Bank Guarantee
Bank guarantee refers to something as security. A guarantee is when a bank offers surety and guarantees for business obligations on behalf of their customers within certain regulations.
Many of the lending institutions offer bank guarantees which acts as a promise to cover the loss of the customer if he/she defaults on a loan.
It is an assurance to a beneficiary that the financial institution will uphold the contract between the customer and third party.
Uses of Bank Guarantee
- Bank guarantee is often used when any large companies purchase from small vendors, they generally require the vendors to provide guarantee certificates from banks before providing such business opportunities.
- On purchase and sale of goods on credit basis; wherein the seller is assured of payment from the bank in case of default by the buyer.
- It helps in certifying the credibility of individuals, which in turn, enables them in obtaining loans and also assists in business activities.
Though, there are lots of uses from a bank guarantee for the applicant, the lender will process the same only after ensuring the financial stability of the applicant/business.
The risk involved in providing such a guarantee must be analyzed thoroughly by the bank.
Typically, BG charges are based on the risk assumed by the bank in each transaction. For example, a financial BG is considered to assume more risk than a performance BG.
Based on the type of the BG, fees are generally charged on a quarterly basis on the BG value of 0.75% or 0.50% during the BG validity period.