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Home gt Experts gt Others gt Differance between financial bank guarantee amp performance bg

Differance between financial bank guarantee ampperformance bg (Others)

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P Chandrasekhar

( Querist )09 August 2011

Dear Sir

Request you to clearly define financial bank guarantee and performance bankguarantee and pls bringout the differance between those two and pls sepcify thebelow whether financial bank guarantee or performance guarantee1Bid bond EMD2 Mobilisation advance3 Retension money4 Security depositRequest you to revert at the earliest as the need to clarify to my collegues

CMA RameshKrishnan

( Expert )10 August 2011

The financial guarantees and performance guarantees issued by banks on behalf oftheir clients A financial guarantee assures repayment of money (eg an advancereceived on an electrification contract) in the event of nonshycompletion of the contractby the client

A performance guarantee provides an assurance of compensation in the event ofinadequate or delayed performance on a contract A deferred payment guaranteepromises payment of installments due to a supplier of machinery or equipment

EMD which security deposit for tender purpose

Mobilisation advance is the advance given to any contractor by the contractee for startthe contract work

Retention money means the money with held by the contractee based on contractterm for some period

SachidanandSingh

( Expert )10 August 2011

In both financial guarantee and performance guarantee a bank assures its customerrsquosclient that in case the client makes a demand on the bank (ie invokes theguarantee) the bank will immediately pay a certain amount In both cases theguarantees are valid till a certain pre specified date No claim under the guaranteescan be made after that date

It must be clearly understood that in a performance guarantee the bank does notguarantee to perform It merely guarantees that if its customer fails to perform it willbe liable to pay the guarantee money and its customerrsquos client is the sole arbiter of itscustomers performance

Where a bank guarantee is to be used for proposal security or earnest money deposit(the two are one and the same thing) it is a financial guarantee The guaranteemerely replaces the security amount The bank while issuing such a guarantee doesnot have to assess its customerrsquos ability to perform it merely assesses its customerrsquosability to pay

Where a guarantee is required to be given to the tender authorities (the bankrsquoscustomerrsquos clients) for release of mobilization advance (which as CMA RameshKrishnan has rightly described as the advance given to a contractor to enable him to

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start work on the contract) the guarantee is a performance guarantee The bankwhile issuing such a guarantee needs to assess whether its customer will be able tostart the work within the stipulated time or not This assessment theoretically isdifferent from a mere credit analysis which is banksrsquo staple diet

Similarly a guarantee to be submitted for release of retention money (part of paymentusually around 10 that tender authorities tend to retain ie not release as asecurity against nonshyperformance of the work delivered by a contractor) is aperformance guaranteeEarlier (go back by 50 years or so) banks were wary of issuing performanceguarantees as they felt they were not in a position to assess their customersrsquo ability toperform (Please remember all projects are different) For issuing performanceguarantees they charged higher commission than what they did for issuing financialguarantees Though the assessment is now considered not very difficult and in mostcases banks hardly spend more (or more costly) executive time in assessing ability toperform than they do in credit assessment still they are loath to let go of anopportunity to earn more and the system of charging higher commission forperformance guarantees continues

A bid bond is a bank guarantee which is submitted in lieu of earnest money deposit (orproposal security)

EMDs and Retention Monies are security deposits ndash as they give the client a sense ofsecurity that the contractor is serious (while submitting the bid ie the tender) andwill deliver works of required quality Often tender authorities demand performancesecurity or security deposits for allowing the contractor to start work such depositsgive them a sense of security that the contractor will not walk off midshyway

Except EMD gurantees for all other purposes mentioned here are performanceguarantees

Other examples of financial guarantees are guarantees to be given to statutory bodiesin lieu of deposits for example to electricity boards fro getting (HT) connections toCustoms and Excise people pending appeals etc

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