Bank Guarantee: As a part of Banking Business, Bank Guarantee (BG) Limits are sanctioned and guarantees are issued on behalf of our customers for various purposes. Broadly, the BGs are classified into two categories:
i) Financial Guarantees are direct credit substitutes wherein a bank irrevocably undertakes to guarantee the payment of a contractual financial obligation. These guarantees essentially carry the same credit risk as a direct extension of credit i.e. the risk of loss is directly linked to the creditworthiness of the counter-party against whom a potential claim is acquired. Example – Guarantees in lieu of repayment of financial securities/margin requirements of exchanges, Mobilization advance, Guarantees towards revenue dues, taxes, duties in favour of tax/customs/port/excise authorities, liquidity facilities for securitization transactions and deferred payment guarantees.
ii) Performance Guarantees are essentially transaction-related contingencies that involve an irrevocable undertaking to pay a third party in the event the counterparty fails to fulfill or perform a contractual obligation. In such transactions, the risk of loss depends on the event which need not necessarily be related to the creditworthiness of the counterparty involved. Example – Bid bonds, performance bonds, export performance guarantees, Guarantees in lieu of security deposits/EMD for participating in tenders, Warranties, indemnities and standby letters of credit related to particular transaction.