Bank guarantee and charges for the same?

1. When two parties enter into any contract of commercial nature, each party has to perform some commercial activity.

2. Any one of the parties may ask another party to give an assurance of his performance of the obligation.

3. To make sure that the other party performs his obligation, a bank guarantee may be insisted.

4. A bank guarantee is a financial support offered by a bank promising to cover a financial obligation if one party in a transaction fails to perform his obligation as per a contract.

5. The concerned party will approach his bank and obtain a bank guarantee to satisfy the other party of the contract.

6. The bank is taking the responsibility on behalf of the concerned party. The responsibility of the bank is denominated in terms of an amount.

7. In the bank guarantee, it is clearly mentioned when the bank guarantee can be claimed.

8. Bank guarantee is a legally drafted document.

9. Bank guarantee will have many clauses.

10. Every bank guarantee will have an expiry date and also a claim period.

11. For issuing bank guarantee, bank will charge service charges.

12. We understand that many banks are charging 2% per annum minimum for each quarter. In other words, if the bank guarantee is of Rs 10 lakh, the annual bank guarantee charge works out to Rs 20,000 only.

13. However, the applicable service charges are based on a quarter (3 months).

14. In other words, Rs 5,000 will be payable every 3 months.

15. Generally it is payable at the beginning of the quarter.

16. If the bank is issuing a guarantee other than performance guarantee, then the charges can be 3% per annum for each quarter.

17. If this guarantee is renewed, then the same rate of charges will be applicable.

18. For the extension of bank guarantee, same charges will be applicable as for issuance of fresh guarantee.

19. If the renewal is effected before the expiry date of the original guarantee, then claim period is not to be charged.

20. If the concerned person gives 100% cash margin, then the bank may charge only small token amount of say Rs 500 only.

21. If guarantee is secured by 100% term deposit including third party deposits of the bank, then the bank may charge only 25% of normal service charge.

22. While charging the service charges, minimum one quarter is considered.

23. Part of the quarter will be considered as a full quarter.

24. A bank guarantee is a promise by a bank to meet the liabilities of a particular party / individual if they don’t fulfill their obligations in a contractual transaction.

25. Different types of guarantees include a performance bond guarantee, an advance payment guarantee, a warrantee bond guarantee.

26. The service charges mentioned here are indicative. It may differ from bank to bank, client to client, time to time, and also depend upon the perceived risk in the purposed bank guarantee.