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letter of guarantee

letter of guarantee

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Published by tanveer
letter of guarantee
letter of guarantee

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Published by: tanveer on Mar 30, 2010
Copyright:Attribution Non-commercial


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Tanveer, MBA (B&F) 3rd Term 2008-2010
Page 1
Letter of guarantee\ue000issuing bank\ue001s risks and obligations
A guarantee is an undertaking given by a person/bank to be answerable for the debt, default or
miscarriage of another person/bank.

A guarantee may be specific or continuing. When the guarantee is specific, the guarantor is answerable for a particular loan only. In case the guarantee is continuing, the guarantor shall promise to pay whole or part of transactions carried out by the debtor.

Characteristics of guarantee
The main characteristics of guarantee are as under:-
\ue000There are three parties in guarantee:

1. Principal creditor
2. Principal debtor.
3. Guarantor.

\ue000 The primary liability to pay the debts falls on the original debtor. The guarantor will pay only the
principal debtor fails to pay whole or part of agreed debt.
\ue000 The guarantor is answerable for the loan if the debtor defaults. Guarantor has no interest in the
contract between principal creditor and principal debtor.
Capacity to contract
The person or firms who are able to make contracts may stand as surety for loans.
\ue001 Minors and persons of unsound mind are not eligible to enter into contract of guarantee.
\ue001 Married women have capacity to contract only against their separate estates. The bank
however should avoid accepting guarantee of married women.
Types of bank guarantee
1.Shipping guarantee: addressed to shipping companies requiring the issue of delivery orders in
the absence of original bill of lading.

2.Financial guarantee. These are guarantees given by the bank to financial institutions (e.g. IDBP) and companies (the creditors or beneficiary) undertaking to pay the debts of its customer(the principal debtors) in the event of the default by the customer.

3.Tender guarantee or bid bonds: These are issued by the bank to avoid the deposit of the earnest money by its customers when they tender for contract. The amount is usually 1% to 20% of the contract value and the duration is for very short period until the bids are opened and the contract awarded. Once the bank issues the bid bond, it is usually committed to supporting the project by issuing further guarantees such as performance bonds etc.

4.Performance guarantee/performance bond: These are issued by a bank on behalf of its customer who has entered into a contract to supply goods or perform other services and the guarantee compensation in term of money in the event of non performance of such contract. It is usually for 5% to 10% of the value of the contract and would remain in force throughout the period of the contract at a constant amount.

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