What is bank guarantee? what is procedure of taking bank guarantee ?

A guarantee from a bank ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.

For example if a buyer purchased some goods from a seller and later he experiences cash flow problems. Then the bank will pay the seller on behalf of the buyer.

 

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The bank guarantee fund is a fund that protects savers in the event of bankruptcy of their bank.

Bank Guarantee is a commercial instrument guaranteeing by bank to a party on behalf of his customer, assuring the beneficiary to effect payment on time for the goods.

Bank Guarantee is provided by the BANK against collateral security or credit limits sanctioned by the bank .. The main purpose of Bank guarantee is for transactions wherein the Seller has to place a Bank guarantee to the Buyer against  Performance Contract 

In big contracts , before the Buyer would  award contract in favour of the Seller the buying organising can secure PERFORMANCE contract , by seeking100 % Performance Bond , backed by10%  Bank guarantee ( which is financial in nature ) , so in case of defaulting contracter not heeding to complete the contract the Buyer can seek claim  damages to the contract by enforcing BG provided by the Seller in his possession .

 

Also in case where the buyer is providing advance payment to the Seller  against  project work , the buying organisation will seek100% BG for the value of the advance payment made to the Contracter since the contract has not been completed , the BG should be valid till the date of completion of contract or hand over which ever has been agreed in the contract .

The Seller can approach his BANK for obtaining a BG in favour of the Buyers by putting some collateral security with his bank , or the said limit of the BG will be adjusted against the over all  financial credit exposure the seller is having with the seller BANK , ususally the over all annual limit is divided into BG limits and L/C and Cash credit limits fixed by the bank based on annual financial  transaction and credit worthiness of the client .

For obtaining a BG there are bank charges one time and depending on the duration of the BG  ( ie  period  from and  to validity date ) the charges will  have to be paid by  person seeking to get BG from the respective bank .