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Bank guaranty


BG (Bank Guarantee) Service Provide by Shanky Finance

Shanky Finance help for Bank guarantee (BG) is an agreement between 3 parties viz. the bank, the beneficiary (party to whom the guarantee is given) and the applicant (party who seeks the bank guarantee from the bank). BGs are an important banking arrangement and play a vital role in promoting international and domestic trade.

BG is issued by bank on the receipt of request from the applicant for the guarantee amount towards some purpose / underlying transaction towards the beneficiary. If the bank i.e. the guarantor receives the claim from the beneficiary, it results in BG invocation. In case of foreign BG, apart from these 3 parties, there is also a correspondent bank. If a bank does not have branch in some foreign country, it issues BG in that country through its correspondent bank. The bank does all the required due diligence, financial and business analysis before issuing the guarantee.

For example, An exporter called ABC LLC. In USA seeks a bank guarantee from an importer called XYZ Pvt. Ltd in India. In this case, XYZ Pvt. Ltd approaches Corporation Bank to give a bank guarantee on his behalf to the exporter. Now, if corporation bank does not have a branch in USA, corporation bank would issue the guarantee through State Bank of India (SBI). Here, XYZ Pvt. Ltd is the applicant; ABC LLC is the beneficiary; Corporation Bank is the issuing bank and SBI is the correspondent bank.

This BG agreement acts as an undertaking assuring the beneficiary that the bank would pay the specified amount, in case of its applicants default in delivering the financial or performance obligation as mentioned in the guarantee. In effect, the BG acts as a promise that in case the liabilities of the debtor/applicant (banks customer) are not met, the contractual liability will be met by the bank. It is to be noted that the obligation to pay is not of the applicant, but of the bank, since bank acts as the guarantor. BG contract is independent from the underlying transaction/contract that exists between the beneficiary and the applicant.

Features of a Valid Guarantee:

* The period till which the guarantee holds is clearly specified
* Guarantee is always issued for a specific amount
* The purpose of the guarantee is clearly stated
* Guarantee is valid for a specific defined period
* The grace period allowed to enforce guarantee rights is also stated in the guarantee
* Guarantee clearly states the events under which it can be enforced

 

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