BANK GUARANTEE

MD. JAHIRUL ISLAM

Senior Principal Officer
Rupali Bank Limited
FTF & International division
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 • A bank guarantee is a written
contract given by a bank on the
behalf of a customer. By issuing
this guarantee, a bank takes
Bank guarantee
responsibility for payment of a
sum of money in case, if it is
not paid by the customer on
whose behalf the guarantee has
been issued. In return, a bank
gets some commission for
issuing the guarantee.
 THE
. CONTRACT Section 126 Defines…
ACT 1872
• A "contract of guarantee" is a contract
to perform the promise, or discharge
the liability, of a third person in case
of his default. …

• A guarantee may be either oral or

written.
 TYPES OF BANK GUARANTEE
 Direct Guarantee Retention Money
Indirect Guarantee
Guarantee
Conditional Payment
Bid bond/Tender
Guarantee
Guarantee
Guarantee Securing a
Advance Payment
Credit Line
Guarantee
Order & Counter
Performance Guarantee
Guarantee
(Performance bond)
 Direct & Indirect Guarantee

• Direct guarantees are set up and executed through one

bank, the bank at which the principal applies for the
guarantee, known as the issuing bank.
• Indirect guarantees are set up through one bank and
then executed through another bank that is local to the
benefactor. The local bank then gets a guarantee from
the issuing bank to cover any claims. Direct guarantees
are typically less expensive and more secure for the
principal, whereas indirect guarantees are more secure
for an out-of-country beneficiary.
 TYPES OF GUARANTEE
  • Guarantee for Earnest money Deposit
(Local Tender)/ Bid Bond Guarantee
(International tender
A bid bond guarantee is a guarantee issued by the
bank to the effect that bidder would not withdraw
the bid before the expiry of bid/tender period or in
case the contract is awarded to the bidder that he
would comply with the terms of the tender and
enter into the contract.
 TYPES OF GUARANtEE
• Performance Guarantee
These guarantees are issued for the
performance of a contract or an obligation.
.
In case, there is a default in the
performance, non-performance or short
performance of a contract, the beneficiary’s
loss will be made good by the bank.
 TYPES OF GUARANtEE
• Advance Payment Guarantee
This guarantee assures that they would return the advance
amount in case of no fulfillment of the terms.
• Retention Money guarantees
Retention money is a part of the amount payable to the
contractor, is retained and payable at the end after successful
completion of the contract. Retention Money guarantee is
issued to ensure that retention money withheld by the
beneficiary is released to the applicant (contractor) so that he
gets sufficient working capital to complete the contract.
 TYPES OF GUARANtEE
• Guarantee in favor of the customs authorities 
This guarantee is a security of obligation of the company
performing import and export operations to the Customs
authorities for payment of customs taxes and duties.
• Guarantees of warranty execution
This guarantee plays a role of security of quality for
delivery to the contract terms.
• Guarantee of credit return 
This guarantee is a security for repayment of credit.
 TYPES OF GUARANtEE
• On Demand Guarantee
A guarantee that imposes a primary obligation on the
issuer to pay the beneficiary on its first demand (or 
on demand) where the primary obligor fails to perform
the contract. 
• Conditional Guarantee
a guarantee may only be called on the actual proof of
default or damage. The payment will only cover the
proven loss sustained by the beneficiaries or the owner,
and up to the amount stated in the Bank Guarantee.
 GUIDELINES ON GUARANTEES
• Customer selection for guarantee
- Customer’s bank transaction & Business position.
- Social & financial Status.
- CIB report.
- Source of fund of the customer.
• Security/Counter guarantee
- Cash Margin.
- Savings certificate, FDR, Bond, & Share as security.
- Guarantee of instructing party for Foreign guarantee
 GUIDELINES ON GUARANTEES

• Security/Counter guarantee
- Cash Margin.
- Savings certificate, FDR, Bond, Share, & 100%
registered mortgage of Fixed asset as security.
- Guarantee of instructing party for Foreign guarantee.
- CIB report.
- Source of fund of the customer.
 GUIDELINES ON GUARANTEES

• Precautions for Banker’s

- The documentation procedures is very similar with
other types of loans & advances.
- To issue Bank guarantee on behalf of a company, the
applicant should have such authority given by board/
memorandum/articles.
- To receive more cash as margin for long
term/unlimited guarantee.
 Advantages of Bank Guarantees

To the applicant
• Small companies can secure loans or conduct business that would
otherwise not be possible due to the potential riskiness of the
contract for their counterparty.
• The banks charge low fees for bank guarantees, normally a fraction
of 1% of the overall transaction, for the assurance provided.

To the beneficiary
• The beneficiary can enter the contract knowing due diligence’s
been done on their counterparty.
• The bank guarantee adds creditworthiness to both the applicant
and the contract.
• There is a risk reduction due to the bank’s assurance that they will
cover the liabilities should the applicant default.
Uniform Rules for Demand Guarantees 758

• General principles of the

• The URDG describes a demand guarantee as
any signed undertaking, however named or
described, providing for payment on
presentation of a complying demand.