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Guarantees.

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.

Precautions in Issue of Guarantee.


Issue of Guarantee proposal should be assessed like any other fund base limits. It should be ensured by the bank that the person on whose behalf the guarantee is to be issued would be in a position to fulfill the obligations and honor the commitments under the contract. It should be ensured that the customer would be in a position to reimburse the bank in case the guarantee is invoked. Prior to issue of a guarantee, the terms of contract between the parties must be scrutinized. Guarantee should be for specific amount and for genuine trade and business transactions. Sec20 of B R Act, 1949 prohibits banks fro granting loans or advances to any of the directors or any firm or company in which any director is the partner or a guarantor. How ever issue of guarantees are not reckoned as granting advances within the meaning of Sec20 of the Act.

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.

TEXT & AUTHENTICATION IN B G.


The text of the B G should contain: The name & address of the applicant & beneficiary. A reference to the underlying contract between the parties. In case of performance B G, a clause to the effect that the Bank is liable only to the extent of loss or damage suffered by the beneficiary & not to perform the contract. The maximum liability amount and the period i.e. date of expiry of liability including claim the period. A clause discharging the bank of its liability irrespective of whether the original B G is returned by the beneficiary or not within 30 days of claim period. The B G should be issued on the applicable judiciary stamp paper. If the BG is in favor of Govt. Dept. the standard format (text) drawn by the Ministry of Finance /RBI should be used. The limitation clause should be incorporated at the end of the text.

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.

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