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8/3/2019 Non-Funded Credit (Bank Guarantee)
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Non-Funded Credit
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What is non-fund based credit ?
The non-fund based facilities areessentially in the nature of promises madeby banks in favour of a third party to
provide monetary compensation on behalfof their clients if certain situations emergeor certain conditions are fulfilled.
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Non-fund based credit facilities :-
Bank Guarantees
Co-acceptances
Letter of Credit
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Why non-fund based credit ?
Cost Factor Non fund based facilitydoes not require immediate outlay of fundsand so cost of such facilities tend to be
lower.
Off-balance sheet item A bankguarantee or a letter of credit issued by a
bank on behalf of its client is an off-balance sheet item.
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BANK GUARANTEE
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Bank Guarantee
Sec 126 of the Indian Contract Act, 1872 definesa guarantee as .a contract to perform thepromise or discharge the liability of a third
person in case of his default.
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Bank Guarantee
Three Parties to a Bank Guarantee
The Applicant
The client on whose behalf the guarantee is being
issued.
The Beneficiary
To whom the guarantee is issued.
The Guarantor It is the issuing bank.
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Situations where guarantees areissued by banks
Enterprise participating in tenders, auction, etc..
Security required against mobilisation advance given tocontractors.
When ancillary units supply product/services to parent
company. When goods are supplied in terms of the contract.
Suppliers provide warranty period to the buyers ofproducts. On submission of such performance
guarantees the suppliers receive the proceeds withoutwaiting for the expiry of the warranty period.
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Situations where guaranteesshould not be issued by banks
Guarantees which promise refund of any types of loansor deposits by NBFCs.
Guarantees to banks/offices outside India for thepurpose of grant of loans or overdrafts abroad.
Guarantees on behalf of customers enjoying creditfacilities with other banks.
Guarantees in favour of other financial institutions, otherbanks or other lending agencies on behalf of theirborrowers against the loan facilities provided by theselending institutions
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Types of Bank Guarantee
On the basis of nature
Financial Guarantee A certificate issued by the bank regarding the
financial ability / worth of its client to meet certainfinancial obligations, making payments and satisfyingthe dues, etc..
Performance Guarantee The issuing bank provides a guarantee to the
beneficiary to make good the monetary loss in theevent of non-performance or short-performance of acontract by the client (applicant).
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Types of Bank Guarantee
On the basis of purpose
Advance Payment Guarantee
Issued by banks on behalf of customers who are in
the business of execution of major export orders,implementation of turnkey projects, constructioncontracts, major servicing projects, etc
Bid bonds, performance bonds, guarantees
for exports In favour of overseas buyers on account of bona fide
exports from India.
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Types of Bank Guarantee
Regulated by Exchange ControlRegulations
Minor Guarantees
Bank Guarantees import under foreignloans / credits.
Guarantees for non-residents
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Types of Bank Guarantee
Infrastructure project related bankguarantee
Deferred payment guarantee
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Appraisal of bank guaranteerequirements of an enterprise
Purpose
Frequency
Amount of bank guarantee financial or
performance.
Past records of the applicant.
Present balance outstanding against the BG
limit. Amount of margin
Counter guarantee
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Issue of Bank Guarantee
The bank guarantee is being issued for adefinite period.
It is enforceable on the happening of a definite
event. The amount is specific.
The bank guarantee is being issued against abona fide trade / commercial transaction.
It does not stipulate any onerous clause. It does not contain any clause for automatic
renewal of the bank guarantee on its expiry.
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Limitation Clauses
Onerous Clause
Invocation of Bank Guarantees
Payment of invoked amount
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THANK YOU
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