1) In simple words Guarantee means giving something as a security.

2) Bank Guarantee is a one kind of assurance given by Bank to two external parties, a buyer and a seller.
3) Guarantee is defined in The Indian Contract Act, 1872 in section 126.

4) Guarantee is a contract to perform the promise, discharge the liability of a third person in case of his default.

5) In Bank Guarantee Bank offers security for different business obligations of their customers within some regulations.

6) In Business and Personal transaction Bank Guarantee used to protect third party from financial loss.

7) Bank guarantee is given on a contractual obligation between the Bank and its customers.

8) The person who gives the Guarantee in known as “The Surety”

9) The person whose behalf the guarantee is given known as “ The Principal Debtor”

10) The person whom the guarantee is given known as “The Creditor”.

Guarantees issued come under two broad classifications. 

Financial Guarantee.

Performance Guarantee.

There is a another Guarantee that is  known as “Deferred Payment Guarantee”

Financial Guarantee:

Financial Guarantees which are given in lieu of purely monetary obligations.

Financial Guarantees examples 

Security Deposits issued to Contractors.

Earnest Money Deposit.

Bid Bonds.

Tender Money Guarantees issued to Bidders.

Advance Payment guarantees issued to secure the Advance payment made to the Contractors.

Guarantees given in Courts.
Customs, Excise, Sales Tax Authorities.

Guarantees issued in favour of Customs for duty payment.

Performance Guarantees:

Performance guarantees are issued in respect of performance of a contract or obligation.

In such guarantees, in the event of non-performance or short performance of the obligation, the Bank will be called upon to make good the monetary loss arising out of the non-fulfillment of the guarantee obligation. 


(i) Bank Guarantee issued in respect of performance of the party for installation of Plant & machinery within given time frame and with regard to specification.   
(ii) Bank Guarantees issued in respect of performance of the party relating to supply of agreed material within stipulated period.

Deferred Payment Guarantees:

These guarantees normally arise in the case of purchase of any goods, raw materials,machinery or such other capital equipment from Industries (from suppliers in India or outside). 

In the case of these guarantees an advance, generally upto 10% to 15% of the entire cost of machinery is paid and the balance of 85% to 90% of the cost and interest thereon is payable in instalments spread over a period of three, five or seven years or even ten years or more as the case may be. 

The manufacturers of the machinery supply the machinery against cash payment as above said and get executed bills for the balance amount.  In respect of the balance amount, the sellers of the machinery insist on a Bank Guarantee. Presently, we are not issuing Deferred Payment Guarantees.

Uses of Bank Guarantee

1) When big companies purchases from small vendors, they typically require the vendors to supply guarantee certificate from banks before providing such business opportunities.

2) Predominantly utilized in the acquisition and sale of products on credit basis, where the vendor is assured of payment from the bank just in case of default by the customer .

3) Helps in certifying the credibility of people , which successively , enables them in obtaining loans and also assists in business activities.

Though there are many uses from a bank guarantee for the applicant, the bank should process an equivalent only after ensuring the financial stability of the applicant/business. the danger involved in providing such a guarantee must be analysed thoroughly by the bank.

Advantages and drawbacks of Bank Guarantees

Bank guarantee has its own advantages and drawbacks .

The advantages are:

1)Bank guarantee reduces the financial risk involved within the business transaction.

2)Due to low risk, it encourages the seller/beneficiaries to expand their business on a credit basis.

3) Banks generally charge low fees for guarantees, which is useful to even small-scale business. Guarantee need very few documents and is processed quickly by the banks.

On the opposite side, there are some disadvantages such as:

1) The banks are so rigid in assessing the financial position of the business. This makes the method complicated and time-consuming.

With the strict assessment of banks, it's very difficult to get a bank guarantee by loss-making entities.

2) For certain guarantees involving high-value or high-risk transactions, banks would require collateral security to process the guarantee.

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