How to Get Bank Guarantee in India
A bank guarantee 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. The bank will assure the original creditor through this bank guarantee that if the borrower does not meet his or her liabilities, then the bank will take care of them. Bank Guarantee Bank Guarantee 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. This guarantee helps a company to purchase things that it ordinarily could not, thus helping business grow and promoting entrepreneurial activity. For Example- Xyz company is a newly established textile factory that wants to purchase Rs.1 crore fabric raw materials. The raw material vendor requires Xyz company to provide a bank guarantee to cover payments before they ship the raw material to Xyz company. Xyz company requests and obtains a guarantee from the lending institution keeping its cash accounts. The bank essentially cosigns the purchase contract with the vendor. If Xyz company defaults in payment, the vendor can recover it from the bank. A bank guarantee is a contract between 3 different parties and they include The applicant (the party that requests a bank guarantee from the bank and borrows from a creditor) The beneficiary (the party that receives a partial guarantee) The bank (the party that agrees to sign and assures payment in case the applicant fails to repay the loan) Bank guarantees are very commonly utilised among business entities. With the help of a bank guarantee, the debtor or borrower or customer will be able to purchase equipment, machinery, raw materials, acquire additional funds, etc. for commercial purposes. Bank guarantees help businesses as creditors will get a proper reassurance that the loan amount will be repaid by the bank if the business is unable to repay the loan entirely on time. When a bank signs a bank guarantee, it promises to pay any amount according to the request made by the borrower. Hence, signing a bank guarantee implies a high risk for banks. 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. Kinds of Bank Guarantee Deferred payment guarantee: This refers to a bank guarantee or a payment guarantee that is offered to the exporter for a deferred period or for a certain time period. When a buyer purchases capital goods or machinery, the seller will give credit to the buyer when the buyer’s bank gives a guarantee that it will pay the unsettled dues of the buyer to the seller. Under this type of guarantee, payment will be made in installments by the bank for failure in supplying raw materials, machinery or equipment. Financial guarantee: A financial bank guarantee assures that money will be repaid if the party does not complete a particular project or operation entirely. According to the financial guarantee agreement, when there is a delay in the completion of the project, the bank will make the payment. Advance payment guarantee: Under this kind of guarantee, an advance payment will be made to the seller. There will also be a guarantee that if the seller fails to deliver the service or product accurately or promptly, the buyer will receive a refund of the payment. Foreign bank guarantee: A foreign bank guarantee is provided by a bank on behalf of a borrower. This will be offered on behalf of the foreign beneficiary or creditor. Performance guarantee: Under a performance guarantee, compensation of money will be made by the bank when there is any delay in delivering the performance or operation. Payment will have to be made even if the service is delivered inadequately. Bid bond guarantee: Under this type of guarantee, there will be a supply bidding procedure. This will be conducted by the contractor for the owner of an infrastructure or industrial project or any kind of operation. The contractor of the project will guarantee that the best bidder or the highest bidder will have the capability and authority to implement a project as per his or her preferences. The bid bond will be given to the owner of the project as a proof of guarantee and the bond will imply that the project will have to be devised according to the bid contract. Advantages and Disadvantages of Bank Guarantees Bank guarantee has its own advantages and disadvantages. The advantages are: 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). On the flip side, there are some disadvantages such as: Sometimes, the banks are so rigid in assessing the financial position of the business. This makes the process complicated and time-consuming. With the strict assessment of banks, it is very difficult to
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