Bank Guarantees

1. INTRODUCTION
A `Contract of Guarantee' (also known as contract of surety ship) is a contract to perform the promise or discharge the liability of a third person in case of his / her default. There are three parties to a Guarantee.
“Surety” or “Guarantor” The person who gives the Guarantee.
“Principal Debtor” The person on whose behalf the guarantee is given.
“Creditor” or “Beneficiary” The person in whose favour the guarantee is given.
Bank Guarantees are issued to customers of the Bank for obligations such as for construction of building, supply of raw materials, stocks, etc, or to meet the pecuniary obligations.
2. TYPES OF GUARANTEES
Bank issues Guarantees under the following broad classifications.
Financial Guarantees All guarantees issued guaranteeing repayment of a loan or a debt is considered as Financial Guarantees. Such guarantees are those issued in lieu of monetary obligations. Eg: To bid a tender, payment of customs duty, earnest money deposit for dealership etc.
Performance Guarantees These are the guarantees issued in respect of performance of contract or obligation. Although these guarantees are for performance, in such cases, in the event of non-performance of the obligations as per the terms of the contract, the Bank assumes under the guarantee, only monetary liability up to a specified amount, and for a specified period and not due performance of the contracts.
Eg: Construction of building or supply of raw materials etc.
Guarantees for specific transaction A Bank guarantee may be issued to cover a single transaction only.
Eg: Payment of advance deposit of tax.
Continuing Guarantee A guarantee which extends to a series of transactions for a specified amount and period is called a continuing guarantee.
Deferred Payment Guarantee (DPG)
Advance Payment Guarantee (APG) Advance Payment Guarantees are issued for parties to seek ‘advance payment’ from their principals to meet part of the expenses for execution of contracts or to meet a part of the working capital requirements.
3. The following are a few instances where Bank Guarantees are issued
  • Guarantees for due performance of a contract undertaken by a customer in favour Government / Semi Govt./ reputed joint stock companies, Coffee Board etc., for supply of materials, stocks, construction of building etc.
  • Guarantees favouring Customs Authorities to clear goods against payment of duty at confessional rate or provisional assessment of duty.
  • Guarantees to Sales Tax / Income Tax or other authorities for payment of taxes or other dues.
  • Guarantees favouring tax authorities, where dispute regarding payment of tax would be pending in the court / tax appellate authority etc.
  • Bid bonds and tender guarantees in lieu of earnest money / security deposit.
  • Guarantees to Central Excise authorities to enable removal of goods without payment of excise duty or against provisional assessment of excise duty.
  • Performance guarantees for purchase / import of machinery on deferred payment basis.
  • Advance payment guarantees, for supply of raw materials.
  • Guarantees to Banks / Financial Institutions for extending guarantee facilities.
  • Besides the above instances, there may be several other commercial transactions which may involve Bank guarantees.