Bank Guarantee :-

BGs are an important banking system and play a crucial role in facilitating domestic and foreign trade. Its significance is that it adds to creditworthiness, acts as a trusted instrument to assess businesses' stability and creditworthiness, helps reduce the risk of the beneficiary, and ultimately protects against any probable loss.

Bank Guarantee is an agreement between three parties: the bank, the beneficiary, and the applicant. The applicant is the party who seeks the bank guarantee from the bank, and the beneficiary is the one who takes the guarantee. The bank issues BG on receipt of the applicant's request. This receipt is of the "guarantee amount" towards some purpose / underlying transaction towards the beneficiary.
If the claim is received from the beneficiary by the bank (guarantor), it results in BG invocation. In the case of a foreign BG, there is also a 'correspondent bank' apart from these three parties. If a bank has no branch in any foreign country, it issues BG in that country through its 'correspondent bank.' Before issuing the guarantee, the bank does all the required due diligence, financial and business analysis.

Key Features of a Bank Guarantee:
 

• Assurance of Payment:
  The bank commits to covering the financial obligations of the applicant if they default, providing security to the beneficiary.
   

• Risk Mitigation:
  Reduces the financial risk for the beneficiary, ensuring that they will receive payment or compensation if the counterparty fails to perform.
   

• Various Types:
  Includes performance guarantees, bid bonds, advance payment guarantees, and financial guarantees, each serving different business needs.
   

• Specific Terms:
  The guarantee outlines specific terms and conditions under which the bank will be obligated to make payments.
   

• Time-Bound:
  Bank Guarantees are typically valid for a specified period, ensuring that the obligation is fulfilled within a certain timeframe.