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Want to know everything about bank guart'ee

ABHINANDAN JAIN (CA Student) (886 Points)

11 July 2012

Hi everyone...

Please anyone share ur views, experience,knowledge...about Bank guarantee....

What it BG...Why BGs...Types...etc..everything...

Pls discuss from Bank's point of view...as i want to do concurrent audit...also share wht are the main aspects needs to be checked by the con. auditor..how it can be done...upload excel sheet/ word file..etc related to audit of bank gur'tee...

Share any imp material that can describe ABC of BG...

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6 Replies

CA Lokesh Pokharna (CA (Ahmedabad Bhilwara Chittorgarh)) (4128 Points)
Replied 12 July 2012

Hi abhinandan, you r doing articleship at s.s.kothari & co. which is very renowned firm.....

Definition of bank gurantee

A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.

Why need of bank gurantee from customet view- A bank guarantee enables the customer (debtor) to acquire goods, buy equipment, or draw down loans, and thereby expand business activity.

from bank view- revenue generation field.

Auditing- from audit point of view you should collect guidelines of h.o. from branch officilas, than check what bank's working as per guidelines... check int. rates, other terms, period of b.g, etc..

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ABHINANDAN JAIN (CA Student) (886 Points)
Replied 15 July 2012

But u hv not said anything about types of BGs...explain with a suitable example...

Anand Raghavendra (Manager-Internal Audit) (111 Points)
Replied 26 July 2012

From the point of view of Bank Guarantee and Internal Audit.We need to keep a check on the validity of the BG's made.This becomes important when the BG's are made in Infrastructure projects which are huge and unwieldly.On completion or renewal's tracking them and keeping them under an Internal Control system also needs to be checked.Since huge amounts are lost track of at the completion of projects

Ankita CWA Final Student (Principle Internal Auditor) (348 Points)
Replied 11 October 2012

Types of Bank Guarantees

1. Direct or Indirect Bank Guarantee: A bank guarantee can be either direct or indirect. Direct Bank Guarantee It is issued by the applicant's bank (issuing bank) directly to the guarantee's beneficiary without concerning a correspondent bank. This type of guarantee is less expensive and is also subject to the law of the country in which the guarantee is issued unless otherwise it is mentioned in the guarantee documents. Indirect Bank Guarantee With an indirect guarantee, a second bank is involved, which is basically a representative of the issuing bank in the country to which beneficiary belongs. This involvement of a second bank is done on the demand of the beneficiary. This type of bank guarantee is more time consuming and expensive too.

2. Confirmed Guarantee It is cross between direct and indirect types of bank guarantee. This type of bank guarantee is issued directly by a bank after which it is send to a foreign bank for confirmations. The foreign banks confirm the original documents and thereby assume the responsibility.

3. Tender Bond This is also called bid bonds and is normally issued in support of a tender in international trade. It provides the beneficiary with a financial remedy, if the applicant fails to fulfill any of the tender conditions.

4. Performance Bonds This is one of the most common types of bank guarantee which is used to secure the completion of the contractual responsibilities of delivery of goods and act as security of penalty payment by the Supplier in case of nondelivery of goods.

5. Advance Payment Guarantees This mode of guarantee is used where the applicant calls for the provision of a sum of money at an early stage of the contract and can recover the amount paid in advance, or a part thereof, if the applicant fails to fulfill the agreement.

6. Payment Guarantees This type of bank guarantee is used to secure the responsibilities to pay goods and services. If the beneficiary has fulfilled his contractual obligations after delivering the goods or services but the debtor fails to make the payment, then after written declaration the beneficiary can easily obtain his money form the guaranteeing bank.

7. Loan Repayment Guarantees This type of guarantee is given by a bank to the creditor to pay the amount of loan body and interests in case of nonfulfillment by the borrower.

8. B/L Letter of Indemnity This is also called a letter of indemnity and is a type of guarantee from the bank making sure that any kind of loss of goods will not be suffered by the carrier.

9. Rental Guarantee This type of bank guarantee is given under a rental contract. Rental guarantee is either limited to

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ABHINANDAN JAIN (CA Student) (886 Points)
Replied 11 October 2012

@ Ankita

But then.... Finacial and performance guarantee..i'm little bid confused..whether all above types will lie in this two category (i.e. Finacial and performance)...

pls make it clear if possible...

Milind M. Kulkarni (Practicing CA) (580 Points)
Replied 29 October 2012

Financial BG is given by customer to supplier to secure him in case of default in making payment. Performance BG is given by a supplier to a customer to protect the customer in case of performance standards not meeting the agreed criteria/ norms (including delay in completion). This happens in cases where supplier is a relatively unknown party.

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