Banking Knowledge is very important for all potential and prospective bankers for smooth operation and risk minimization of the bank. Bank Guarantee is a non funded
credit facility extended to customers. Bank earn fee income in the form of commission.
Bank also gets no cost deposits in the form margin. It improves banks burden
coverage ratio. It helps banks liquidity position as well as less capital
requirement for this type of business.
Though non funded, there is risk of
being converted into funded if the customer fails to perform and is claimed by
the beneficiary.
So bank guarantee is allowed
assessing the risks of claim, creditworthiness of the customer, ability to
perform, security, past performance of the customer etc.
Selection
of customer, risk analysis is done like other funded facilities.
Definition of Bank
Guarantee:
- Section 126 of contract act .1872:
·
Guarantee is a contract to perform the
promise of discharge of the liability of a third party in case of his default.
- A guarantee is an accessory contract by which the promissory undertakes to be answerable to the promisee for the debt, default or miscarriage of another person whose primary liability to the promisee must exist or be contemplated. The surety / guarantor is a person who engages with the creditors of a third party to be answerable in the second degree, for some debt default, miscarriage and non performance.
- Guarantee may be defined as an irrevocable obligation of a Bank to pay a certain sum of money in the event of non performance of contract by a third party.
Features
of Bank Guarantee:
1.
It must be Written
2.
It is Unconditional
3.
It is Irrevocable
4.
It is Independent of contract between
the beneficiary and applicant
5.
It is Fixed amount
6.
Is has Expiry date / Open ended
Parties
to a Bank guarantee
1.
Issuing Bank
2.
Beneficiary /Creditor/Supplier/Work
giving authority.
3.
Principal Debtor/Applicant
Types of a Bank
Guarantee:
- Bid Bond /Tender guarantee: Bid Bond has some specific features:
i.
Within approved limit
ii.
Experience of the contractor
iii.
Department ,class of license
iv.
Work Value
v.
Margin & Commission obtained
vi.
Validity
vii.
If Successful ,Who will provide PG &
SOD
viii.
If required PG amount & SOD amount
ix.
Security- Nature & Value
x.
Capability & Logistic support to
complete the work
xi.
Availability of fund
xii.
Past Performance
xiii.
Other liabilities & securities held
xiv.
Status of liabilities
xv.
Liability Voucher passed
xvi.
Expired Guarantee called back
xvii.
Margin not released before returning the
Original BG duly discharged by the
department though validity of the BG
expired.
- Performance Guarantee:
Within approved limit
Experience & reputation
Margin & Security
Work Value
Past performance : Value of work
performed
Other liabilities & status
Who provided SOD
Assignment and acceptance of the
department –Verification from department
Validity of PG
Progress of work site Visit
Validity work order
Extension of validity of work –genuine
–Verified
Talk to department regarding progress of
work
Bill submitted and cheque issued
favoring bank
Margin not released before returning the
Original BG duly discharged by the department. Though validity of the BG
expired.
a. Assignment
- APG for Mobilization Fund:
Within approved limit
No SOD allowed
Assignment & acceptance by the
department –Verified from department
Security like funded facility
Value of work
Validity of work order
Progress of work site visit
Mobilization of fund deposited to bank
and gradually withdrawn for
completion of work.
Bill submitted and APG amount adjustment
out of the bills.
Reputation ,Experience
Past performance and value of work
completed
Other liabilities ,Statues &
Security held
Margin not released before returning the
Original BG duty discharged by the department though validity of the BG
expired.- Retention money guarantee
- Warranty /Maintenance Bond
- Custom Guarantee
- Judicial Guarantee
- Shipping Document
- Payment Guarantee
- Loan Guarantee
- Counter Guarantee (Foreign Bank Authenticated SWIFT )
a.
Applicant- Instructing Bank (Foreign)-BG
Issuing Bank-Beneficiary.
- Stand- by L/C
- Syndicated Guarantee
- Suppliers performance Guarantee
- Foreign Loan /Advance T.T. Guarantee
- Container Guarantee
Uniform
Rules for demand guarantee -2010, ICC Publication
Dispute settlement
under law of witch country should be mentioned.
Suppliers Credit
guarantee –
Ø Permission
of term loan committee
Ø Permission
of BOI.
Ø BG
in Foreign currency-Bangladesh Bank Permission.