Barrister Remura Mahbub
22 March 2016
Updated in 2022 August.
A bank guarantee in Bangladesh is a promise made by a bank or other financial institution that if a borrower defaults on a loan, the bank or institution will cover the losses. Through this bank guarantee, the bank will assure the original creditor that if the borrower fails to meet his or her obligations, the bank will be responsible for them.
To deal with global business policy and participate in international business, Bank Guarantee has become a powerful ally for businesspeople and organizations. Today we live in an era of technology that allows people to learn about the world from the comfort of their own homes. In such a case, one must adapt their product and business to global demand. Bank Guarantee aids the businessman in mediating with the vendor to ensure that a quality product will be delivered within the margin period. Here, we discuss Bank Guarantee and the Bank Guarantee process in our nation.
What exactly is Bank Guarantee in Bangladesh?
A bank guarantee is essentially a written promise from a bank or other financial institution to its customer/applicant/borrower that if the seller fails to pay the committed product according to the contract between buyer and seller within the specified time, then the bank or financial institution will pay the amount written in the bank Guarantee.
A bank guarantee is a contract between 03(Three) parties, which are as follows:
1. The applicant/primary creditor/Account Party (Who requests a bank guarantee from the bank).
2. The recipient/debtor-obligee (Who receives the guarantee).
3. The bank, Surety, or Guarantor (Bank or Financial institution who agrees to sign and assures payment in case the applicant fails to keep the promise)
In an international bank guarantee, the Instructing Party/Counter Guarantee issuing Bank is another party.
Present Bank guarantee Sectors:
Common sectors for which bank guarantees are issued include:
- To participate in a bid.
- To keep promises in accordance with a contract.
- To keep advance payments secure.
- To release retained financial assets
- To release merchandise from customs.
For temporary release from a government or court order requiring the discharge of goods from a ship or cargo.
- To provide products.
- Real estate enterprise.
- To participate in an international trade show.
Varieties of Bank Guarantees:
Bank Guarantee has no universal classification. In the case of local and international business or sales contracts, however, banks typically practice or provide the following types of bank guarantees:
1. Tender or Bid Guarantee.
Performance Assurance.
a) Good Performance of Contract Assurance
b) Assurance of Job Performance
Shipping Guarantee.
- Advance Payment Assurance
- Guarantee of Return of Bond Deduction
- Customs Assurance
- Payment Undertaking Guarantee.
- Payment deferral guarantee
A bank guarantee is a contract between 3 different parties and they include:
What is the Process of Bank Guarantee in Bangladesh?
Kinds of Bank Guarantee in Bangladesh
Comparison between Bank Guarantee and Letter of Credit
A bank guarantee is a contract between 3 different parties and they include:
- The candidate (the party that requests a bank guarantee from the bank and borrows from a creditor)
- The recipient (the party that receives a partial guarantee)
- The lender (the party that agrees to sign and assures payment in case the applicant fails to repay the loan)
Bank guarantees are widely utilized by commercial entities. For commercial purposes, the debtor or borrower or customer will be able to acquire equipment, machinery, raw materials, additional funds, etc. with the aid of a bank guarantee. Bank guarantees aid businesses because they provide creditors with the assurance that the loan amount will be repaid by the bank if the business is unable to do so on time.
When a bank signs a bank guarantee, it pledges to pay any amount based on the borrower’s request. Therefore, signing a bank guarantee poses a significant risk for banks.
Understand the Bank Guarantee Process
- The applicant will initially request a loan from a beneficiary or creditor.
- During the loan application process, these two parties will concur that a bank guarantee is required.
- The applicant will then request that a bank provide a bank guarantee for the creditor loan. On behalf of the creditor, the bank guarantee will be obtained.
- The bank will now provide the applicant with a bank guarantee and send a financial instruction to an advising bank.
- Deferred payment guarantee refers to a bank guarantee or a payment guarantee offered to the exporter for a deferred period of time or for a specific time period. When a buyer purchases capital goods or machinery, the seller will extend credit to the buyer if the buyer’s bank guarantees payment of the buyer’s unpaid balance to the seller.
- Under this type of guarantee, the bank will make payments in installments in the event that raw materials, machinery, or equipment are not supplied.
- A financial bank guarantee ensures the repayment of funds if a party fails to complete a particular project or operation in its entirety. According to the financial guarantee agreement, the bank will make the payment if the completion of the project is delayed.
- This type of guarantee stipulates that the seller will receive an advance payment. There will also be a guarantee that the buyer will receive a refund if the seller fails to deliver the service or product accurately or on time.
- Foreign bank guarantee: A bank provides a foreign bank guarantee on behalf of a borrower. On behalf of the foreign beneficiary or creditor, this will be offered.
- A performance guarantee stipulates that the bank will pay monetary compensation if there is a delay in delivering the performance or operation. Even if the service is rendered inadequately, payment will still be required.
- People frequently confuse a bank guarantee with a letter of credit. However, one must recognize that the two are quite distinct.
- A bank guarantee is a commercial or financial instrument provided by a bank in which the bank assures or guarantees a beneficiary that it will make the payment to the bank in the event that the actual customer fails to fulfill his or her obligations. If a customer requests a bank guarantee, the bank will pay on his or her behalf.
- A letter of credit, on the other hand, is a written promise or commitment made by a bank or other financial institution or corporation to a specific seller that payment will be made if the seller performs whatever is specified in the letter of credit. In order for the bank to make the payment on behalf of the original buyer, there must be documentary evidence that the seller has accurately completed the transaction by delivering the correct product or service on time. Once the obligations are met, the bank will provide a guarantee to the seller that he or she will pay the amount on behalf of the original buyer.
- Under a bank guarantee, if the buyer is unable to pay the seller or creditor, the bank pays the fixed amount to the seller because the buyer’s contractual obligations have not been met. In contrast, under a letter of credit, the bank pays the seller once he or she has made delivery. This is because the seller has fulfilled all necessary obligations.
TR- TLS: The best law firm in Bangladesh.
Eligibility for Bank Guarantee (BG) and Process:
Applicants for Bank Guarantee must have a solid business and financial history. Typically, a business entity applies for a bank guarantee at a bank where bank accounts are maintained in its name. Once a BG application has been submitted, the relevant bank will evaluate the applicant’s banking history, creditworthiness, liquidity, and net worth.
Other Qualifications include:
1.Requires a Bank Account in the name of the Concerned firm or himself.
Form for bank guarantee completion
3. An impeccable business history that satisfies bank management.
The security for a bank guarantee, such as FDRs or other deposits, must have a greater value than the bank guarantee itself.
5. Valid contractor license(s) and registration(s) with the Concerned Department(s), along with a copy of the Tender document, if tender guarantee is required. And must submit supporting documentation to demonstrate its bid viability.
For performance guarantee, you must submit a Notification of Awards (NoA) from the appropriate authority.
Purchase order (PO) or Proforma Invoice (PI) duly signed for the product for which a guarantee is to be issued.
8. Buyer or seller details.
The applicant’s liability position must satisfy the bank’s authority.
In some instances, depending on the level of risk associated with the guarantee, the bank may request collateral in order to issue the guarantee. For collateral, documents associated with the collateral must be provided.
The bank will process a bank guarantee in Bangladesh or letter of guarantee after these requirements and questions have been met. After completing the procedure, the bank completed the necessary paperwork and issued the guarantee.
Bank Guarantee Charges
In general, banks receive commission for a period, typically a quarter or three months, at a rate imposed by the bank and primarily based on the risk assumed by the bank for each guarantee. Bank to bank, the rate of BG commission may vary. In contrast, banks typically assess a value of 0.75 percent or 0.5 percent during the validity period of a BG, in addition to a stamp fee.
In addition, the bank may charge an application processing fee, a loan documentation fee, a site verification fee, a Supervising fee, and any other fees mandated by government circulars and banks.
Timeframe for Bank Guarantee:
Typically, banks offer Bank Guarantee in Bangladesh for no more than ten years, renewable after one year by paying a commission to the bank. When the guarantee period expires, the beneficiary must cancel the guarantee.
For Tender guarantee, the maximum period for each transaction/drawing is 120 days (i.e. from the date of issuance)
Nearly all banks use the same procedure for issuing Bank Guarantees in favor of applicants who choose the seller.
Banks typically act as guarantors, relieving the borrower of the need to invest new capital, when providing bank guarantees to business entities. Which also contributes to the growth of new businesses and international trade, export-import. Bank guarantees serve as financial advisors and creditors for businesses and individuals.
Format example for a Bank Guarantee:
“Drafting of the Memorandum of Articles and Articles of Association, as well as other required documents, as well as the Directors’ resolution to establish a new company in Bangladesh”
Eligibility for Bank Guarantee (BG) and Process:
Applicants for Bank Guarantee must have a solid business and financial history. Typically, a business entity applies for a bank guarantee at a bank where bank accounts are maintained in its name. Once a BG application has been submitted, the relevant bank will evaluate the applicant’s banking history, creditworthiness, liquidity, and net worth.
Other Qualifications include:
1.Requires a Bank Account in the name of the Concerned firm or himself.
Form for bank guarantee completion
3. An impeccable business history that satisfies bank management.
The security for a bank guarantee, such as FDRs or other deposits, must have a greater value than the bank guarantee itself.
5. Valid contractor license(s) and registration(s) with the Concerned Department(s), along with a copy of the Tender document, if tender guarantee is required. And must submit supporting documentation to demonstrate its bid viability.
For performance guarantee, you must submit a Notification of Awards (NoA) from the appropriate authority.
Purchase order (PO) or Proforma Invoice (PI) duly signed for the product for which a guarantee is to be issued.
8. Buyer or seller details.
The applicant’s liability position must satisfy the bank’s authority.
In some instances, depending on the level of risk associated with the guarantee, the bank may request collateral in order to issue the guarantee. For collateral, documents associated with the collateral must be provided.
The bank will process a bank guarantee or letter of guarantee after these requirements and questions have been met. After completing the procedure, the bank completed the necessary paperwork and issued the guarantee.
Bank Guarantee Charges
In general, banks receive commission for a period, typically a quarter or three months, at a rate imposed by the bank and primarily based on the risk assumed by the bank for each guarantee. Bank to bank, the rate of BG commission may vary. In contrast, banks typically assess a value of 0.75 percent or 0.5 percent during the validity period of a BG, in addition to a stamp fee.
In addition, the bank may charge an application processing fee, a loan documentation fee, a site verification fee, a Supervising fee, and any other fees mandated by government circulars and banks.
Timeframe for Bank Guarantee:
Typically, banks offer Bank Guarantees for no more than ten years, renewable after one year by paying a commission to the bank. When the guarantee period expires, the beneficiary must cancel the guarantee.
For Tender guarantee, the maximum period for each transaction/drawing is 120 days (i.e. from the date of issuance)
Nearly all banks use the same procedure for issuing Bank Guarantees in favor of applicants who choose the seller.
Banks typically act as guarantors, relieving the borrower of the need to invest new capital, when providing bank guarantees to business entities. Which also contributes to the growth of new businesses and international trade, export-import. Bank guarantees serve as financial advisors and creditors for businesses and individuals.
The legal team of TR, The Legal Source are highly experienced in providing all kinds of services related to forming and registering a Private Limited Company in Bangladesh . For queries or legal assistance, please reach us at:
E-mail: info@trfirm.com
Phone: +8801847220062
Address: House 410, Road 29, Mohakhali DOHS
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