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GURANTEE IS A CONTRACT TO PERFORM THE PROMISE, OR DISCHARGE THE LIABILITY OF A THIRD PERSON IN CASE OF HIS DEFAULT. Guarantee is a Non fund base advance to the party by a bank.
Nature & Types of Guarantees issued by the bank:
(1) Government Depts. For fulfillment of contract for supply of goods or for rendering services in lieu of security deposit or tender money. (2) Railway & Airline for payment of freight. (3) Collector of Excise /Customs for payment of excise / custom duty. (4) Shipping companies for delivery of goods without producing Bill of Lading.(its given I exceptional cases where the relative shipping documents negotiated under LC opened by the bank have not been received & the relative bill has been retired).
Performance guarantee.
P E R F O R M A N C E G U A R A N T E E : Its performance contract not involving loan transactions or financial obligations. I Performance with regard to completion of a project within given time frame within agreed specifications. Like construction of building, Installation of Plant & Machinery. ii. Manufacturing and delivery of Plant & Machinery as per the design and capacity. iii. Procurement & supply of material as per specified grades / quantity within stipulated time frame. iv. Guarantee given in lieu of earnest money deposit/ security deposit /tender money deposit to fulfill requirement under Govt. tender supply contract. v. Performance of any other work contract.
FINANCIAL GUARANTEE.
The guarantee which are given to secure loan transactions or financial obligations whereby the guarantor(bank) undertakes to make the payment to the beneficiary within the time limits of a of a stated sum of money in the event of default by the principal debtor to pay / repay in accordance with the terms and conditions of a contract between principal debtor and the beneficiary. i. Guarantees for payment of liabilities towards tax, excise, custom, etc. ii. Guarantee issued in lieu of security deposit/earnest money deposit/ tender deposit to fulfill requirements under bid bonds. Which is also called Bid bond guarantee. Deferred Payment Guarantee: Bank gives guarantee to the buyer of capital goods for purchase of Machinery from local market or for import of machinery in favour of the supplier where by the payment may spill over few years.
General Guidelines on B G.
The bank should confine to provisions of Financial guarantees & exercise due caution in issuing performance guarantee. Longer the duration of guarantee, higher are the risk factors. Therefore banks should guarantee for shorter maturities. The Bank can normally issue B G for not exceeding 10 years. Precautions: Bank should avoid issuing unsecured guarantee for a longer duration as well as for larger value. Also bank should avoid over exposure on a particular group of companies besides exposure on particular industry. This should be within the prescribed exposure norms as per Banks credit policy. Unsecured B G should be restricted to specific constituent s within over all portfolio of unsecured B G. Also unsecured B G portfolio within total B G portfolio should be restricted. Once the B G is invoked, he payment to the beneficiary should be honored immediately without delay unless there is a court order restraining the payment.
Amendment in a Guarantee.
Sometimes customer / beneficiary may ask for amendment in the B G which normally pertain to : Change in condition; wording of a clause of Guarantee; Change in amount; Change in expiry date etc. Such amendment may be carried our by the sanctioning authority at the written request of the customer subject to evaluating the appraisal note for issuing the B G. Normally on expiry of BG , the beneficiary submits the letter confirming cancellation of the guarantee, stating that the original guarantee , dully cancelled, is retained with them.