Import Export Guarantee Guide

IMPORT/ EXPORT GUARANTEE 2018
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IMPORT / EXPORT GUARANTEE
MS. RUTUJA CHUDNAIK
FINANCIAL MANAGEMENT
WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT AND
RESEARCH
YEAR OF SUBMISSION 2017-18

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IMPORT / EXPORT GUARANTEE
Table of Contents
Introduction...........................................................................................................................................................................................5
Purpose of Bank Guarantees ..............................................................................................................................................................5
Classification of Bank Guarantees: ....................................................................................................................................................6
Guarantee types....................................................................................................................................................................................7
IMPORT TRANSACTION ............................................................................................................................................................7
The most common bank guarantee types in an import transaction are: .............................................................................7
How it works – Import Transactions?...........................................................................................................................................7
First you and the seller agree on the terms of the contract (1). In this case you agree to provide the seller with a
direct payment guarantee to secure your payment. You will then apply to Bank for the guarantee (2). Bank issues
the requested guarantee based on the information on the contract between you and the seller. The guarantee is then
advised to the seller directly from Bank in an original paper version (3) or by SWIFT through a correspondent
bank (3a and 3b). The parties to the Credit facilities are now ready to start the trade (4). .............................................7
In case of a claim under the guarantee,Bank will check the claim as well as inform you,depending on the nature
of the guarantee, as to whether you should effect payment or possibly refuse until your actual contractual default
has been determined ....................................................................................................................................................................8
.........................................................................................................................................................................................................8
EXPORT TRANSACTION............................................................................................................................................................8
The most common bank guarantee types in an export transaction are:..............................................................................8
Work Flow of Bank Guarantee .........................................................................................................................................................10
How does a bank guarantee work in paper format? .................................................................................................................10
How does a bank guarantee work in swift format? ..................................................................................................................11
Counter Guarantee.............................................................................................................................................................................12
How does a counter guarantee work? .........................................................................................................................................12
What are the parties to a counter-guarantee?.............................................................................................................................13
What are the advantages of a counter-guarantee?.....................................................................................................................13
What are the main specifications of a counter-guarantee?......................................................................................................14
What are the differences between counter-guarantee and bank guarantee?.........................................................................15
Rules and practices.............................................................................................................................................................................15
Amount and Currency........................................................................................................................................................................16
Reduction and increase of the guarantee amount......................................................................................................................17
Guarantee - URDG 758.......................................................................................................................................................................17
Overseas Investment – Guarantee on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad........24
STATE BANK OF INDIA – CORPORATE ACCOUNTS GROUP ..........................................................................................................26
BACKGROUND............................................................................................................................................................................26
TRADE FINANCES......................................................................................................................................................................26

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Guidelines on conduct of Bank Guarantee business....................................................................................................................27
Appraisal of Bank Guarantee Limit..................................................................................................................................................28
Margins.................................................................................................................................................................................................29
Security.................................................................................................................................................................................................30
Commission..........................................................................................................................................................................................30
Documents ...........................................................................................................................................................................................30
Format of Bank Guarantees ..............................................................................................................................................................31
Extension/Renewal of Bank Guarantee ..........................................................................................................................................33
Amendment.........................................................................................................................................................................................34
Termination/Cancellation of Bank Guarantees .............................................................................................................................34
Invocation of Bank Guarantee..........................................................................................................................................................35
Interchangeability between Letter of Credit and Bank Guarantee limits.................................................................................36
Advance Payment Guarantee (APG)................................................................................................................................................37
Deferred Payment Guarantee (DPG)...............................................................................................................................................38
Export Performance Guarantees Favouring Customs..................................................................................................................39
Bid Bonds and Performance Guarantees on behalf of Exporters ..............................................................................................40
Bank Guarantee Scheme of Government of India........................................................................................................................41
Bank Guarantees favouring Government departments- correspondence with President of India.....................................42
Procedure to be followed when the judgements are delivered by Courts in favour of Government departments ........42
Issue of Bank Guarantees in favour of other banks/financial institutions ...............................................................................43
Exceptions are permitted in the following cases by Reserve Bank of India. .......................................................................43
Accounting System .............................................................................................................................................................................44
ILLUSTRATIONS....................................................................................................................................................................................47
Illustration showing the method of assessment of Bank Guarantee (BG) ............................................47
Counter Guarantee ...................................................................................................................................................................49
Annexure BG – 2A............................................................................................................................................................................51
Omnibus Counter Guarantee ..............................................................................................................................................51
Annexure BG-2AA..........................................................................................................................................................................53
Instructions to fill in the Omnibus Counter-guarantee..........................................................................................53
Annexure BG-3................................................................................................................................................................................54
Specimen of the First Page of Bank Guarantee ........................................................................................................54
Subject : Our Bank Guarantee No. …………………… dated ……………………… .....................................................................55
MODEL FORM OF BANK GUARA NTEE BOND GUARANT EE BOND ........................................................56
CONCLUSION & RECOMMENDATION .............................................................................................................................................58
BIBILOGRAPHY.....................................................................................................................................................................................58

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Introduction
Bank guarantees play a vital role in international trade and other business transactions. They are
used in almost every phase of the transaction between the buyer and the seller
Some situations require that a third party (often a bank) guarantees to pay a sum of money to one
party if the counterparty defaults, for example if the counterparty fails to deliver a project within
the agreed time lines. As such, the guarantee transfers the creditworthiness of the
applicant/instructing party of the guarantee to the bank (the guarantor).
It is important to understand that what the guarantor guarantees is to pay an amount of money to
the beneficiary, not to complete the project and deliver the goods or whatever else may be the
subject of the guarantee. In fact, the guarantor does not guarantee that the applicant/instructing
party will fulfil its obligation; it only commits itself to pay, in whole or in part, the amount stated
in the guarantee.
Demand guarantees (sometimes called first demand or document guarantees), which are those
payable by the guarantor upon presentation to it of a complying demand/documents submitted by
or on behalf of the beneficiary. For these types of guarantees, the guarantor will review the
presented documents solely against the terms of its guarantee to determine if a payment is
warranted. The guarantor will not review the underlying goods or services or the
applicant/beneficiary contract/ relationship.
1) Agreement between buyer and seller
2) Guarantee application/counter indemnity (from applicant to the guarantor)
3) Issuance of the guarantee by the guarantor
In many ways a guarantee is a very simple instrument: a bank (the guarantor) guarantees to pay a
certain amount of money provided pre-described documentation is presented to the guarantor.
However, other elements need to be considered. First, although the guarantee is independent from
the underlying transaction between the parties, it is there to support that transaction. Consequently,
it is important that the text of the guarantee clearly expresses exactly what the guarantee is to cover.
This is because the guarantee instrument is very flexible, meaning it can be used for all kinds of
purposes. Although the use of standard texts is preferred, because of this flexibility, an individual
text, in many instances, may require legal assistance in its preparation.
Purpose of Bank Guarantees

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Bank may issue guarantees generally for the following purposes:
(a) In lieu of security deposit/earnest money deposits for participating in tenders;
(b) Advance money before commencement of the project by the contractor and for money to be
received in various stages like plant layout, design/drawings in project finance;
(c) In respect of raw material supplies or for advances by the buyers;
(d) In respect of due performance of specific contracts by the borrowers and for obtaining full
payment of the bills;
(e) Performance guarantee for warranty period on completion of contract which would enable
the supplier to realise the proceeds without waiting for warranty period to be over;
(f) To allow units to draw funds from time to time from the concerned indentors against part
execution of contracts, etc.
(g) Bid bonds on behalf of exporters,
(h) Export performance guarantees on behalf of exporters favouring the Customs Department
under EPCG scheme.
Classification of Bank Guarantees:
It is essential that the Bank Guarantees issued are properly categorized. Incorrect classification
would result in incorrect applicability of credit conversion factor, the factor used to convert the non
fund based limit to funded limit, on which the bank provides applicable capital charge. Higher the
conversion factor, higher is provision of capital charge. It is therefore essential that the
classification is error free.
Instructions for classification of Bank Guarantees are as under:
(1) Bank Guarantees, which have the effect of directly substituting funded exposure, are to be
classified as financial guarantees. Such guarantees attract 100% credit conversion factor (CCF).
(2) Transaction related contingent items (e.g. performance bonds, bid bonds, warranties,
indemnities and standby letters of credit related to particular transaction) are to be classified as
performance guarantees which would attract 50% (CCF)

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Guarantee types
IMPORT TRANSACTION
The most common bank guarantee types in an import transaction are:
1. Payment guarantees: Secures the applicant’s ability to fulfill its payment obligations to the
beneficiary. Usually the guarantee will cover the entire value of the underlying contract,
less any advanced payments made by the applicant. The purpose of a payment guarantee is
to cover the applicant/instructing party’s ability to meet its payment obligations. The most
common type of payment guarantee is one covering the buyer’s obligation to pay for goods
received or services rendered. When the beneficiary has performed the contract (delivered
the goods or completed the work) and the buyer does not meet its payment obligation, due
to a lack of ability or a willingness to pay, the beneficiary may demand payment under the
guarantee. Normally, a payment guarantee is given for the full amount of the contract or,
where part of the amount has been paid in advance, for the remaining amount. The payment
guarantee may be used to cover a specific consignment or contract, or it may cover the
applicant/instructing party’s outstanding balance arising from its regular business with the
beneficiary. When the guarantee is to cover this balance in connection with, for instance,
the regular delivery of goods, the beneficiary must ensure that the guarantee amount is
sufficient to cover the outstanding balance (assets) at any time. This means that, when
calculating the guarantee amount, the seller must take into account the value of the
individual deliveries (also the future ones), the frequency of deliveries and the credit period
granted.
2. Guarantee for a missing bill of lading (letter of indemnity): Authorizes a transport
carrier or its agents to release specified cargo to a consignee named in the bill of lading
without the surrender of the original bill of lading. The consignee is the
applicant/instructing party of the guarantee, and the purpose of the guarantee is to secure the
carrier if the bill of lading is later surrendered with a claim for the goods. This guarantee is
also called an “indemnity”, as it is used to indemnify a carrier against losses and legal
challenges in connection with the release of the cargo without the original bill of lading.
3. Customs guarantee: Issued in favor of customs offices as security for payment of customs
duties by an importer.
How it works – Import Transactions?
First you and the seller agree on the terms of the contract (1). In this case you agree to provide the
seller with a direct payment guarantee to secure your payment. You will then apply to Bank for the
guarantee (2). Bank issues the requested guarantee based on the information on the contract
between you and the seller. The guarantee is then advised to the seller directly from Bank in an
original paper version (3) or by SWIFT through a correspondent bank (3a and 3b). The parties to
the Credit facilities are now ready to start the trade (4).

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In case of a claim under the guarantee, Bank will check the claim as well as inform you, depending
on the nature of the guarantee, as to whether you should effect payment or possibly refuse until
your actual contractual default has been determined
.
EXPORT TRANSACTION
The most common bank guarantee types in an export transaction are:
1. Bid bond/tender guarantee: When a company invites tenders, it is not uncommon
that it will require that the tenders be accompanied by a tender guarantee. The tender
guarantee covers the risk that the company submitting the tender will not abide by its
offer, will not sign the contract if awarded to it or will not submit the required
performance guarantee. Usually issued for an amount up to 5% of the value of the
tender. The purpose of these guarantees is to cover the risk that the company
submitting a tender will not abide by its offer or deliver the required performance.
If the company is not awarded the tender, the guarantee should be released immediately
by the beneficiary.
1. Advance payment guarantee: Issued when the buyer/manufacturer pays the contract price
or part thereof in advance and requires security for a refund if the merchandise is not
delivered, or if the delivery is not in accordance with the contract. In connection with large
contracts, especially international transactions, the parties sometimes agree that the supplier
or contractor is to receive a certain percentage, for instance 10% or 30% of the contract
amount when the contract is signed. This provides the supplier or contractor with the
financial basis for getting the project under way, by offering it the possibility to buy raw
materials or to pay wages during the initial phase. To safeguard the beneficiary against
losing the advance payment, the recipient of the amount may provide a guarantee to secure

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the repayment of the sum should the goods not be delivered or the work not be done.
Usually the guarantee is to be provided before the amount is transferred. In this situation,
the guarantee should stipulate that claims under the guarantee cannot be made until the
guaranteed amount has been credited to an account specified by the supplier/contractor. The
contract between the parties will stipulate how the remaining sum is to be paid - whether as
a lump sum on delivery or in installments when the goods have been delivered or the work
has been carried out. This part of the contract is not covered by the advance payment
guarantee.
2. Performance guarantee: Secures the seller's/performers contractual obligations. The
guarantor undertakes to pay compensation up to a certain amount to the beneficiary in case
the applicant/instructing party fails to deliver the goods or to carry out certain work. Often
the performance guarantee is for 10-15% of the value of the contract, but the percentage
may vary from contract to contract.
3. Warranty guarantee: Covers the buyers after goods are delivered or work is completed
during any agreed warranty period. The purpose of this type of guarantee is to cover the
applicant/instructing party’s obligations after it has delivered the goods or completed its
work during the contractual warranty/ guarantee period.
4. Retention money guarantee: Ensures that the correct repayments are made if the applicant
fails to meet its contractual obligations during the warranty period. This can be the case, for
example, in projects when full payment is made against shipping documents but the
completion of the contract has not yet occurred. The guarantee secures that the final
completion of the contract will be properly fulfilled. Usually, this type of guarantee contains
a clause stating that it is a condition for the payment of any claim under the guarantee that
the retention money (the advanced amount) has been received by the applicant/instructing
party. Since this guarantee replaces the retention part of the amount of the contract, it is
often called a retention money guarantee.

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Work Flow of Bank Guarantee
How does a bank guarantee work in paper format?
 Step 1: Principal and beneficiary sign a contract which will be demanding a bank guarantee
 Step 2: Principal approaches Guarantor to issue a Demand Guarantee in favor of the
beneficiary. On this stage principal must supply the terms and conditions of the guarantee to
the guarantor by the help of the Bank Guarantee Application Form.
 Step 3: Guarantor issues the bank guarantee and sends it to the beneficiary.

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How does a bank guarantee work in swift format?
Step 1: Principal and beneficiary sign a contract which will be demanding a bank guarantee
Step 2: Principal approaches Guarantor to issue a Demand Guarantee in favor of the beneficiary.
On this stage principal must supply the terms and conditions of the guarantee to the guarantor by
the help of the Bank Guarantee Application Form.
Step 3: Guarantor issues the bank guarantee in swift format and sends it via secure online swift
platform to the advising bank which is located in the beneficiary’s country.
Step 4: Advising bank advices the bank guarantee to the beneficiary in online means.

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Counter Guarantee
Unlike letters of credit, banks could not add their confirmations to the demand guarantees that have
been issued by another bank, because latest version of bank guarantee rules do not define
confirmation.
Instead of confirmation, URDG 758 defines counter guarantee.
How does a counter guarantee work?
The figure below explains how does a counter-guarantee works in international trade transactions.
 Step 1: The principal and the beneficiary sign a sales contract. In order to be able to talk
about the counter-guarantee, the principal and the beneficiary should be located in different
countries. Otherwise the principal could have issued a bank guarantee in favor of the
beneficiary without using any form of counter-guarantee.
 Step 2: The principal gives instructions to his bank to issue a counter-guarantee.
 Step 3: The instructing party, who is the principal’s bank, issues a counter-guarantee in
favor of the guarantor bank to issue the bank guarantee against its counter indemnity.
 Step 4: The guarantor bank issues the guarantee in favour of the beneficiary.

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What are the parties to a counter-guarantee?
• The Principal: The party requesting the issuance of a counter-guarantee.
• The Instructing Bank: The bank that requests to the beneficiary's bank to issue the guarantee
against its counter indemnity.
• The Guarantor Bank: The bank that guarantees that the agreed compensation amount will be
paid if the guarantee principal fails to meet its contractual obligations and the beneficiary makes a
complying demand in writing according to terms and conditions of the guarantee.
• The Beneficiary: The party in favour of whom the guarantee is issued.
What are the advantages of a counter-guarantee?

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• Counter-Guarantee Eliminates Country Related Economic and Political Risks: Bank
guarantee issued by a guarantor bank, which is located in a different country than the beneciary
may not be satisfactory, espacially when the guarantor bank is located in a high risk country. For
example, bank guarantee issued by an Iraqi bank would not mean anything for a medium size
manufacturing company located in USA. As a result in order to protect its interests, US
manufacturing company may demand a bank guarantee issued by a US bank. By having a bank
guarantee issued by a US bank, US manufacturing company eliminates country related economic
and political risks.
• Counter-Guarantee Eliminates Foreign Jurisdiction Risks: I have already mentioned on my
previous article that bank guarantees are applicant oriented trade finance tools. Which means that
demand guarantees may protect the applicants interests more than beneficiaries rights. It is not an
uncommon practice to stop the payments under bank guarantees by local court order. By having a
local bank gurantee, beneficiary may eliminate foreign jurisdiction risks.
What are the main specifications of a counter-guarantee?
• Independence of Counter-Guarantee: A counter guarantee is an independent form of facility
than the bank guarantee. Additionally, counter-guarantee is also independent from the underlying
transaction and any instructions received by the instructing bank. As a result counter-guarantee is
bound by its own terms and conditions. Independence of a counter-guarantee has a gigentic effect
in legal situations.
• Counter-guarantee and bank guarantee need not to be a mirror image each other: For
example expiry of the counter-guarantee may be different than the bank guarantee.

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• Counter guarantee and bank guarantee may be issued in a different form of facilities: For
example counter guarantee may be a demand guarantee, whereas the guarantee is a surety.
What are the differences between counter-guarantee and bank guarantee?
• Bank guarantee issued by the guarantor bank in favor of a beneficiary.
• Counter-guarantee is issued by the instructing bank in favor of the guarantor bank in order
to facilitate the issuance of the bank guarantee.
• Bank guarantee and counter-guarantee are seperate instruments as a result they may be
issued in different structure.
Rules and practices
More than one set of rules could govern a guarantee. In order for a guarantee to be subject to a
specific set of rules, the guarantee must include a clear indication that it is subject to those rules.
The current rules include:
 URDG 758
The Uniform Rules for Demand Guarantees (2010 Revision) (ICC Publication No. 758). URDG
758 are rules to govern demand guarantees. They are effective as of 1 July 2010. They replace
ICC’s first set of guarantee rules, URDG 458.
URDG (Uniform Rules on Demand Guarantees) are the set of rules that apply to bank guarantees in
international scale. URDG have been published by ICC. URDG rules, like other trade finance rules
published by ICC, have a contractual nature as a result they apply to a specific bank guarantee only
if parties to the given transaction choose these rules by giving express reference to the rules in the
text of the bank guarantee.
The most significant changes in URDG 758 edition are:
 New definitions and interpretation rules for greater clarity and precision;
 The treatment of non-documentary conditions, incomplete presentations, and many other
contentious practices;
 A comprehensive coverage of advice of guarantees, amendments, electronic documents,
transfers and more;
 A provision on force majeure that triggers an extension of a guarantee for thirty calendar
days;
 The replacement of “reasonable time” with fixed periods for the examination of demands,
the extension of guarantees and the suspension of payments.

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 A clear layout of the examination process for demands and a step-by-step roadmap for
handling extend or pay demands;
 ICC 325
Uniform Rules for Contract Guarantees
ICC 325 are ICC’s rules for contract guarantees. They came into effect in August 1978.
These rules have not been generally accepted by the market and consequently are rarely used.
 ICC 524
ICC Uniform Rules for Contract Bonds
These rules came into effect in January 1994. They are rarely used.
 ISP98
International Standby Practices (ISP98)
Developed by the Institute of International Banking Law and Practice, endorsed and published by
ICC, ISP98 are the basic rules for the use of standby letters of credit worldwide. (See Chapter 2,
Standby letters of credit)
 UCP 600
Uniform Customs and Practice for Documentary Credits (2007 Revision) (ICC Publication No.
600). UCP 600 are universally used for commercial documentary credits but can also be used for
standbys.
Amount and Currency
A guarantee must state the maximum amount and the currency for which the guarantor is liable. It
must be clear from the guarantee the amount to which the bank’s liability extends. The bank’s
pricing is based on the guarantee amount, which is the amount the instructing party is liable to pay
for the guarantee’s commission.
The amount for which the guarantee is valid is important for two reasons: first, it is the amount that
the applicant/instructing party is liable to the guarantor if a complying demand is made; and
second, it is based on that amount that the fees for the guarantor are calculated.
Sometimes the bank’s liability extends to payment of interest in addition to the principal amount.
For instance, in advance payment guarantees the bank may undertake to repay the advance payment
plus interest. This may be expressed in clauses as follows: “We undertake the repayment to you of
the advance payment of ........ plus interest thereon at the rate of 6% per year
calculated from the date of receipt of the advance payment by the principal until the date of
repayment of the same by us”.
However, the principal rule is that the bank’s liability only covers the guarantee amount unless
otherwise stated in the guarantee text.

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Reduction and increase of the guarantee amount
In most cases, the guarantee covers the amount it was issued for during its entire period of validity.
However, it is possible for the guarantee amount to be reduced over time.
Since the guarantee is issued to secure the beneficiary’s interests, a reduction of the bank’s liability
under a guarantee must be approved by the beneficiary.
This may take place either by a separate confirmation by the beneficiary or by including a reduction
clause in the guarantee text.
Naturally, it would be in the interest of the instructing party to have the guarantee amount reduced
in accordance with the progress of its performance under the underlying contract, for instance by
presenting a certain document to the bank. This, however, makes the bank’s position difficult.
Before the bank releases in part the instructing party of its liability to the bank, the bank must be
absolutely sure that the beneficiary approves the reduction of the guarantee amount.
As a consequence, if the guarantee text contains a reduction clause, it should be indisputable and
clear. The simplest way to ensure this is for the guarantee text to stipulate a calendar date, after
which the guarantee amount will be reduced to a lower amount. A sample clause to this
effect could be written as follows: “This guarantee remains valid for ........ until ........ (calendar
date),
and provided that no demand for payment has been presented to us on or before that date, this
guarantee remains valid for the reduced amount of ........ until ........ ”.
Unfortunately, it is not always possible to set a specific calendar date in this way. An alternative
would be for the guarantee text to state that the guarantee amount will be reduced against
presentation of a specified document signed by the applicant/instructing party and the beneficiary
or an independent third party.
Guarantee - URDG 758
The following is an introduction to a guarantee that incorporates URDG 758. The first
section describes the parties as defined in the rules, the second is a detailed, step-by-step
outline of the demand guarantee process.
The parties involved in a guarantee transaction
 Advising party
Advising party is defined as “the party that advises the guarantee at the request of the
guarantor”. In a guarantee transaction, the advising party will often be either a
correspondent of the guarantor or the bank that has a relationship with the beneficiary.

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 Applicant
Applicant is defined as “the party indicated in the guarantee as having its obligation
under the underlying relationship supported by the guarantee”. In many cases, the
applicant and instructing party are the same, but this need not be the case.
Note: this definition must be read in conjunction with the definition of “instructing party”.
 Beneficiary
Beneficiary is defined as “the party in whose favour a guarantee is issued”. This
is normally the counterparty of the applicant/instructing party with whom the
applicant/ instructing party has the underlying contract/relationship
 Counter-guarantor
Counter-guarantor is defined as “the party issuing a counter-guarantee, whether in favour of
a guarantor or another counter-guarantor, and includes a party acting for its own
account”. In most cases, the guarantor is the bank of the applicant and/or instructing
party.
 Guarantor
Guarantor is defined as “the party issuing a guarantee”.
In most cases, the guarantor is the bank of the applicant or instructing party.
The steps of a URDG 758 guarantee
The following is a step-by-step walk through the process of a demand guarantee issued subject
to URDG 758. This guarantee transaction which is used to exemplify the use of guarantees is a
standard demand guarantee issued by a guarantor on behalf of an applicant/ instructing party.
Other guarantee structures will be described as well where appropriate.
This process is described in detail below:
1) Agreement between the parties
It is the applicant/instructing party that sends an application for the issue of a guarantee to its bank.
The application should be based on the agreement with the applicant/instructing party’s
counterpart, who becomes the beneficiary of the guarantee.
This agreement (outlined in a contract, proforma invoice, etc.) should preferably include
information about the guarantee(s) to be issued. It is important to bear in mind that this is the
information that will be included in the final guarantee. Therefore, it is important that it reflects the
agreement made and that it be clear and precise. See No 2 below for the information that should be
included.
2) Guarantee application

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When the contract is concluded, the next step is to apply for issuance of the guarantee. Most banks
have dedicated application forms especially for this purpose. The applicant/instructing party fills in
all relevant facts that should be included in the guarantee, such as beneficiary, amount and required
documents, etc. This should reflect what has been agreed in the contract.
All instructions for the issuance of a guarantee and the guarantee itself should be clear and precise
and avoid excessive detail.
It is recommended that at least the following be included in a guarantee:
 applicant;
 beneficiary;
 guarantor;
 a reference number identifying the underlying relationship;
 a reference number identifying the issued guarantee;
 the amount and currency payable
 the expiry of the guarantee;
 the terms for demanding payment;
 in what form a demand or other document shall be presented, i.e. in paper and/or electronic
form;
 the language of any document specified in the guarantee; and
 the party liable for the payment of any charges.
Information concerning the names and addresses of the applicant/instructing party and the
beneficiary must be complete and correct. It should be clear which obligation the guarantee covers
and who is entitled to make a demand under the guarantee. This is of particular importance for
companies operating under several names and with independent units that may be separate legal
entities. Obviously, it is essential that the amount of the guarantee and currency be correctly stated.

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If the guarantee is to cover interest or expenses in addition to the principal amount, these must be
explicitly stated.
In addition, the parties should consider which bank should issue the guarantee. When receiving the
guarantee, one could say that the beneficiary “transfers” a defined risk (e.g. of non-performance or
non-payment) from the applicant/instructing party to a guarantor (often a bank). It is therefore
important to indicate which bank will do the issuance.
The application may also include information concerning how the guarantee is to be advised to the
beneficiary.
The application also serves as the agreement between the guarantor and the applicant/ instructing
party for the issuance of the guarantee. Therefore, the application also contains General Terms and
Conditions under which the bank is prepared to issue the guarantee. The application must also be
duly signed by the applicant/instructing party (this may be an electronic signature). In many cases,
for example when the application is sent electronically, the General Terms and Conditions may be
agreed via a general agreement between the customer and the bank covering all guarantees issued.
It is important to bear in mind that because this application is the basis for the guarantee the
information in it also should be clear and precise. The applicant/instructing party is committed to
the guarantor according to the information in the application. The guarantor is bound by the terms
and conditions stated in the guarantee vis-à-vis the beneficiary, while all the terms and conditions
stipulated in the trade agreement are a matter solely between the buyer and the seller.
If a specific guarantee text has been agreed by the parties, it should be attached as an appendix to
the application.
The guarantee application will also be the place where the applicant/instructing party chooses
which rules should apply to the guarantee. In order for URDG 758 to apply, the guarantee must
expressly indicate that it is subject to these rules.
3) Issuing the bank guarantee/amendment
The issuance of the guarantee by the guarantor is based on the application received from the
applicant/instructing party.
The guarantor will only issue the guarantee after having checked and accepted the application
form.
The issuance of the guarantee may take place in a number of ways, for example through SWIFT
via an advising party, but it may also be issued in paper format and handed over to the instructing
party for further delivery to the beneficiary, or sent directly to the beneficiary according to the
instructions received.
An amendment (change to an existing guarantee) is either requested by:
1) a signed letter from the applicant/instructing party or
2) a bank’s amendment request application.

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An amendment should be routed through the same parties as the original guarantee.
4) Advising/amending the bank guarantee
When advising the guarantee the advising party will check its apparent authenticity and will be
responsible for ensuring that the advice sent to the beneficiary accurately reflects the terms and
conditions of the guarantee received.
Immediately on receipt of the guarantee, the beneficiary should examine it to make sure that it is in
accordance with the contract or any other agreement, and that it will be possible to comply with all
of its terms and conditions if a demand for payment is to be made.
5) Demand/presentation/payment under the bank guarantee
The purpose of most guarantees is to serve as security. In a perfect world, demands will not be
made under the guarantee, and it will simply expire unutilized as the commercial parties each
perform as they are supposed to according to the commercial contract.
However, in some cases it will be necessary to make a demand under the guarantee. When this
occurs, URDG 758 has a number of provisions to regulate the process.
Demand/presentation
URDG 758 makes a distinction between demand and presentation. A demand is a demand for
payment, while a presentation is to be understood in a broader sense and may also serve other
purposes: for example presentation of a document reducing the amount of the guarantee. In other
words, a demand is always a presentation, but a presentation is not always demand.
The presentation must be made to the guarantor at the place where the guarantee has been
issued or a place stated in the guarantee. The presentation must be made on or before expiry.
It is also important that the presentation identifies the guarantee under which the presentation is
made. This will normally be done by stating the guarantor’s reference number of the guarantee. In
case there is no such identification, the examination of the demand will only begin after this
identification has been made.
If the examination of the presentation is delayed because of problems with identification, this does
not mean that the expiry of the guarantee is extended.
Examination of the presentation
When a presentation is made to the guarantor, it will be examined in order to determine if it is in
compliance with the requirements set out in the guarantee. If it is a complying demand, this
obligates the guarantor to pay the beneficiary.

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The examination is based solely upon the documents presented; in this respect, it is important that
the examination be based upon the documentary requirements expressed in the guarantee, since
non-documentary conditions are generally disregarded.
For example, a requirement such as: “This guarantee will expire once the plant has been
successfully installed at the site of the applicant” is a non-documentary condition. However, while
guarantors may disregard this condition for document examination purposes, this does not mean it
will be disregarded when it comes to performance of the parties under the guarantee.
The example above relates to dates or the lapse of a stated period, i.e. statements that trigger an
event by a determinable date or specified period. Another example concerns conditions/ events that
may increase or decrease the amount of the guarantee, for instance: “The guarantee will
automatically be reduced by USD 50.000 on 1 June 2018 unless a complying demand has been
made to the guarantor on or before that date”. This condition, while non-documentary, still
remains a term of the guarantee that must be adhered to. Likewise, the fulfillment of a stated
requirement that can be determined from the guarantor’s own records, i.e. the reduction of the
guarantee amount based on a payment transfer from the applicant’s account held with the guarantor
is a non-documentary condition that must be adhered to, even though it may be disregarded during
the examination process.
While it is expected that each guarantee will contain all the documents necessary to fulfil a
complying demand, URDG 758 includes a common, best practice default requirement that a
statement (supporting statement) must be provided by the beneficiary, indicating in what respect
the applicant is in breach of its obligations under the underlying relationship. This provision is only
effective should a guarantee not be issued in accordance with the standard format and if it is silent
with regard to the beneficiary’s requirement to provide a demand’s supporting statement.
The examination by the guarantor will be made on the basis of the presentation alone, whether it
appears on its face to be a complying presentation. This examination is independent of the
underlying relationship. It is important to note that the guarantor will compare data within and
between documents and with data in the guarantee in accordance with “international (not local)
standard guarantee practice”. The data need not be identical to, but must not “conflict” with other
data or the guarantee. For example, if a guarantee states that it covers a shipment of shirts sizes S-
XXL and a required demand document shows that skirts sizes S-XXL were shipped, this would be
a basis to determine that the demand presentation is not a complying one.
Time for examination, payment and rejection
When a demand is made to the guarantor, the guarantor shall, within five business days following
the day of presentation, examine the demand and determine if it is a complying demand.
The guarantor has some obligation to inform the instructing party of the demand under the
guarantee; however this, in itself, does not give the instructing party any right to reject the

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demand. Any payment or rejection will be based only on the examination of the demand by the
guarantor.
In the examination process there are three possible scenarios:
a)It is a complying demand
When the guarantor determines that it is a complying demand it must pay under the
guarantee.
As noted above, the instructing party should be informed about the demand. In addition, the
guarantor must send copies of the complying demand to the instructing party. However, the
payment obligation is triggered by the demand made to the guarantor; if it is a complying
demand, the guarantor has an obligation to pay the beneficiary, and the instructing party is
obligated to pay the guarantor based on the guarantee application.
b) It is a non-complying demand
If the demand is not a complying demand, the guarantor may reject the demand. It also has the
option to contact the instructing party for a waiver of the discrepancies noted.
If the guarantor rejects the demand, this must be done in accordance with the provisions set out in
article 24. In this respect it should be noted that the rejection must be sent without delay, but no
later than the closing of the fifth business day following the day of presentation.
c) The demand is not rejected within five business days from its date of presentation
The consequences of not making a timely rejection can be onerous. In such a case, the guarantor is
precluded from claiming that the demand does not constitute a complying demand. In other words,
if a rejection of a demand for payment has not been sent by the close of the fifth business day
following the day of presentation, the guarantor is obligated to pay!
Extend or pay
If the beneficiary alleges that the applicant will or has not been able to fulfil its contractual
obligations and the guarantee is about to expire, the beneficiary may present an “extend or pay”
demand to the guarantor. Such a demand provides the guarantor with an alternative, namely to
extend the expiry of the guarantee or pay the complying demand. This situation is covered in
URDG 758 article 23.
The prerequisite for this is that a complying demand has to have been presented to trigger the
guarantor’s obligation to pay.
If a demand is complying, the guarantor may suspend the payment for a period not to exceed 30
“calendar” days and shall inform the instructing party of the suspension.
It is the sole choice of the guarantor whether or not to grant the extension request, but if an agreed
extension is not provided, the guarantor (or counter-guarantor) must pay the demand.

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This process gives the beneficiary an opportunity to negotiate and the flexibility either to prolong
the guarantee’s validity or to receive payment.
It is usually in the interest of the guarantor to negotiate an extension with the beneficiary (hence the
30-day suspension rule described above), and if no agreement can be reached, to make sure that the
beneficiary is paid and the guarantee is cancelled. The extend or pay demand may cause the
guarantee to be extended several times, at the discretion of the beneficiary (and the guarantor), and
it can significantly increase the cost of the guarantee to the instructing party.
6) Expiry of the guarantee
A guarantee should include information about its expiry. The expiry may be expressed in the
guarantee either as a specific expiry date or as an expiry event.
In the case of an expiry event, it is important that the guarantor be able to determine when that
event occurs, either based on a document presented to the guarantor or an event that can be
determined from the guarantor’s own records (for example an indication that the transfer of a
certain amount of money from the applicant to the beneficiary has taken place).
If the guarantee includes an expiry date and an expiry event, the earlier of the two is deemed to be
expiry.
A presentation under the guarantee must be made on or before expiry.
URDG 758 has a special provision concerning expiry, namely that if the guarantee states neither an
expiry date nor an expiry event; the guarantee shall terminate after the lapse of three years from the
date of issue.
If a guarantee does not state an expiry date or event and is not subject to URDG 758, then local law
will determine when the expiry occurs.
Although it is not recommended, there are situations in which the guarantee will not include
information about its expiry, for example guarantees in favour of customs offices, tax or other
authorities. For this kind of guarantee, it is essential that the applicant ensure that the guarantee
document is returned to the bank, or that the bank is otherwise released by the beneficiary when the
guarantee is no longer needed.
Overseas Investment – Guarantee on behalfofWholly Owned Subsidiaries (WOSs)/Joint Ventures
(JVs) abroad
(i). An Indian party may have financial commitment to its JV / WOS to the limit of 400 percent of
the net worth of the Indian party as on the date of the last audited balance sheet. The financial
commitment may be in the form of
(a) capital contribution and loan to the JV / WOS;

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(b) corporate guarantee (only 50 percent value in case of performance guarantee) and / or bank
guarantee (which is backed by a counter guarantee / collateral by the Indian party) on behalf of the
JV / WOS and
(c) charge on immovable / movable property and other financial assets of the Indian party
(including group company) on behalf of JV / WOS.
(ii). An Indian party may offer any form of guarantee on behalf of the JV / WOS [corporate or
personal / primary or collateral / guarantee by the promoter company / guarantee by group
company, sister concern or associate company in India] provided that:
The total financial commitments of the Indian party, including all forms of guarantees, are within
the overall ceiling prescribed for overseas direct investment;
No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be
specified upfront.
In the case of performance guarantee, time specified for the completion of the contract shall be the
validity period of the related performance guarantee;
In cases where invocation of the performance guarantee breaches the specified ceiling for the
financial commitment of 400 per cent, the Indian party shall seek prior approval of the Reserve
Bank before remitting funds from India;
All forms of guarantees are required to be reported to the Reserve Bank in Form ODI Part II.
(iii) An Indian party may extend corporate guarantee on behalf of the first generation step down
operating subsidiary under the Automatic Route within the prevailing limit for the overseas direct
investments.
(iv) An Indian party may issue corporate guarantee on behalf of second generation or subsequent
generation step down operating subsidiaries with prior approval from the Reserve Bank, provided
the Indian party indirectly holds 51 percent or more stake in the overseas subsidiary for which such
guarantee is intended to be issued.
(v) The bank guarantee issued by a resident bank on behalf of an overseas JV / WOS of the Indian
party, which is backed by a counter guarantee / collateral by the Indian party, shall be reckoned for
computation of the financial commitment of the Indian party for overseas direct investments. The
bank guarantee to be issued would be subject to the prudential norms issued by the Reserve Bank
(DBOD) from time to time.”

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STATE BANK OF INDIA – CORPORATE ACCOUNTS GROUP
BACKGROUND
CAG is the dedicated SBU of the Bank handling the portfolio of ‘large credit'. The SBU has 7
Offices in 6 regional centers viz. Mumbai, Delhi, Chennai, Kolkata, Hyderabad and Ahmedabad
headed by General Managers. The business model of CAG is centered around the Relationship
Management concept and each client is mapped to a Relationship Manager who spearheads a cross-
functional Client Service Team. The Relationship strategy is anchored on delivering integrated and
comprehensive solutions to the clients, including structured products, within a strict Turn-Around-
Time. The principal objective of the strategy is to make ABC the first choice of the top corporates
thereby increasing the wallet-share and improving the Return on Capital Employed. A sustained
Account Planning exercise with rigorous review of the account by senior management sets the pace
for the Relationship Management in CAG
ABC is a one shop providing financial products / services of a wide range for large, medium and
small customers both domestic and international.
TRADE FINANCES
 Issuance and advising of Domestic and Foreign Letters of Credit.
 Confirmation of Export Letter of Credit.
 Issuance of Guarantees on behalf of Domestic Customers
 In favour of Domestic Beneficiaries and
 Foreign Beneficiaries.
 Issuance of guarantees on behalf of foreign correspondent banks to beneficiaries in India.
 Deferred Payment Guarantees.
 Domestic and Foreign Bills discounting.
 SWIFT Interface.
 (e-TradeABC) Front-end interface (Internet Based) at the customer place. Through e-
TradeABC, the customer can request the Bank;To issue Letter of Credit and handle related
bill transactions

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 To issue Bank Guarantee
 To send advice on Letters of Credit received from others
 To lodge Export Collection Bills
 To enquire status of Trade Finance transactions
 For negotiation of bills and track negotiated bills
 For Advance against Export Bills on Collection
 For Lodge of Bills where Full Advance Payment has been received
While ABC is the most widely accepted Indian Bank across the world with correspondent
relationship extending to a spectrum of international banks numbering 876 at present our LCs,
Guarantees and DPGs are issued at the most competitive rates.
ABC is the only Indian Bank whose guarantee is accepted by most of the Export Credit Agencies
globally without seeking confirmation.
ABC's Clean & Documentary Collections are made at most competitive rates through our Global
Link Services.
Guidelines on conduct of Bank Guarantee business
Branches should, as a general rule, limit themselves to the provision of financial guarantees and
exercise due caution with regard to performance guarantee business. The subtle difference between
the two types of guarantees is that under a financial guarantee, a bank guarantees the customer’s
(applicant’s) financial worth, creditworthiness and his capacity to take up financial risks. In a
performance guarantee, the bank’s guarantee obligations relate to the performance related
obligations of the applicant (customer).
While issuing financial guarantees, branches should satisfy themselves that customers would be in
a position to reimburse the Bank in case the Bank is required to make the payment under the
guarantee. In case of performance guarantee, branches should exercise due caution and have
sufficient experience with the customer to satisfy themselves that the customer has the necessary
experience, capacity, expertise and means to perform the obligations under the contract and any
default is not likely to occur.
Bank should not issue guarantees valid for more than 18 months without obtaining prior
administrative clearance from the appropriate authority through their respective controlling

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authorities. Bank Guarantees originally issued for period less than 18 months but that have been
subsequently extended, crossing in aggregate the 18 months cut off will also attract administrative
clearance form competent authority. However, if the remaining validity period after such extension
is less than 18 months (Fresh extension is for less than 18 months) administrative clearance is not
required.
No bank guarantee should, normally, have a maturity of more than ten years. Bank guarantee
beyond maturity of 10 years may be considered against 100% cash margin with prior approval of
the competent authority specified in this regard.
Branches should normally refrain from issuing guarantees on behalf of customers who enjoy other
credit facilities not with them but with other banks.
Unsecured guarantees, where furnished by exception, should individually be for a short period and
for relatively small amounts.
All deferred payment guarantees (DPGs) should ordinarily be secured.
Issuing of guarantees by banks on behalf of corporate entities in respect of Non-Convertible
Debentures (NCDs)/ bonds or debt instruments is not permissible. In this Connection Bank’s Loan
Policy of State Bank Of India also states that:
“The bank will not execute guarantees covering inter-company deposits/ loans. BGs will also not
be issued for the purpose of indirectly enabling the placement of deposits with non-banking
institutions”.
Although RBI has not permitted issue of guarantees by banks on behalf of corporate entities in
respect of NCDs/ Debt instruments as mentioned above it has clarified that guarantees may be
issued by banks favouring FIs/other banks/ other lending agencies for loans extended by them.
However, ABC in terms of Bank’s Loan Policy has taken a decision not to issue such guarantees
for domestic operations. Further, the Bank will also not undertake the business of co-acceptance of
bills of its constituents.
Appraisal of Bank Guarantee Limit
Branches should appraise the proposals for guarantees with the same diligence as in the case of
fund-based limits. They may obtain adequate cover by way of margin and security so as to prevent
default on payments when guarantees are invoked.
Whenever an application for the issue of bank guarantee (or sanction of a regular bank guarantee
limit as part of working capital limits) is received, branches should examine and satisfy themselves
thoroughly about the following aspects:

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(a) The need for the bank guarantee and whether it is related to the applicant’s normal
trade/business.
(b) Whether the requirement is one-time or on a regular basis.
(c) The nature of bank guarantee i.e., financial or performance.
(d) Applicant’s financial strength/capacity (through an analysis of his financial statements,
cash/ funds flow position and opinion reports) to meet the liability/obligation under the bank
guarantee in case of invocation.
(e) Past record of the applicant in respect of bank guarantees issued earlier; e.g., instances of
invocation of bank guarantees, the reasons thereof, the customer’s response to the invocation, etc.
(f) Present outstanding on account of bank guarantees already issued.
(g) Margin.
(h) Collateral Security offered.
(i) KYC of the borrowers & guarantors.
Margins
Following are some of the factors to be kept in view by the branches while determining the margins
required:
(a) Cash margins provide a cushion against invocation. Margin money may be in the form of
TDR with the Bank or a lien marked on the drawing power in the constituent’s cash credit account.
However, where margin is sought to be taken in the form of a lien on the drawing power in the
constituent’s cash credit account, specific approval from the sanctioning authority is necessary.
(b) The margin to be stipulated would depend on the borrower’s means, resources,
creditworthiness, security available, past experience with regard to issue of BGs, nature of
guarantee and the nature of underlying transactions. If the applicant is an existing borrower, margin
on bank guarantee may generally be the same as on stock, receivables, etc. Where reduced margins
or no margins are stipulated, the reasons thereof must invariably be stated in the proposal.
(c) In case of Advance Payment Guarantees, lower margins may initially be stipulated.
(d) In respect of non-borrower applicants, Banks’ approach should normally be to obtain full
margins. However, a credit risk can be taken on the applicants based on the financial indicators,
credit worthiness, security available etc.

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(e) 100% margin should ordinarily be retained in respect of guarantees issued in connection
with disputed customs/central excise duties, unless otherwise specified in the sanction.
Security
Apart from the margin, bank guarantees are usually secured by an extension of the charge on
current assets obtained to cover working capital facilities. Adequate collateral security by way of
equitable mortgage/extension of charge on current/fixed assets or third party guarantee should be
taken depending on the merits of each case.
Commission
Commission to be charged on the guarantees issued, service charges, authority for sanction of
concession in service charges, refund of commission etc. shall be as per the instructions issued by
the Bank from time to time.
Documents
1. Whenever a guarantee is issued and/or guarantee bond is countersigned by the Bank on
behalf of a constituent, suitable Counter Guarantee should be obtained from the constituent..
For each ad hoc bank guarantee issued, a separate Counter Guarantee is necessary. In the case
of a regular bank guarantee limit duly sanctioned, a stamped omnibus Counter Guarantee for
the bank guarantee limit will suffice. An omnibus Counter Guarantee, can be executed one time
by the borrower to whom a limit for issuance of guarantees up to a specific amount is
sanctioned. Where such a limit is sanctioned, guarantees can be issued within the limit
favouring various beneficiaries. Guarantees issued should be recorded in a register and a check
kept so that the total amount of guarantees issued does not exceed the amount for which the
omnibus Counter Guarantee has been taken.
2. In case of a partnership firm, Counter Guarantees should be signed/executed by all the partners
of the partnership firm. A partner of the firm is not competent to execute the Counter Guarantee
for and on behalf of the firm unless he (managing partner) has been specifically authorised to
do so by all the partners under the deed of partnership or otherwise.

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3. In case of a joint stock company, a board resolution should be got passed by the company
before executing the Counter Guarantee or omnibus Counter Guarantee. The Bank’s charge in
respect of the guarantees issued on behalf of the companies should also be filed for registration
with the concerned Registrar within the stipulated period of 30 days.
4. Both the bank guarantee (to be executed by the Bank) and the Counter Guarantee or Omnibus
Counter Guarantee (to be executed by the applicant/ borrower) are to be stamped as agreements
as per Stamp Duty required at the place of execution.
5. Branches are advised to refer to the Bank’s Manual on Documentation for detailed instructions
on documentation.
Format of Bank Guarantees
Bank guarantees should normally be issued on the format standardised by Indian Banks
Association (IBA). When it is required to be issued on a format different from the IBA format, as
may be demanded by some of the beneficiary Government departments, it should be ensured that
the bank guarantee is
(a) for a definite period,
(b) for a definite objective enforceable on the happening of a definite event,
(c) for a specific amount
(d) in respect of bona fide trade /commercial transactions,
(e) contains the Bank’s standard limitation clause
(f) not stipulating any onerous clause, and
(g) not containing any clause for automatic renewal of the bank guarantee on its expiry.
Bank guarantees should be issued with a pre-printed and numbered standard first page of the
guarantee form, which contains the limitation clause. The pre-printed form is to be used for all
Bank guarantees. However, in the case of a guarantee favouring a Government department if the
concerned department objects to the use of the pre-printed form, branches may issue the guarantee
on non-judicial stamp paper. The text of the guarantee will appear on the pages succeeding the
printed first page. It should be ensured that while filling up the first page of the bank guarantee (the
pre-printed and numbered standard first page), no separate claim period is provided i.e., the validity
period of the guarantee will be stated inclusive of the claim period. Further, each page of the text of

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the guarantee enclosed with the pre-printed form should also find mention of pre-printed serial
numbers of the prescribed security form, BG number, date of issue and amount, etc.
In all the guarantees issued by the Bank, the limitation clause suggested by IBA, quoted below,
should invariably be incorporated at the end of the text as concluding paragraph of the bank
guarantee.
(This clause should be included in addition to the text appearing on the printed page one.)
“Notwithstanding anything contained herein:
(a) our liability under this Bank Guarantee shall not exceed Rs._ _ _ _ _ _ _ (Rupees _ _ _ _
_ _ _ _ _ _ _ _ _ _ _ _ _ _ only);
(b) this Bank Guarantee shall be valid up to _ _ _ _ _ _ _ _ _ _ _; and
(c) we are liable to pay the guaranteed amount or any part thereof under this Bank
Guarantee only and only if you serve upon us a written claim or demand on or before _ _ _ _ _ _
_ _ _ _ _ (date of expiry of Guarantee).”
In case of guarantees issued favouring Government departments, the above clause should be
included in the BG form prescribed for bank guarantees in favour of Government departments. If
the Government departments/quasi-Government institutions require guarantees as per their format,
the controlling authorities may permit the branches to issue guarantees/extension guarantees as per
their specimen forms, provided such forms generally conform to the model guarantee form, contain
the usual standard limitation clauses and are free from any clause prejudicial to the Bank’s interest.
As already stated in paragraph above, in the printed page of bank guarantees issued, a separate
period for lodgment of claim, distinct from the validity period of the guarantee, should not be
specified. However, in the case of bank guarantees favouring PSUs and autonomous bodies, where
the beneficiaries so insist and a loss of business is perceived, branches can indicate a separate claim
period. The period of the claim should, however, be kept at the minimum. It should generally not
exceed three months.

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The guarantees/extension guarantees should be issued by signing in full on all pages with original
number.
The guarantee may also be issued by the branches on a stamp paper on which the name of the
customer (on whose behalf the guarantee is issued) appears as the purchaser thereof. It should be
ensured that a) date of purchase of stamp paper is prior to the date of the bank guarantee, and b) the
parties to bank guarantee are identical with those mentioned in the BG.
The guarantees issued by the branches for Rs.50000/ and above should invariably be signed by two
officials jointly.
Extension/Renewal of Bank Guarantee
Branches may entertain requests from the applicants for extension/renewal of guarantee provided
there is no change in the amount and other terms and conditions of the guarantee. The pre-printed
forms prescribed for the purpose (Extension Guarantee) will be used. Expired bank guarantee may
also be renewed with retrospective effect subject to the condition that the Bank remains
indemnified as against the contingent liabilities etc. which may arise under the said guarantee i.e.,
the counter guarantee covers such liabilities retrospectively.
Bank Guarantees issued through Trade Finance Software, complete printed Bank Guarantee is
generated in the software, which is stamped and issued.
Normally, requests for extension should emanate from the applicants. In case, however, the
beneficiaries request the branches either to renew or pay the guarantee amount, the branches should
acknowledge such letters to the beneficiaries and request the applicants to renew before the
guarantees expire or deposit the guarantee amount for honouring the commitment. If no request for
renewal is received by the branches in time, they should honour the guarantees invoked and recover
the amount paid from the applicants in the usual manner.
The stipulations pertaining to issue of guarantees apply equally to extension or renewal of
guarantees.
Bank will issue BGs with automatic renewal clause only to select beneficiaries such as customs
authority, courts and overseas project owners in respect of project exports. Due precaution to
safeguard bank’s interest like obtaining 100% cash margin etc. should be taken before issuing such
guarantees.

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Amendment
Bank Guarantee is a contract whereby the Bank agrees to pay the beneficiary the amount
guaranteed in the Letter of Guarantee, if the guaranteed obligations are not fulfilled by the
applicant. It can be amended as in the case of any other contract, with the consent of all the parties
concerned and there is no restriction under law or guidelines of RBI for such amendment. It is also
relevant to note that Article-11 of the Uniform Rules of Demand Guarantees 758 permits
amendments to the guarantees provided the amendment is accepted in whole and the beneficiary
expressly agrees to the amendment.
Termination/Cancellation of Bank Guarantees
After the expiry of each bank guarantee (including the time limit stipulated for preferring claim, if
any), a registered letter with A.D. should be sent to the beneficiary advising that the guarantee has
expired and requesting the beneficiary to return the original guarantee document. It should be made
clear in the letter that the beneficiary is no longer entitled to invoke the guarantee. This registered
letter, to be sent to the beneficiary, will be as per the format prescribed. The letter in the format is
to be issued for all guarantees, including guarantees issued on behalf of a Foreign Bank/ Foreign
Office.
 The liabilities in branch books may be reversed after seven days of expiry of the guarantee.
 If the claim period is different from that of the validity period, the entries may be reversed
seven days after the expiry of the claim period.
 Reminder after one month by Regd AD, if the BG is not returned, and margin/collateral, if any,
taken exclusively for relative BG are to be refunded/released only after return of the original
guarantee document.
Branches should periodically verify the outstanding guarantees and take appropriate action for
cancellation of outstanding guarantees beyond the respective dates of expiry/claims.
Bank guarantee can be cancelled :
(a) prior to expiry of the period only with the written consent of the two parties to the contract
i.e., the beneficiary and the applicant, or
(b) on the expiry of claim period

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In cases where the guarantee duly cancelled is received back before the expiry date, the liability
will be marked off in branch books. However, the commission for the balance period is not
refundable if the purpose for which the guarantee was issued has been fulfilled.
Branches should diarise two months before expiry date and advise the applicant to take steps for
either renewal or release of the guarantee. The applicant should be put on notice that the Bank
would be honouring the claim without further reference if the guarantee is invoked consequent
upon non- renewal in time.
Invocation of Bank Guarantee
The beneficiary of the bank guarantee can invoke in writing, the guarantee any time before the
expiry of the guarantee period. Invocation can be done by Telex/Telegram/hand delivery also
followed by mail confirmation. Branches should ensure that all valid claims received by them
under bank guarantees issued by them are settled promptly. In the case of any dispute, such
honouring, on invocation, will be done under protest and the matters of dispute should be pursued
separately.
The Bank’s liability under bank guarantee is absolute and independent and exclusive of any other
contract entered into by the applicant and beneficiary. It is, therefore, obligatory on the part of the
Bank to pay to the beneficiary without delay, the amount of bank guarantee on its invocation in
accordance with the terms and conditions of the guarantee deeds. It is not necessary for the
beneficiary to satisfy the Bank, about the default or the amount of actual loss suffered by him. In
this connection, branch managers have been vested with necessary powers to honour the claims
under the guarantees issued by the Bank provided the guarantee was executed under sanction from
the competent authority and conditions stipulated for invocation of the guarantee have been fully
complied with. Delay in honouring the claim immediately may unnecessarily put the Bank in
problems pertaining to claim of interest, damages and at times injunction orders from court.
Only when the Bank has received an order of restraint/injunction from a competent/ appropriate
court, the Bank can withhold payment under the bank guarantee. Till the court case is decided, the
liability of the Bank under bank guarantee will continue. Guarantee commission for the period of
pendency of court cases has to be recovered. In such cases, the beneficiary of the guarantee should
be advised appropriately of the reason for non payment of amount due under invoked guarantee.

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In case of invocation of performance guarantees issued in favour of foreign beneficiaries, branches
should note that the Bank is responsible for paying Indian income tax (withholding tax, where
applicable) on the payments on account of such invoked guarantees. Hence the same may be
deducted from the payments due to the beneficiary. Failure to deduct tax will make the Bank liable
to pay the same. Bank’s obligation to deduct income tax from the claim amount in the event of
invocation to be specifically mentioned. If the transaction requires that the Indian company on
whose behalf the guarantee is issued, should make good the tax liability, then a separate
arrangement between the two parties can be entered into which would be outside the purview of the
Bank guarantee.
Interchangeability between Letter of Credit and Bank Guarantee limits
Generally, requests for interchangeability between the two facilities will be entertained only when
the purposes for which the facilities have been sanctioned are similar.
The interchangeability from LC to BG and vice versa need to be considered with caution as there
would be change in quality of underlying exposure. Further, while considering requests for such
interchangeability, the undernoted factors may be kept in mind:
i) Time horizons of risk devolvement between the two facilities are different.
ii) Nature of risk is not the same i.e., the risk associated with a performance guarantee is
different from that of a financial guarantee or an LC.
iii) While examination of cash flows is vital at the time of opening an LC, it is not generally
considered as relevant in most cases of issues of BGs.
iv) A usance LC limit has a bearing on the level of sundry creditors available and hence on the
fund-based credit limit required.
v) The borrowing unit’s track record in meeting the obligations under Letters of Credit.
vi) The authority for permitting such interchangeability will be as per the authority structure.

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37
Advance Payment Guarantee (APG)
Advance Payment Guarantees are ordinarily required by construction companies/contractors. The
following monitoring mechanism has been prescribed in respect of such guarantees for ensuring
end use of funds. The undernoted guidelines should be followed by the branches while executing
and monitoring advance payment guarantees:
(a) Submission by the applicant of a flow chart indicating the expected progress of work in
respect of each contract along with the application for issue of Advance Payment Guarantee (APG).
(b) A schedule of utilisationof the advance payment to be received, indicating the expected
date/month of utilisation and its purpose. Withdrawal of the advance payment received should
normally be permitted in accordance with the utilisation schedule, which should be examined by
the branch at the time of issuing the guarantee.
(c) A periodical progress report should be submitted by the applicant of the guarantee to enable
the branch to monitor the end use of funds/the progress of the work vis-à-vis the flow chart and the
utilisation schedule. The periodicity of the report may be quarterly or half-yearly depending on the
size of the contract and the period over which it is spread.
(d) The progress of the work should be verified with the help of the flow chart and periodical
progress reports and if there is deviation in the progress of work in excess of, say 15%, the matter
may be reported to the controlling authority. The services of outside consultants/architects may also
be enlisted in cases where contracts are of large value warranting vetting by such outside agency.
This, however, would need to be approved by the appropriate authority and the cost recovered from
the applicant.
(e) Where advance payments for purchase of material (or for meeting other expenses) are
received by the customer against the Bank’s guarantee, the end use of these funds should be
monitored to ensure that adequate stocks are actually held and these are not additionally financed
by the branch under working capital facility. Stocks procured out of advance money may be
knocked off from the value of security charged to the Bank mentioned in the stock statement.
Alternatively, credit limit may be impounded during the execution period/cycle of operation during
the currency of the guarantee.

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38
Deferred Payment Guarantee (DPG)
A deferred payment guarantee (DPG) is a contract to pay to the supplier the price of machinery,
supplied by him on deferred terms to the buyer, in agreed installments with stipulated interest on
the respective due dates in case of default in payment thereof by the buyer.
Under the contract, the Bank executes a guarantee on behalf of the buyer to the seller’s banker who,
on the strength thereof, discounts the seller’s bills drawn on the buyer. The seller receives payment
for the plant and machinery by his bills being discounted by his banker, and the buyer repays his
obligation in installments to the seller’s banker by retiring those bills on the respective maturity
dates.
DPG is also sanctioned in respect of deferred term commitments and obligations of financing
institutions/borrowers. A DPG is, in many respects, a substitute for a term loan with the only
difference in the mode of term assistance. The process of appraisal is, therefore, the same as is
applicable to term loans.
All the activities which are eligible for the purpose of granting term loans by the Bank will be
eligible for the purpose of issuing deferred payment guarantees.
The period of deferred payment guarantees should not ordinarily exceed 7 to 10 years, although it
could be considered even beyond 10 years in exceptional cases depending upon merits.
The standard covenants for DPGs are generally the same as those for term loans.
Where both the buyer and the seller have common banking arrangements i.e., both are Bank’s
constituents, the deferred payment guarantees as such will not be required to be executed. Instead
the branch which handles the buyer’s account will issue a letter of commitment to the discounting
branch (which handles the seller’s account) authorising the discount of bills/notes without issuing a
separate deferred payment guarantee. The issue of such a letter of commitment on behalf of the
buyer, however, should be treated on par with a deferred payment guarantee for all purposes.
Installments due under deferred payment guarantees are payable out of cash accruals generated by a
unit. As cash accruals are part of the sales proceeds, which get routed through the unit’s cash credit
accounts, it is the usual practice to debit the cash credit account with the amount of the installments
under deferred payment guarantees, provided there is adequate drawing power. However, such
debits should not be permitted, where these will result in over drawings in the cash credit account.
Overdue installments or installments in default (where the DPG issued by the Bank has been
invoked) should be debited to a separate account opened in the Term Loans Ledger styled as under:

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39
“Name of the unit……………………..(overdue installments due under deferred payment
guarantee No……………………….. dated……………. for Rs…………………………………..)
account.”
Transfer of the overdue installments in overdue DPG account to the cash credit account
subsequently when it is regularised and sufficient drawing power is available may be made only
with the prior approval of the controlling authorities.
The Bank’s commitments under a DPG facility should usually be secured by a charge
(exclusive/pari-passu/second charge) over the capital equipments acquired/to be acquired by the
buyer.
The liability of the Bank under DPG will be the amount for which the guarantee is issued inclusive
of interest. The liability should be reduced by the amount of installments, inclusive of the interest
component, as and when they are paid.
Bank also executes foreign DPGs covering import of plant and machinery on deferred payment
basis. A foreign DPG is in no way different from an inland DPG and, therefore, the proposal for a
foreign DPG has to be processed, in the same way as the proposal for an inland DPG. Additionally,
in the case of a foreign DPG it has to be ensured that all the relevant Import Trade Control/
Exchange Control requirements in force from time to time are duly complied with before the DPG
is executed.
In the case of DPGs issued in foreign currencies, the conversion rate for control entries will be BC
selling rate for the currency concerned ruling on the date the guarantee is issued. The entries will be
reversed as and when the amounts are paid, at the same rate at which the original entry was passed
as in the case of other bank guarantees.
Export Performance Guarantees Favouring Customs
These guarantees are those which are executed favouring the Customs Department for amounts
linked to the customs duty relief availed by the exporter customers on imports of capital goods
under the Export Promotion Capital Goods (EPCG) Scheme. The guarantees are for the due
fulfillment of a specified level of export obligation undertaken by a customer to avail of the
customs duty remission on the imports.

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40
In view of the nature of exposure involved in these type of guarantees, these guarantees stand on
the footing of long term financing of a project, like a DPG commitment.
In all cases of EPCG linked Bank Guarantees, branches should adopt the following approach:
i) Export Performance Guarantees given for availment of duty concessions on capital goods
will be considered as part of the long term project finance.
ii) The assessment of the guarantee will continue to be done on the lines as of now, viz. the
technical, financial and marketing ability of the project to achieve exports of the value within the
time allowed under the duty concessions scheme, will be assessed.
iii) The guarantee should be supported by the same security which is available for the TL and
DPG commitments for the project i.e. the Bank should have the first charge/pari passu first charge
on the assets to be acquired. In addition, additional security as necessary should be obtained for
the facility including the Export Performance Guarantee issued by ECGC.
iv) Where the value of these guarantees is substantial in relation to the TL and DPG
commitments from term lending institutions and banks, the risk under the guarantees should be
shared with the term lending institutions through appropriate counter guarantees from them on the
lines similar to issue of DPGs by the Bank on behalf of a consortium of term lenders.
Comments on export performance are required to be given in the review/ renewal proposals, for
units availing bank guarantees under EPCG Scheme. In view of the above, it should be ensured that
a suitable system in place for monitoring the actual exports made by the customers vis-à-vis the
commitments made with prescription to retain higher cash margins.
Bid Bonds and Performance Guarantees on behalf of Exporters
Bid bonds are issued in favour of overseas buyers in lieu of earnest money. Such guarantees have to
be submitted by the exporters at the time they participate in tenders for the supply of goods/services
abroad.
While issuing bid bonds, branches may follow the undernoted guidelines:
i) A flexible approach may be adopted in the matter of obtaining cover and earmarking of
assets/credit limits/drawing powers, while issuing bid bonds and performance guarantees for export
purposes. Branches may not ask for any cash margin in respect of bid bond and guarantees counter-
guaranteed by ECGC. In other cases where such counter- guarantees of ECGC are not available,

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41
branches may stipulate a reasonable cash margin where it is considered absolutely necessary, as
generally they are required to satisfy themselves about the capacity and financial position of the
exporter while issuing such bid bonds/ guarantees.
ii) Branches may consider sanctioning separate limit for issue of bid bonds and within the
limits so sanctioned, bid bonds against individual contracts may be issued, subject to usual
precautions.
iii) Issue of bid bonds for project exports is subject to compliance with the Exchange Control
Regulations. Branches must comply with these regulations. For guidelines on project exports,
please refer to the compendium of instructions brought out by the Project Exports Cell, Corporate
Centre.
Bank Guarantee Scheme of Government of India
The Indian Banks’ Association (IBA) has, in consultation with the Reserve Bank of India, and
Ministry of Finance, Government of India, evolved a Model Bank Guarantee Form in respect of
guarantees to be issued in lieu of security deposit to departments of the State/Central Governments
and Public Sector undertakings. While issuing such guarantees in lieu of security deposit, branches
should adopt the aforementioned model guarantee form.
It will also be in order for branches to consider issuing guarantees in any other suitable form, with
the permission of the controlling authority provided the standard limitation clause is retained and
also the spirit behind the model guarantee form is preserved and the Bank’s interests are not in any
way jeopardised. However, if inclusions of any additional clause or alterations in the clauses of the
model bank guarantee form are considered necessary owing to the peculiarities of certain contracts,
it should be ensured that these additions/alterations are not one-sided and are not prejudicial to the
interests of the Bank.
Branches should note that the guarantee bond is to be issued at the request of the
contractor(s)/supplier(s) and it can be renewed or its period of validity extended only at the request
of the contractor(s)/supplier(s) concerned.
Government of India has also clarified that
(i) the bank guarantee would be invoked only where there is a specific breach on the part of the
contractor of the terms and conditions of the relevant agreement and the bank guarantee bond, (ii)
the decision to invoke the guarantee would be taken as far as possible, by an officer higher in rank
than the officer who accepted the guarantee, and

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42
(iii) all claims under the guarantee bond should be made and lodged with the bank within the period
specified in the relevant guarantee bond.
Bank Guarantees favouring Government departments- correspondence with President of
India
In respect of guarantees issued by the branches favouring Government departments, branches
shouldnot address any correspondence to the President of India, although such guarantees are
favouring the President of India. The correspondence relating to such guarantees should instead be
addressed to the concerned Government Ministry/Departments.
Procedure to be followed when the judgements are delivered by Courts in favour of
Government departments
The following procedure should be adopted when the judgements are delivered by Courts in respect
of guarantees issued in favour of Government Departments:
(a) Where the Bank was a party to the proceedings initiated by Government for enforcement of
the bank guarantee and the case was decided in favour of the Government by the Court, branches
need not insist on production of certified copy of the judgement as the judgement/order was
pronounced in open Court in presence of the parties/their Counsels and the judgement would be
known to the Bank.
(b) In case the Bank was not a party to the proceedings, a signed copy of the minutes of the
order certified by the Registrar/Deputy or Assistant Registrar of the High Court or the ordinary
copy of the judgement/order of the High Court, duly attested to be true copy by Government
Counsel, would be sufficient for honouring the obligation under the guarantee unless the Bank
decides to file any appeal against the order of the High Court.
To facilitate prompt identification of the guarantees with the concerned departments, branches
should mention in their correspondence with various State Governments, the names of the
beneficiary departments and the purposes for which the guarantees were executed.

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43
Issue of Bank Guarantees in favour of other banks/financial institutions
Branches should not issue guarantees favouring financial institutions, other banks and/or other
lending agencies for the loans extended by the latter, as it is intended that the primary lender should
appraise and assume the risk associated with sanction of credit and not pass on the risk by securing
itself with a guarantee.
Exceptions are permitted in the following cases by Reserve Bank of India.
(a) Issue of guarantee in favour of another bank in cases where a bank is unable to take its
additional share in consortium account due to a liquidity strain and has temporarily transferred the
share to another bank in the consortium along with issuing a guarantee in its favour.
(b) In the case of Seller’s Line of Credit Scheme (SLCS) operated by financial institutions like
IDBI, SIDBI, PFC etc. for sale of machinery, the primary credit is provided by the seller’s bank to
the seller through bills drawn on the buyer and seller’s bank has no access to the security covered
by the transaction which remains with the buyer. As such, buyer’s banks are permitted to extend
guarantee/co-acceptance facility for the bills drawn under Seller’s Line of Credit.
However, such guarantee/co-acceptance facilities favouring financial institutions under their
Buyers Line of Credit Scheme (BLCS) should not be granted for the reason that under the BLCS,
the financial institutions assume the role of a primary lender by directly providing credit to the
buyer to facilitate purchase of machinery, equipments etc. covered by the transaction. As the
primary lender is required to make a proper assessment of the proposal and secure a charge of
hypothecation on the assets financed, it would not be in order for the financial institutions to shift
the risk of repayment by obtaining a bank guarantee.
(c) Issue of guarantee in favour of different Development Agencies/ Boards like Indian
Renewable Energy Development Agency, National Horticulture Board, Sugar Development Fund,
etc., on behalf of their clients/customers for obtaining soft loans and/or other forms of
development assistance from such Agencies/Boards.
However, such sanctions should be subject to the following conditions:
i) Banks should satisfy themselves, on the basis of credit appraisal, regarding the technical
feasibility, financial viability and bankability of individual projects and/or loan proposals i.e., the
standard of such appraisal should be the same, as is done in the case of a loan proposal seeking
sanction of term finance/ loan.

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44
ii) Banks should conform to the prudential exposure norms prescribed from time to time for an
individual borrower/group of borrowers.
iii) Banks should conform to the ceilings prescribed from time to time for sanction of term
finance/loans from the banking system.
iv) Banks should suitably secure themselves before extending such guarantees.
Branches should not execute any guarantee in favour of HUDCO in respect of loans given to State
sponsored bodies.
Branches should not execute guarantees covering inter-company deposits/ loans. Guarantees should
not also be issued for the purpose of indirectly enabling the placement of deposits with non-
banking institutions. This stipulation will apply to all types of deposits/loans irrespective of their
source, e.g. deposits/loans received by non-banking companies from trusts and other institutions.
It is not the Bank’s normal practice to grant credit facilities on the strength of guarantees issued by
other banks.
But, in cases where branches entertain loan proposals on the strength of the guarantees issued by
other banks/ financial institutions, the undernoted points should be kept in view:-
i) The credit proposals should be subjected to usual scrutiny by the branches ensuring that the
proposals conform to the prescribed norms and guidelines and credit facilities allowed only if they
are satisfied about the merits of the proposal. The availability of the other bank’s guarantee should
not result in dilution of the standards of evaluation of the proposal and financial discipline in
lending.
ii) Branches should also enquire into the reasons as to why the other bank, instead of itself
granting the credit facility, is guaranteeing it. This should be recorded in bank’s books.
iii) It should also be ensured that the officials of the Bank issuing the guarantee are vested with
the necessary powers and should insist on the relative powers being registered with it before
releasing the credit facility.
For instructions on delegation of powers in regard to bank guarantees, branches should refer to the
Bank’s Scheme of Delegation of Financial Powers.
Accounting System

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45
In regard to the accounting system, procedures and control returns to be submitted by the branches
covering various aspects of guarantee business, branches should be guided by the instructions
issued by the Bank from time to time.
Journal Entries:
Guarantee is a contingent liability and shown in notes of account only. Some people do not want to
take risk of forget at the time of finalisation of financial statements of an enterprises. Therefor I
workout following solution with the help of undermentioned entries in books of account:
Step -1 Create a Contingent Liability Sub-group under the heading of Long Term Provisions:
Step -2 Create 2 Leger under said sub group;
BG ABC Bank (Guarantee Issuing Bank)
BG ABC International Pvt Ltd (To whom BG is given)
Step -3 Journal Entry:
Entry for opening of bank guarantee:
BG Margin A/c Dr
To Bank a/C
(Being ..% margin paid to bank for issue of BG of Rs. … in favour of ABC International Pvt Ltd)
Entry for payment of BG Charges
BG Charges/ Bank Charges A/c Dr
To Bank A/C
(Being Rs. .. /-paid to bank against issue of BG, valaidity period 21.07.2016 to 20.07.2019 in
favour of ABC international)
Entry for handover of BG to party
BG ABC International Pvt Ltd Dr Eg 20,000.00
To BG ABC Bank A/C eg 20,000.00
(Being bank guarantee handed over to party)
Trail position at the yearend:

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46
1. Both the ledger is grouped in same sub group, therefore, closing balance will be NIL no effect in
financial statement;
2. You can observed following ledger in trail balance and you can mitigate risk to forget at the time
of preparation of financial statement. Contingent Liability Credit 0 BG ABC International Pvt Ltd
20,000.00 BG ABC Bank A/C – 20,000.00
Entry for provision against Bank Guarantee
Open new ledger in the group of contingent liability as “BG Provision A/c)
Profit & Loss A/c Dr
To BG Provision
(Being provision made against given guarantee)
Entry when guarantee invoked
BG ABC Bank Dr
To BG Margin A/c
To Bank A/c
(being BG no .. invoked by party)
BG Provision Dr.
To BG ABC International Pvt Ltd.
(being BG no .. invoked by part and amount paid by bank)

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