Types of Guarantee :
Following types of bank guarantees issued by banks-
1. Financial guarantee:
These are guarantees issued by banks on behalf of their customers, in lieu of the customer being require to deposit cash security or earnest money. These kinds of guarantees are mostly issued on behalf of customers dealing with government departments. Most of the government departments insist that before the contract is awarded to the contractor, he should show that he is willing to perform the contract and to bind him to perform the contract government departments insist on an earnest money deposit. In lieu of earnest money deposit,government departments are generally willing to accept a bank guarantee. This helps customer in as much as he is enabled to utilize the otherwise payable earnest money deposit for his business purposes. Bank are always willing to help their clients and hence issuing bank guarantees enables them to earn pretty good commission besides developing customer contact and loyalty. Normally, a bank that grants short term and long-term finance will look forward to this business of issuing bank guarantee as well. In case the contractor dose not fulfill his obligation, then the government departments invoke the guarantee and collect the money from the banks.
2. Performance Guarantee:
These are the guarantee issued by banks on behalf of its customers whereby the bank assures a third party that the customer will perform the contract as per the condition stipulated in the contract, failing which the bank will compensate the third party to the extent of amount specified in the guarantee. These types of guarantees are usually issued by banker on behalf of their customers who have entered into contracts to do certain things on or before a given date. Though the bank assures that the conditions as stipulated in the contract will be complied with by the customer in practice the banks on being served a notice of default by third party pays the amount guaranteed without going into technicality of contract.
Though in certain performance guarantees, a clause isinserted that proof of default of the customer is necessary, most f the banks do not insist on such proof. A mere demand by the beneficiary that there has been a default by the bank’s customer is sufficient for the bank to make payment. This is based on the principle that banks by nature of their expertise and dependability prefer to deal with documents and they would not like to go beyond the contract. The very sanctity of guarantee would be lost if banks were to sit in judgment over the proof of breach. The beneficiary would not care to invoke a bank guarantee just like that. For him, performance of the terms is more important than its breach. Therefore, it is in this context that banks honour their commitment immediately upon hearing from beneficiary about invocation of banks guarantee.
Generally, performance guarantees are not preferred by banks. Here, the banker is guaranteeing the quality of work and its execution in terms of quality control. It is difficult to guarantee performance to someone. Bankers cannot be expected to come to the spot where work is going on. These guarantees are issued subject to fixing the liability in financial terms. Performance guarantee is difficult to monitor and hence, they are issued favoring third parties at the instance of customers of unquestionable integrity and performance standards.
3. Deferred Payment Guarantee:
Under this type of guarantee, the banker guarantees payment of installment spread over a period of time. This type of guarantee is required when goods or machinery is purchased by a customer on credit and the payment is to be made in installments on specified dates. In terms of the contract of sale, the seller draws drafts (bills) of different maturities on the customer which is to be accepted by the customer. The banker guarantees due payment of these drafts. A deferred payment guarantee constitutes an undertaking on the part of the bank to make payment of deferred installments to the seller (beneficiary) on due dates in the event of default by the customer (buyer). While issuing a deferred payment guarantee, the banker has to assess the ability and sources of funds of the customer to honour the payment of installments on due dates.
4. Statutory Guarantee:
These are guarantees issued by banks favoring courts and other statutory authorities guaranteeing the customer will honors his commitments imposed under law, falling which the bank will compensate the extent of the amount guaranteed. These are usually given in the form of a bond and the format of these guarantees is usually drawn up by the courts or concerned authority or are already prescribed by the statute as per which guarantee is required.
This kind of guarantee is usually given under the code of Civil Procedure, Customer Act, Central Excise Act, and Major Ports Act and also to authorities like the Sales Tax Commission, Provident Fund Commission etc.