A ppt about Bank Guarantee

1. BANK
GUARANTEE
Afrah Abdul

2. WHAT IS BANK
GUARANTEE
• A bank guarantee is an assurance that a bank provides to a
contract between two external parties, a buyer and a seller, or in
relation to the guarantee, an applicant and a beneficiary. The
bank guarantee serves as a risk management tool for the
beneficiary, as the bank assumes liability for completion of the
contract should the buyer default on their debt or obligation.
• Bank guarantees serve a key purpose for small businesses; the
bank, through their due diligence of the applicant, provides
credibility to them as a viable business partner for the beneficiary
of the guarantee. In essence, the bank puts its seal of approval to
the applicant’s creditworthiness, co-signing on behalf of the
applicant as it relates to the specific contract the two external
parties are undertaking.
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3. TYPES OF BANK
GUARANTEES

4. A bank guarantee is for a specific amount and
a predetermined period of time. It clearly
states the circumstances under which the
guarantee is applicable to the contract. A bank
guarantee can be either financial or
performance-based in nature.
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5. • In a financial bank guarantee, the bank will guarantee that the
buyer will repay the debts owed to the seller. Should the buyer
fail to do so, the bank will assume the financial burden itself, for
a small initial fee, which is charged from the buyer upon issuance
of the guarantee.
• For a performance-based guarantee, the beneficiary can seek
reparations form the bank for non-performance of the obligation
as laid out in the contract. Should the counterparty fail to deliver
on the services as promised, the beneficiary will claim their
resulting losses from non-performance to the guarantor – the
bank.
• For foreign bank guarantees, such as in international export
situations, there may be a fourth party – a correspondent bank
that operates in the country of domicile of the beneficiary.
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6. REAL-WORLD EXAMPLE
• For a real-world example, consider a large agricultural equipment manufacturer. While the
manufacturer may have vendors in many places, it is often best practice to have local vendors for
key parts, both for accessibility and transportation cost reasons.
• As such, they may wish to enter into a contract with a small metalworks shop that is located in the
same industrial area. Due to the small vendor being relatively unknown, the large company will
require the vendor to secure a bank guarantee before entering into a contract for $300,000 worth
of machine parts. In such a case, the large company will be the beneficiary, and the small vendor
will be the applicant.
• Should the small vendor receive the bank guarantee, the large company will enter into a contract
with the vendor. At this point, the company may pay the $300,000 in advance, with the
understanding that the vendor is to deliver the agreed-upon parts in the following year. If the
vendor is unable to do so, the agricultural equipment maker can claim the losses resulting from the
vendor breaking the terms of the contract from the bank.
• Through the bank guarantee, the large agricultural equipment manufacturer can shorten and
simplify its supply chain without compromising its financial situation.
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7. ADVANTAGES OF BANK
GUARANTEES
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8. To the applicant:
•Small companies can secure loans or conduct business that would otherwise
not be possible due to the potential riskiness of the contract for their
counterparty. It encourages business growth and entrepreneurial activity.
•The banks charge low fees for bank guarantees, normally a fraction of 1% of
the overall transaction, for the assurance provided.
To the beneficiary:
•The beneficiary can enter the contract knowing due diligence’s been done on
their counterparty.
•The bank guarantee adds creditworthiness to both the applicant and the
contract.
•There is a risk reduction due to the bank’s assurance that they will cover the
liabilities should the applicant default.
•There is an increase in confidence in the transaction as a whole.

9. DISADVANTAGES OF
BANK GUARANTEES

10. •The involvement of a bank in the transaction can
bog down the process and add an unnecessary
layer of complexity and bureaucracy.
•When it comes to particularly risky or high-value
transactions, the bank itself may require assurance
on the part of the applicant in the form of
collateral.
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11. CASE LAW/JUDICIAL
INTERPRETATION
Bank guarantees have been usually found out by the courts as a matter that should be kept
separate from judicial interference.
In Tarapore and Co. v VO Tractors Export (1970 AIR 891, 1969 SCR (2) 920), the court held
that as the bank guarantee is a separate contract distinguishable from the original contract, the
banks’ undertaking to the creditor is absolute. The very purpose of such guarantees is to avoid legal
proceedings and enables the creditor to recover his money.
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12. • The judicial intervention would do injustice and would destroy the very purpose of such provision of bank guarantee. United
Commercial Bank v Bank of India (1981 AIR 1426, 1981 SCR (3) 300 ) was also one such case wherein the supreme court
ruled out a temporary injunction stating that if such injunctions would be granted then the whole banking system would fail. Here the
case was regarding the supply of mustard oil and herein letters of credit were issued with the appellant bank.
The appellant bank asked the respondent bank to pay the amount under the guarantee when there was a dispute between two
parties. Also, the court said that the bank has nothing to do with the original contract. It has an absolute obligation towards the
parties. But the courts have taken a different stand on cases where it found it that the invocation of such guarantees would lead to
injustice and has led down certain exceptions when bank guarantee cannot be revoked.
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13. THANK YOU