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Bank Guarantee

Bank Guarantee in India

In the Indian traditional working capital format, CC and OD are the most famous and commonly known working capital facilities. However, over the period, the banking industry has developed many products. They have designed considering the characteristics of the nature of the businesses. Few of them are developed to build trust between buyer and seller. Generally, working capital facilities can bifurcate into two segments. One is fund-based and another one is non-fund-based. Bank Guarantee is a non-fund-based credit facility. The bank arrange it for the borrower.

bank guarantee service

It is the promise given by the applicant’s (Buyer’s) bank stating that in case the buyer defaults to perform the duty or to make the payment, the banker is committed to making the payment limited to the amount of bank guarantee. The buyer requests the bank to issue the bank guarantee to the seller.

There are mainly 3 parties involved in the BG process.

  1. Buyer/Applicant/Borrower
  2. BG issuing bank
  3. Beneficiary/Creditor/Seller

There is a certain format every banker follows to issue the bank guarantee in India. However, there are a couple of important features, as follows –

  1. BGs issued against the collateral (maybe in the form of a fixed asset or maybe in the form of a fixed deposit)
  2. It is issued and limited to the amount specified in the BG.
  3. Its validity limits the period specified in BG. And it is a void post-given period.
  4. BG has the purpose for which it is issued. It cannot go vague.
  5. It also mentions the areas under which the BG stands invoked.
  6. There are certain fees for bank charges on issuing the BG.

Over the period of time, banks have developed multiple BGs. Below are a few of the famous bank guarantee instruments.

  1. Deferred Payment BG
  2. Performance BG.
  3. Advance Payment Guarantee
  4. Foreign BG
  5. Financial BG

Process of BG Backed Transaction:

Whenever the buyer and seller need assurance on the payment and delivery of the product or service the bank guarantees come into the picture. Below is the standard process followed for the BG backed transaction.

The buyer/applicant approaches the bank to issue the bank guarantee to the seller. The applicant provides all the necessary inputs which include, amount, date, validity period, the purpose of the issuance, etc.

Once the bank receives all the required documents and inputs to issue the bank guarantee, the bank issues the same to the seller. In this case, the banker may charge a certain amount as the fees to the buyer/applicant. Bank will also consider whether it has sufficient mortgage/collateral to issue the requested BG. If the requested amount is more than the banker’s comfort, the banker may ask the buyer/applicant to arrange for more security deposit.

Once the seller receives the BG from the Buyer, it confirms to the seller his assured payment. So the seller can start the execution of the order and delivery of the goods and services.

When the seller has performed all the terms and conditions of the payments, the buyer has to make the payment to the seller. In any case, if the buyer refrains from making the payment or delays the payment, then the BG issuing bank is liable to make the payment without question to the seller. And if the buyer makes the committed payment, then the bank guarantee stands void.

Understand how Terkar Capital executes bank guarantee from case study

Why Terkar Capital?

When it comes to the bank guarantee, there are multiple banks that provide BG issuance and discounting facilities. The buyer or seller may confuse as to which one to opt for. We at Terkar Capital, understand the role of the bank guarantee in India from both sides, from the buyer side and from the seller side. It is not only limited to the issuance of the bank guarantee but to the discounting of the bank guarantee as well. We make sure that our professional execution shall help all the parties (Bank, buyer, and seller) to complete the transaction without any hassle.

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