Bank Guarantee
Bank Guarantee
What is Bank Guarantee?
The Bank Guarantee means giving something as security. A bank guarantee is when a bank offers surety and guarantees for different business obligation on behalf of their customers within certain regulations. It is generally a promise made by the bank to any third person to undertake the payment risk on behalf of its customers.
Bank guarantee is given on a contractual obligation between the bank and its customers. Such guarantees are widely used in business and personal transactions to protect the third party from financial losses.
What are uses of Bank Guarantee?
- When large companies purchases from small vendors, they generally require the vendors to provide guarantee certificate from banks before providing such business opportunities.
- Predominantly used in the purchase and sale of goods on 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 from a bank guarantee 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 analysed thoroughly by the bank.
Advantages of Bank Guarantee:
- Bank guarantee reduces the financial risk involved in the business transaction.
- Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit basis.
- Banks generally charge low fees for guarantees, which is beneficial to even small-scale business.
- When banks analyse and certify the financial stability of the business, its credibility increases and this, in turn, increase business opportunities.
- Mostly, the guarantee requires fewer documents and is processed quickly by the banks (if all the documents are submitted).
Bank Guarantee Eligibility and Process:
- Any person who has a good financial record
- BG can be applied by a business in his bank or any other bank offering such services
- Before approving the BG, the bank will analyse the previous banking history, creditworthiness, liquidity, CRISIL, and CIBIL rating of the applicant.
- The bank would also examine the BG period, value, beneficiary details, and currency as required for the approval.
- In certain cases, banks will require security to be provided by the applicant to cover the BG value.
- Once the banking officials are satisfied with all the criteria, they will provide the necessary approvals required for the BG processing.
Financial Guarantee
These guarantees are generally issued in lieu of security deposits. Some contracts may require a financial commitment from the buyer such as a security deposit. In such cases, instead of depositing the money, the buyer can provide the seller with a financial bank guarantee using which the seller can be compensated in case of any loss.
Performance Guarantee
These guarantees are issued for the performance of a contract or an obligation. In case, there is a default in the performance, non-performance or short performance of a contract, the beneficiary’s loss will be made good by the bank. For example, A enters into a contract with B for completion of a certain project and the contract is supported by a bank guarantee. If A does not complete the project on time and does not compensate B for the loss, B can claim the loss from the bank with the bank guarantee provided.
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FAQ
A Bank Guarantee (BG) is a promise from a bank that the liabilities of a debtor will be met in the event that he/she fails to fulfill his/her contractual obligations. BGs are an important banking arrangement and play a vital role in promoting international and domestic trade.
You can avail against 100% Fixed Deposit or against collateral subject to assessment of your previous year performance
- Performance Guarantee
- Bid Bond/Earnest Money Deposit (EMD) Guarantee
- Financial Guarantee
- Advance Payment Guarantee
- Foreign Bank Guarantee
- Deferred Payment Guarantee
You can apply for Trade Online through CIB only if you are a proprietorship firm. Otherwise, please contact your relationship manager for getting Trade Online access.
Letters of Credit ensure that a transaction goes ahead, whereas a Bank Guarantee reduces any loss incurred if the transaction does not go to plan. Merchants involved in the exports and imports of goods will choose Letters of Credit to ensure delivery and payments. In contrast, Contractors bidding for infrastructure projects will prove their financial credibility through Bank Guarantees. Moreover, unlike Letter of Credit, Bank Guarantees protect both parties involved.
How do I know whether I have registered for Trade Online? Trade Online access is not provided by default. If you can see Trade tab at left side of Corporate Internet Banking (CIB) screen, then Trade Online navigation is available. For applying Bank Guarantee through Trade Online, go to Trade > Trade Online > Import > BG Issuance Request.
Clean BG means non-conditional and without any reference to a performance or non-performance
of any act or tour de force.
BG should be assignable and transferable means that this instrument should be worth negotiable
for creating a line of credit.
First installment of payment can be started within 30 banking days of submission of operative BG
in our Bank. The rest payment will be as per project implementation schedule.