A Bank Guarantee is an instrument issued by the Bank in which the Bank agrees to pay a specific amount of money to the beneficiary of the BG, in the event of non-performance of underlying commitment by the applicant of the BG.
There are 3 parties to a BG viz. The Guarantor – The bank that issues the BG, The Applicant – on whose behalf the BG issued, The Beneficiary – who is the recipient in whose favour the BG is issued. A BG is payable on first demand and such demand is raised by the beneficiary immediately on breach of contract by the applicant.
There are mainly 2 types of BGs, viz. Financial BGs and Performance BGs. Of late, another financial instrument namely Standby Letter of Credit (SBLC), has gained prominence and is being used as an alternative to BGs across the world.
Did you know that – “A bank guarantee is always issued with an intention that it should never get invoked and should always remain unutilised”!!!