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Detailed Guide on How to Get Bank Guarantee in India


Detailed Guide on How to Get Bank Guarantee in India

A Bank Guarantee is a guarantee from a bank in which the Bank would fulfil the obligations of the debtor if the debtor fails to do so. Bank guarantees is thus a mechanism wherein a third party performs a due-diligence and accepts responsibility on behalf of the debtor – for a consideration. Bank guarantees are part of doing business and are required for various business transactions. In this article, we look at the bank guarantee in India and the procedure for obtaining a bank guarantee.

Bank Guarantee Overview

Bank guarantee guarantees an amount of money to a beneficiary if the bank guarantee applicant does not fulfil the conditions in a contract. Bank guarantees are mainly used to ensure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.

Types of Bank Guarantee

There are various types of Bank Guarantees as follows and each is used for a specific type of transactions:

Performance Guarantee

Performance guarantee is used as collateral in transactions involving a buyer and a seller. A performance guarantee is typically invoked if the buyer incurs cost and the seller does not deliver goods or services as promised in the contract. To invoke a performance guarantee, the beneficiary requires to declare in writing that the seller did not fulfil his or her contractual obligations properly or on time.

Bid Bond Guarantee

Bid bond guarantees are typically used in tenders to ensure that the winning bidder undertakes the contract as per the terms of their winning bid. In case a winning bidder does not perform the tender requirements as stipulated, then the tender issuer can invoke the bank guarantee and fully or partially forfeiture the amount. Therefore, bid bonds are mainly to ensure that the winning bidder performs as per the tender terms after winning the tender.

Financial Guarantee

A financial guarantee is an undertaking from a bank to take responsibility for another company’s financial obligation if that company does not meet its responsibility. The bank provides financial guarantees mostly between two related parties, i.e., a partner company providing a financial guarantee to a subsidiary company.

Advance Payment Guarantee

An advance payment guarantee is used to protect the advance payment made by a buyer to a seller. In case the seller fails to deliver goods or services as per the terms and conditions of a trade transaction, then the buyer can invoke the advance payment guarantee to recover a full or partial advance payment made to the seller. Advance payment guarantees are used in international trade transactions and domestic transactions wherein large advance payments are made to a vendor.

Foreign Bank Guarantee

International trade uses a foreign bank guarantee. The bank issues a foreign bank guarantees for the benefit of a foreign beneficiary.

Deferred Payment Guarantee

Deferred payment guarantees are used when one party in a transaction undertakes to make payment of fixed amount at corresponding times in the future. In case, the debtor is unable to pay, then the deferred payment guarantee can be invoked to claim the money.

How to Get Bank Guarantee in India

Banks in India issue bank guarantee in return for a guarantee fee. Prior to providing a bank guarantee, the banker will undertake diligence of the bank guarantee applicant and may also request for collateral security. To process a bank guarantee application, it requires some of the following documents:

  • Request Letter and Counter Indemnity cum Memorandum relating to charge over fixed deposit duly stamped (Franking as per respective State Stamp Act).
  • Bank Guarantee text.
  • Board Resolution for Private Limited Company / Limited Company

To know more about bank guarantees in India, get in touch with an IndiaFilings Business Expert.