Types of Guarantee

Guarantee refers to the promise made by a person or institution to the third party for the performance of other party. For example if there are three people A,B and C, so if A gives guarantee to B that C will perform certain work, and in case of C does not perform the work than A will compensate B. Banks also provides guarantees for their clients, let’s see some of the guarantees which banks provides –

1. Financial Guarantee – This type of guarantee is given be the bank to the creditor on behalf of debtor that debtor will pay his or her debt to the creditor on time and in the event of default made by the debtor, bank will compensate to the credit for the loss due to failure of repayment by the debtor.

2. Performance Guarantee – Performance guarantee is often given by the bank on the behalf of contractor who undertakes to complete the contract on time. The company which has awarded the contract to contractor demand guarantee that work will completed on time, and in this case bank will give performance guarantee that contractor will complete the contract on stipulated time, and if he is not able to complete it on time bank will compensate the company for the losses due to such delay in work.

Apart from above guarantees banks also undertake to pay for goods and services in case of import and export of goods and services, however it is not guarantee in strict sense because in this case the liability of the bank is primary, however in case of guarantees the liability of banks is secondary which implies that bank will pay only when the party for which it is given guarantee defaults.

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