|A `Contract of Guarantee' (also known as contract of surety ship) is a contract to perform the promise or discharge the liability of a third person in case of his / her default. There are three parties to a Guarantee.|
|“Surety” or “Guarantor”||The person who gives the Guarantee.|
|“Principal Debtor”||The person on whose behalf the guarantee is given.|
|“Creditor” or “Beneficiary”||The person in whose favour the guarantee is given.|
|Bank Guarantees are issued to customers of the Bank for obligations such as for construction of building, supply of raw materials, stocks, etc, or to meet the pecuniary obligations.|
|2. TYPES OF GUARANTEES|
|Bank issues Guarantees under the following broad classifications.|
|Financial Guarantees||All guarantees issued guaranteeing repayment of a loan or a debt is considered as Financial Guarantees. Such guarantees are those issued in lieu of monetary obligations. Eg: To bid a tender, payment of customs duty, earnest money deposit for dealership etc.|
|Performance Guarantees||These are the guarantees issued in respect of performance of contract or obligation. Although these guarantees are for performance, in such cases, in the event of non-performance of the obligations as per the terms of the contract, the Bank assumes under the guarantee, only monetary liability up to a specified amount, and for a specified period and not due performance of the contracts.
Eg: Construction of building or supply of raw materials etc.
|Guarantees for specific transaction||A Bank guarantee may be issued to cover a single transaction only.
Eg: Payment of advance deposit of tax.
|Continuing Guarantee||A guarantee which extends to a series of transactions for a specified amount and period is called a continuing guarantee.|
|Deferred Payment Guarantee (DPG)|
|Advance Payment Guarantee (APG)||Advance Payment Guarantees are issued for parties to seek ‘advance payment’ from their principals to meet part of the expenses for execution of contracts or to meet a part of the working capital requirements.|
|3. The following are a few instances where Bank Guarantees are issued|