BANK GUARANTREE – AN EXPLANATION

A bank guarantee is a commercial instrument in the nature of a contract, intended between two
parties, to secure compliance with the contract.

Section 126 of the Indian Contract Act, 1872 defines a “contract of guarantee” as contract to
perform the promise, or discharge the liability, of a third person in case of his default. The person
who gives the guarantee is called the "surety", the person in respect of whose default the
guarantee is given is called the "principal debtor", and the person to whom the guarantee is given
is called the "creditor".

According to section 127 of Indian Contract Act, 1872, anything done, or any promise made, for
the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the
guarantee. It is not necessary that the consideration should be received by the surety.
Consideration between the principal debtor and the creditor is a good consideration for the
guarantee given by the surety.

According to Section 128 of Indian Contract Act, Surety’s liability is co-extensive with that of
the principal debtor. However a surety may limit or restrict his liability by contract. It is the
choice of the creditor to recover the amount either from the principal debtor or from the surety.
The liability, though co-extensive is separate. Bank guarantees are given by banks or financial
institutions.

In simple terms, a bank guarantee is defined as an accessory contract, whereby the promisor
undertakes to be answerable to the promisee for the debt, default or miscarriage of another
person, whose primary liability to the promisee must exist or be contemplated.
 HDFC BANK – AN OVERVIEW

A BRIEF BACKGROUND

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the
private sector, as part of RBI's liberalization of the Indian Banking Industry in 1994. The bank
was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office
in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in
January 1995.

HDFC Bank Limited is an Indian banking and financial services company headquartered in
Mumbai, Maharashtra. It has about 76,286 employees including 12,680 women and has a
presence in Bahrain, Hong Kong and Dubai.

HDFC Bank is the second largest private bank in India as measured by assets. It is the largest
bank in India by market capitalization as of February 2016. It was ranked 58th among India’s
most trusted brands according to Brand Trust Report, 2015.

As of December 31, 2015, the Bank’s distribution network was at 4,281 branches in 2,505 cities
in India, and all branches of the Bank are linked on an online real-time basis. The Bank has
overseas branch operations in Bahrain, Hong Kong and Dubai. Customers across India are also
serviced through multiple delivery channels such as Phone Banking, Net Banking, Mobile
Banking and SMS based banking.

The Bank also has a network of 11,843 ATMs across India.

PRODUCT AND SERVICES

Wholesale banking services

HDFC Bank provides a range of commercial and transactional banking services, including
working capital finance, trade services, transactional services, cash management, etc. to large,
small and mid-sized corporate and agriculture-based businesses in India.
Retail Banking Services

HDFC Bank was the first bank in India to launch an International Debit Card in association with
VISA (Visa Electron). The bank also issues the MasterCard Maestro debit card. The Bank
launched its credit card business in late 2001. By the end of June 2013, it had a credit card base
of 5.94 million. By March 2012, the bank had a total card base (debit and credit cards) of over
19.7 million.

The Bank is also one of the leading players in the "merchant acquiring" business with over
240,000 point-of-sale (POS) terminals for debit / credit cards acceptance at merchant
establishments.

Treasury

The bank has three main product areas - Foreign Exchange and Derivatives, Local Currency
Money Market & Debt Securities, and Equities. These services are provided through the bank's
Treasury team. To comply with statutory reserve requirements, the bank is required to hold 25%
of its deposits in government securities. The Treasury business is responsible for managing the
returns and market risk on this investment portfolio.

Services

1. Credit/debit card

2. Personal loan

3. Two wheeler loan

4. Car loan

5. Home loan

6. Loan against property

7. Life Insurance

8. Savings Account

9. Salary Account

10. Current Account

11. Demat Account

12. Forex Card
 THE INTERVIEW

Interviewer: Aditi Garg & Ragini Dadwal

Interviewee: Prabhjot Kaur

Q1. What is a bank guarantee?

A bank guarantee is a promise from bank, or other lending institution that if a particular
borrower defaults on a loan, the bank will cover the loans. In other words for instance If a trader
is trading with another business man and the nature of the business is such that it involves a
business transaction then, the one who is liable to pay the other has to take a guarantee from a
bank that in case of default of payment from the liable party, the bank has to pay for the default

Q2. What are the different types of bank guarantees offered by HDFC?

We offer various types of guarantees viz. financial, performance, etc. that are required at various
stages of your contract.
A Financial (Money) guarantee is of the nature where it is issued in-lieu of cash like Earnest
Money Deposit. The idea is not to lock cash in EMD and issue a guarantee.
Performance guarantee is of the nature where performance is guaranteed while a
performance guarantee is a surety bond issued by an insurance company or
a bank to guarantee satisfactory completion of a project by a contractor.

Q3.What are the advantages of bank guarantee?

1. Customer (buyer) is not required to make the advance payment in cash, (in case of bank
guarantee), thus the funds are used more efficiently
2. Buyer gains reliable partner status at local and international markets, benefits from
various partnership opportunities and is able to demand more relevant conditions from
partners.
 3. Bank guarantee requires less number of documents, no necessity for collateral and, as a
result, the customer receives the letter of guarantee within shorter period of time and
commission fee for services is also very low.
4. Seller is protected from default of buyer on payment and is able to perform prompt sales
without asking for advance payment.

Q4. What are the various documents that have to be submitted to the bank for bank
guarantee?

The documents to be submitted along with the application and KYC documents are as follows :

1. Request Letter and Counter Indemnity cum Memorandum relating to charge over fixed
deposit duly stamped (Franking as per respective State Stamp Act) .
2. Bank Guarantee text.
3. Board Resolution for Private Limited / Limited Company
4. Partnership Consent letter signed by all Partners along with Partnership Deed.
5. Trust Resolution along with Trust Deed for Trust.
6. Managing Committee Resolution along with Bye-laws for Society

Q5. What does the bank guarantee text mentioned above include?

The bank guarantee text includes the following:

1. Introduction/ PREAMBLE part

2. Recitle part/ consideration part
3. Contract/ trade conditions
4. Guarantee conditions
5. Invocation conditions
6. Notwithstanding/ SRC conditions
Q6. What is the time period for a bank guarantee?

The maximum and minimum limit for bank guarantee is fixed by the Reserve Bank of India and
we follow it strictly in our bank.

Presently, minimum tenure is 12 months and maximum tenure is 10 years.

Q7. What are the charges/ rate of interest?

Following is the list of charges for bank guarantee issue by the bank:

Guarantee Charges/Commission/ HDFC Bank - Revised Trade

SWIFT/Courier Charges (wef 1st Sept'14)

Guarantee issuance Charges Documentation charge - INR 1,500

(Financial, Performance) (If applicable )

Commission 1.8%, min INR 2,000

SWIFT/Courier INR 1,000

Guarantee amendment Charges Nil

(Financial, Performance)
Commission 1.8%, min INR 2,000   - 
per month basis and each fraction of
month to be collected as full month

SWIFT/Courier INR 1,000

Guarantee cancellation Charges INR 1,000 for live BG cancellation

proicessing charges (before expiry)

Guarantee Advising Charges INR 1,500

Commission Nil

SWIFT/Courier Nil

Shipping Guarantee  Charges INR 1,000,

Documentation charges (If
 applicable ) - INR 1,500

Q8. What are the remedial measures taken by HDFC in case of default?

The defaulters are sent reminders which are from the bank’s collection cell. The starting
reminders are gentle one but if the defaulter still doesn’t respond to those reminders then the
bank sends a legal notice through the legal cell of the bank.