Bank Guarantee
You may be involved in commercial transactions with various other parties based on the business
needs. However, you may not have acquaintances with most of them. Then the other party, with
whom you have your dealings, may insist on a bank guarantee. A bank guarantee serves as an
alternative to keeping cash as a security deposit. As a customer you may request your bank to
provide guarantee on your behalf. The bank provides a guarantee that it will pay the other party a
definite sum on your behalf, only in case when you fail to fulfill any contractual or legal
obligations towards the concerned party. However, before doing this, the bank takes into account
your financial standing, your financial commitments and also your expertise in fulfilling the
terms of the contract. For providing this service, the bank charges a commission that depends
upon the available security and your financial stability. Your bank has an obligation to honor the
guarantee under all circumstances expect in cases which involve fraud or where there is a
chance of irretrievable harm or injustice to one of the parties involved in the contract.
Following are the major types of bank guarantees:
(i) Financial Guarantee: As a contractor, you may wish to undertake a contract for a government
department by depositing cash security or earnest money. If you don’t have sufficient earnest
money, you may submit financial guarantee given by your bank. The cash available with you can
be utilized to complete the contract awarded to you. Failure on your part to complete the
contract, will lead to concerned government department invoking the guarantee and collecting
the money from your bank.
(ii) Performance Guarantee: When the bank provides performance guarantee on your behalf, it
assures the other party that you will satisfy all the conditions stipulated in the contract. Otherwise
the bank will compensate the other party with a definite sum of money mentioned in the
guarantee. The bank issuing the guarantee may or may not insist on the proof of default (that
may have happened from your end) to be submitted by the other party before making payment of