Bank Guarantees: Jaiib/DBF Paper 3 (Module B) Unit-6

Bank Guarantees: Jaiib/DBF Paper 3 (Module B) Unit-6

Dear bankers,

As we all know that is Bank Guarantees for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Bank Guarantees (Unit-6), Legal Aspects of Banking Operations (Module B), Legal & Regulatory Aspects of Banking -Paper 3.

♦Bank Guarantees

Guarantee is defined in section 126 of Indian Contract Act.

There are three parties to a contract of guarantee

A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

  • Surety: The person who gives the guarantee is called the ‘surety’
  • Principal debtor: The person in respect of whose default the guarantee is given is called the ‘principal debtor’
  • Creditor: The person to whom the guarantee is given is called the ‘creditor’

♦Types of Bank Guarantees

  • Financial Guarantee: These are guarantees issued by banks on behalf of the customers, in lieu of the customer being required to deposit cash security or earnest money.
  • Performance Guarantee: These are guarantees issued by banks on behalf of its customers whereby the bank assures a third party that the customer will perform the contract entered into by the customer as per the conditions stipulated in the contract, failing which bank will compensate the third party up to which the amount specified in the guarantee.
  • Deferred Payment Guarantee: Under this type of the guarantee, the banker guarantees payment of installments over a period of time. This type of the guarantee is required when the customer on credit purchases goods/machinery and payment is to be made in installments on specified dates. 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).

♦Issuance of Bank Guarantee – Precautions to be taken

The liability of the bank under a guarantee depends on two fundamental criteria’s, the amount guaranteed and the period of the guarantee.

  • Amount Guaranteed
  • Period of Guaranteed

Claim period in a guarantee: In a guarantee, it is necessary to provide for a period slightly longer than the validity period, for the beneficiary to make a claim. The claim period is usually a few months more than the validity period of the guarantee. Since if the debtor were to commit a default on the last day of the validity period, then the beneficiary, at the earliest, invokes the same only on the next day.

Amendment to Section 28 of Indian Contact Act and its effect on Bank Guarantee: Prior to the amendment of Section 28 of the Indian Contract Act, 1872 most bank guarantees had a standard clause at the end of their guarantee agreements. As per this clause, the beneficiary was required to enforce his claims within a period of three to six months, failing which, the bank’s liability was extinguished and hence the rights of the beneficiary.

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