Bank guarantees

Bank guarantee is one of the facilities that the commercial banks extend on behalf of
their clients in favour o£ third parties who will be the beneficiaries of the guarantees. In
fact when a bank guarantee is given no credit is extended and banks do not part with
any funds. There will be only a guarantee to the beneficiary to make payment in the
event of the customer on whose behalf the guarantee is given, defaulting in his
commitment. So, if the customer fails to pay as per the terms of the guarantee, the
banker giving the guarantee has to pay and claim reimbursement from his client. The
banker’s liability arises only if his customer fails to pay the beneficiary of the guarantee.
That is why bank guarantee limits are known as non-borrowings limits or non-fund
limits.
Important features – The following points are to be considered regarding bank guarantee:

1. Guarantees should be for a definite period and as far as possible should not run
   for more than one year.
   2The guarantees should be in respect of a definite object or enforceable on happening
   of a definite event.
2. Guarantee should be in respect of transactions which arise out of trade and
   commerce, or any other genuine business.
3. Guarantees should be specific as to amount.
4. Guarantees should be covered by a counter guarantee by a customer giving the
   bank absolute right of payment under guarantee on the happening of contingency
   guaran-teed against.
5. Reliable credit reports should be obtained on the customers for whom the guarantee
   is given. Such reports should be kept uptodate.
6. The guarantees should as far as possible relate to the normal business of the
   customers. The banks will insist the customer to deposit the margin, depending on
   case to case, before the issue of bank guarantees. The banks will charge
   commission on bank guarantees issued or extended.

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