Bank Guarantee - Explained in Hindi - YouTube

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Intro

Namaskar, my name is Mukul & you are welcome to Asset Yogi

Where we unlock the knowledge of finance rather than locking it.

In this video, we are going to talk about the bank guarantee

Many subscribers also requested me to make a detailed video on this

In this video, we will understand the concept of a bank guarantee and its various types.

A bank guarantee is a non-fund-based credit facility.

Let an example, if you want to buy some goods as a buyer let's say a computer equipment

From India or you import it

maybe you have no funds immediately

Your payment has to come from somewhere. let say there is a payment cycle of 1-2 months in your business

If you have no funds immediately, it bit difficult for a seller to trust you

In that case, bank guarantees come useful

here the bank get involved in this

How is the bank involved

Why it does give you a bank guarantee, what bank guarantee is

We will know about it in detail in this video

Bank guarantees are not only used in buying and selling but

Also used in contracts such as governments contracts, contracts involving two private companies

There a bank guarantee comes in handy

In this video will know these things in a detail

You should watch the video from beginning to end, because

In last I will show you a sample format of the bank guarantee

And see what are the important clauses in it

lets move on to the blackboard

let see what is bank guarantee and how it works

Assume a buyer who wants to buy some computer equipment and a seller who wants to sell it

Let, the transaction is of 1 crore, buyer and seller agreed to deal of computer equipment of worth 1 crore.

Maybe the buyer does not have 1crore immediately

Maybe is unable to pay the seller immediately

But the seller cannot trust the buyer, trust issues are there

Here two types of issues arise

First is an issue of trust, because a buyer is not known to the seller

Second issue is of credit

Buyer doesn't have money now, but he may have money in future

His payment has to come from somewhere, so he is unable to pay immediately

To solve issues of trust and credit a bank guarantee is a useful option

In this, a bank gets involved as the third party

The buyer tells the bank to give a bank guarantee of 1 crore

If you gave the guarantee of 1 crore to the seller

So, I get my goods

When the seller get a bank guarantee, then he will deliver the goods to the buyer

We can say that the computer equipment he purchased

Will be delivered when the bank guarantee reaches the seller

Bank Guarantee

Is like a promise where banks promise the seller for payment if the buyer does not pay

The seller gets a bank guarantee and gave the goods(computer equipment) on credit.

But it is the responsibility of the buyer to pay 1crore to the seller so, now he has to pay

Here it is only a bank guarantee, no transaction happened here

It is not a transaction, actual the transaction has to happen only between the buyer and the seller

When the buyer pays 1crore to the seller then the transaction complete

Bank Guarantee voids when payment completes

In this case

The buyer is an applicant/borrower in banking terminology

And the seller is called beneficiary/creditor

This is a simple transaction

In this, the contract also can be done

We will see how contracts will be done in it

The Buyer can be a contractor and the seller can be a tendering agency

For example, there are many government contracts where contractors are appointed, there also we can take guarantee

Because if he does not perform well agency can suffer a loss

Summarizing, a bank guarantee is a type of promise

That if borrower does not complete his liability as per contract

Then the bank will fulfill contractual obligations means the bank will lend money if the buyer is unable

In case, if the borrower makes his payment of 1 crore then there will be no requirement for bank to pay

That time bank guarantee will null and void.

It will ends transaction risks and trust issues, as we have talked earlier credit problem which will enhance the business.

And The buyer can easily purchase things on credit

Some important features of bank guarantee is that

Firstly it is mandatory to mention validity period

If in the transaction of 1 crores with payment cycle of 90 days,

Payment may be possible in 2 or 3 months, then it can order bank guarantee of 90 days

It depends on limit time of the transaction

It can be of 3 months,6 months or 12 months even it can be of 10 years also

In many infrastructures project, it required long bank guarantee

I have written in months but it can be up to 10 years validity period

It is necessary to mention specific bank amount like in this case gurantee is up to 1 crore

In bank guarantee exact amount is necessary

Exact purpose should be mentioned with detail of the contract

The event under which it can be invoked at what events guarantee can be invoked that events should also be mentioned,

I will show you all this in a sample format at last

BGs given against collateral means, The guarantee of 1 crore from any bank will not given in free of cost,

Secondly, they will need a security or a collateral

If a buyers BGs from a particular bank

He will give it against the deposit or against the FDs

Or the kinds of mutual funds or the securities BGs are issued.

Bank will always charge a fee for issuing BGs

So on the 1 crore bank guarantee The bank will charge a fees plus a collateral means with out security bank will not issue a BGs.

This are the workings of BGs, Now we will understand type of BGs

When we talk about trading where buying and selling of goods and services takes place

Earlier we have seen financial guarantee of 1 crore

That if The buyer is unable to pay then the bank will pay on the behalf of the buyer

This normal guarantee is called financial or payment guarantee

In case of import export

Seller from Australia and buyer from buyer The India

The BGs can be issued in case of foreign currency such as dollar also in that case it is called foreign BG

In case of Deferred payment, The guarantee means if the buyer does not have immediate payment but I will lend you in under 6 months

And if seller allowed buyer to pay in under 6 months

The goods will be issued immediately but the payment will be given in 6 months

In this case, bank will give deferred payment guarantee

But in a case in under 6 months, you have to additionally pay 1.2 crores because I will charge interest also

In case of such deferred payment bank can issue BGs up to 6 month or up to 1 year

It depends on terms of bank, it is called deferred payment

When we talk about contracts for example govt. issue many contracts

Road projects, infrastructure projects and electrification projects

In fact, if govt. needs to procure things then there are contracts

Or if any big company needs goods from small company then also contracts are available , in such case

Bid bond or earnest money deposit, Advance payment guarantee and Performance bank guarantee

lets understand this 3 terms,

We have recently understood trading BGs such as financial foreign and deferred BGs

Now lets understand contract BGs

Firstly lets talk about Bid bond guarantee,

Whenever any govt. agency or any company needs purchase item or to execute any contract

Then they will require some companies for Bid for example

If any govt. agency require computer equipment of rupees 10 crores budget

That cost will be estimated cost and real cost appears after The Bid

In this Bid Bond is kept, Bid Bond is generally upto1-2% of project cost, i.e. 10 lakh in this case.

All companies will be asked to deposit their own Bid-Bond of 10 lakh.

Company A will deposit its Bank guarantee of 10 lakh

Company B will deposit its Bank guarantee of 10 lakh, so C

Bid-Bond is kept for,

Let say the successful bidder company A

If he backs out from the contract cause losses to govt. and time delay to the projects

govt. face loss of expenses in making and issuing of tender

Due to time delay, which escalates the cost

Bid-Bond is kept to prevent these losses

If company B won the contract and it backouts

then its Bid-Bond is invoked.

Its 10 lakh lapsed

That's why Bid-Bond is kept

With that, there is also an advanced guarantee

Suppose that company B is awarded a contract of 10 crores. company B quoted the least.

Say, company B quoted 10 crores, and other quoted 11-12 crores

He gets a project at 10 crores, generally received a 10-20% of the cost in advanced payment

the Company say that he does not have resources immediately to buy equipment for the project of 10 crore

And asked for some advanced, generally advanced is 10-20%

Let say

He asked advance of 1 crore

Govt. agency gave the 1 crore in advance

This is the actual transaction

But demands a bank guarantee of 1 crore

*sorry it was a mistake*

The advance of 1 crore is given

Govt. gave advanced of 1 crore but also kept a bank guarantee of 1 crore

why a bank guarantee is kept.

As we talked, the Bank guarantee against mobilization advanced is taken.

Generally 10-20% of the cost of the project

advanced payment guarantee is taken

If company B doesn't full fill the contract, suppose company B run away with 1crore

No one knows whereabout

To reduce that risk, a bank guarantee is taken.

We called it Advanced payment bank guarantee

Then there is a Performance bank guarantee

Let learn this from an example

suppose construction of a flyover has to be done.

And the project cost is 100 crores.

Performance bank guarantee of 20% is taken

Let say, this project contract is awarded to company B

In that case, govt. say we will make payments to you

As you complete the contracts.

Basically, it is a construction-linked payment.

But there is a risk for government

Assume the company didn't do proper work or there are defects in it

To reduce that risk govt is taken the Performance Bank Guarantee

So, company B has to deposit this performance bank guarantee of 20 crores

Performance bank grantee was given against the defects unfinished or for unsupplied items.

If the company does not work well or leave unfinished, then his guarantee money will lapse.

In case of non-performance by the contractor, performance BG is invoked

As we talked, if it

Does not work on time, leave unfinished, or maybe the company goes out of business

In that case, its bank guarantee is invoked, and 20 crores will be recovered from a bank

So, these are the types of the bank guarantees

We quickly see a sample of bank guarantee

I took out a simple sample of bank guarantee

In this format of bank guarantee

Generally,

A company that floats tender or goes into contract

Release a format of it.

Here we see the name of a company that floats tender

After that bank-issued grantee number

Amount of grantee come

Bank guarantee of how much money

Grantee cover from, date come here and the last date

Till when a claim can be lodge

A Bank guarantee is a type of deed which he signs on his behalf to the seller company or contracting agency.

The rest of the terms are written here

Whereas

Dash

Whatever the name of the company

Herein referred to as "ABC", so there is ABC any company

Who brought some products from "XYZ"

For so much amount

And XYZ had agreed to the same and has entered into a contract dated so and so

There is a contract between XYZ and ABC dated so and so

Copy of contract has to be attached.

Here it is mentioned there clearly.

And clearly written here "whereas to safeguard the interest of XYZ against any default of payment by ABC

To XYZ and any of it, contractual obligations under the above said contact

According to that if ABC does not full fill any of the conditions, ABC in this case

Is the contractor Or the buyer

If the buyer or contractor does not full fill the contract

In that case, what will happen, all terms are written here

Here events are mentioned if the default or failure on ABC part happens as per the contract.

In that case, the bank pays that amount as XYZ demands, if ABC fails to pay

The amount of BG mentioned here

Maximum liability is also written here in this clause

That amount of payment does not exceed it.

Bank guarantee amount again mentioned here

And a bank is not liable if the amount exceeds it.

Validity period again clearly mentioned, bank guarantee for 90 days

I took a very simple format, many clauses can be added to it

Every bank guarantee has a different format.

I think you understand the broad concept of a bank guarantee.

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