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Understanding Bank Guarantee

Understanding Bank Guarantee

Bank Guarantee in India

Every business needs a backbone of funds. It is for its effective operations and to maintain the competition in the market. Moreover, there are several debt instruments available for funding. While Bank Guarantees are used the most. let’s understand what is a bank guarantee.

The lending institution offers Bank Guarantee (BG) as a financial instrument. The lender will ensure that the liabilities of a debtor will meet. In the other words, the lender promises to cover a loss in case the borrower defaults on the loan. There are four parties involved in the transactions, the applicant/ borrower, the issuing bank, the beneficiary, and the beneficiary bank.

Features

  1. BG builds confidence between the lender and the borrower. It adds assurance of transaction between an exporter and an importer. The major reason for opting for BG is that many times the exporter and importer are unaware of transacting with each other. So, there can be a risk in the transaction. Hence, to overcome this risk involved, Bank Guarantee clears the hurdles.
  2. The BG obtain for a specified period. It is as per the need and requirements of the borrower. The applicant can hold the BG only up to a specified period, they can further renew it after maturity.
  3. The bank guarantee can or cannot hold assets against the instrument. The collateral depends upon the availability of the asset and the terms & conditions of the agreement between the lender and the borrower. It is also obtained without collateral.

Parties Involved

  • The applicant (importer): who requests BG from his banker as per the demand from the beneficiary
  • The issuing bank: as per the request from the applicant, the bank issues the BG to the beneficiary’s bank.
  • The beneficiary (exporter): is the party who demands BG.
  • The beneficiary’s bank: is the one that receives the BG on behalf of the beneficiary. 

Example

“ABC Pvt Ltd” is an exporter company that deals with “XYZ Pvt Ltd”, and an importer. The exporter on shipping goods requests the importer to get the Bank Guarantee from his banker. The banker on demand from the customer applies for BG and reduces the risk involved in the transactions. After receiving the BG, the applicant submits a copy to his other party which eases the procedure in the business operations. Here, “XYZ Pvt Ltd” is the applicant, the bank is an issuing party, and “ABC Pvt Ltd” is a beneficiary.

Process for applying BG

  1. The parties while transacting with each other, the exporter demands BG from the importer.
  2. The importer requests his bank for the BG and submits the necessary documents.
  3. After preparing BG, the bank communicates the same to the importer.
  4. The importer then requests the bank to send the BG to the exporter’s bank.
  5. The exporter’s bank on receiving BG communicates the same to the exporter.
  6. The exporter then ships the goods to the importer after receiving the BG from the importer.

Difference between Bank Guarantee (BG) and Letter of Credit (LC)

In the case of BG, payment has been made only in case of a default of the buyer. And, in the case of LC, payment has been made on behalf of the customer after receiving the goods.

In the case of BG, payment is made at the non-fulfillment of the transaction between the parties. Whereas the LC payment is made only after the fulfillment of the condition specified.

Read more

The process to avail of Bank Guarantee

Why choose Terkar Capital?

Terkar Capital consults aspiring entrepreneurs. We promote seamless funding solutions to them. We arrange and provide a wide range of products as per the client’s needs and expectations. Our team of experts constantly guides the clients in each and every step of funding. Thus, preserving the confidentiality of the respective clients. Bank Guarantee (BG) is our finest instrument. We do have many others. So whenever it is raising finance for corporates, Terkar Capital is ready to serve you at its best!

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