills
Limits for co-acceptance of bills will be sanctioned by the banks after
detailed appraisal of customer's requirement is completed and the bank is
fully satisfied about the genuineness of the need of the customer.
Customers who enjoy other limits with the bank should be extended such
limits.
Only genuine trade bills shall be co-accepted and the banks should ensure
that the goods covered by bills co-accepted are actually received in the
stock accounts of the borrowers. The valuation of goods as mentioned in
the accompanying invoice should be verified to see that there is no
overvaluation of stocks.
Before discounting/purchasing bills co-accepted by other banks for Rs.2
lakh and above from a single party, the bank should obtain written
confirmation of the concerned controlling office of the accepting bank.
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20. Co-Acceptance of Bills
Banks are precluded from co-accepting bills drawn
under Buyer's Line of Credit schemes of financial
institutions like IDBI, SIDBI, PFC etc.
Similarly banks should not co-accept bills drawn by
NBFCs. Further, banks should not extend
co-acceptance on behalf of their buyers/constituents
under the SIDBI scheme.
Co-acceptance facilities will normally not be
sanctioned to customers enjoying credit limit with
other banks.
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21. Safeguards
While sanctioning co-acceptance limits to their customers , the
need therefore should be ascertained and such limits should be
extended only to those customers who enjoyed other limits
with the bank.
Only genuine trade bills should be co-accepted and the banks
ensure that the goods covered by bills co-accepted are actually
received in the stock accounts of the borrowers
The valuation of the goods as mentioned in the accompanying
invoice should be verified to see that there is no over-valuation
of stocks.
The bank should not extend their co-acceptance to house bills/
accommodation bills drawn by the group concerns on one
another
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