How Bank Guarantees works

Top SIP Funds to Invest in India Online 

It helps to have a third party's vetting for your business.

When running a business, you might come across a situation that your client may ask you to provide a financial guarantee from a third party.

In such circumstances, approach your bank and ask it to stand as a guarantor on your behalf. This concept is known as bank guarantee (BG).

This is usually seen when a small company is dealing with much larger entity or even a government across border. Let us take an example of a company XYZ bags a project from, say, the Government of Ethiopia to build 200 power transmission towers.

In this case, companies all over the world would have applied. The selection would be made on the basis of lowest cost and track record as submitted in the proposal form.

However, the government has limited ability to assess all companies for financial stability and credit worthiness.

To ensure the project is done satisfactorily and on time, the government puts a condition that company XYZ will have to furnish a guarantee given by one or more banks.

In banking nomenclature, company XYZ is an applicant, its bank is the issuing bank and the Government of Ethiopia is the beneficiary.

Usually, the BG is for a specified amount, which is a percentage of the total money required for the contract.

Obviously, the bank will not just issue such guarantee with its own due diligence. The bank does its own thorough analysis of the financial well being of company XYZ to assess the amount of guarantee it can issue. After all, the bank is at a risk too, in case the client defaults. This amount is called a limit.

Here too there is a catch. The bank will issue guarantee provided the company has not exceeded its overall limit for BGs. And if the Government of Ethiopia is not satisfied with the performance of the contract at a later date, it can invoke the BG.

In this situation, the bank will have to immediately release the amount of the BG to the government.

BGs can be broadly classified into Performance and Financial BGs. As the name suggests, Performance BGs are the ones by which the issuing bank, also known as the Guarantor, guarantees the ability of the applicant to perform a contract, to the satisfaction of the beneficiary.

VARIATIONS
Let us continue with our earlier example, to understand the different types of performance BGs. XYZ might need to give a BG that guarantees it has the capability to do the project, on winning the bid. This ensures only serious bidders are in the fray for the project. This is called a bid-bond guarantee. XYZ also might be getting an advance payment for buying materials, etc. Again, it will have to furnish a BG to the extent of the advance, called an advance payment BG. To secure the project even further, the Government of Ethiopia might insist on stage payment guarantees. This would have milestones like 20 per cent, 40 per cent, etc and a period in which these have to be done. As and when XYZ does that part of the work, the BG would expire, thus freeing its limits with the bank (banks also charge for these services, typically as a small percentage of the BG amount, even as little as 0.05 per cent).

Another interesting use of the performance BG is in importing materials into the country. In this case, an importer might want to contest the amount of duty levied by the customs and until the duties are paid, the goods are not released. The importer can, in this case, present a BG for the amount of the duty (also known as customs guarantee) and get his goods released. Once the final decision is taken, the import duty is paid and the BG released.

The other broader types of BGs are financial guarantees. These are used to secure a financial commitment such as a loan, a security deposit, etc. For example, guarantees of margin money for stock exchanges. These are issued on behalf of brokers, in lieu of the security deposit that needs to be paid at the time of becoming a member of the exchange.

The applicant, XYZ, has to prove credit worthiness only to one party, his bank, and can bid for projects across the world. The beneficiary, Government of Ethiopia, does not have to analyse how financially sound the companies are and knows that in case something goes wrong, the bank will pay him.

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Claiming Car Insurance

Top SIP Funds to Invest in India Online 

A comprehensive car insurance policy to insure your car against damage and theft apart is a must buy—apart from the mandatory third-party cover. The own-damage portion of the policy covers damage to vehicle and theft. However, the process of filing claims for theft and damage are slightly different. Read on to understand the two processes.

Accident claim

Regardless of the type of insurance policy you have—health, life or assets—the first thing to do when initiating a claim process is to be prompt. So, if your vehicle meets an accident, call your insurer to inform. A delay can cause problems as the insurer would enquire about your reasons for the delay. However, keep in mind that a genuine claim cannot be denied on grounds of delay alone.

Typically, your insurance company will help you tow the vehicle to a garage for repairs. You will need to fill the claim form, which among other things will ask if there was any injury to a third person or property. In case of injury or major damage to property, you will be required to furnish a first information report. The insurer will appoint a surveyor who will assess the damage and work out the cost the insurer will pay—out of the total estimated repair amount. In case of a cashless facility, the insurer will pay the garage directly. Keep in mind that your insurer may not pay the entire bill and you may need to pay a part of the claim. This part is called deductible and it is that portion of the claim amount which is not covered by the insurer and has to be paid by you, before the benefits of the insurance policy can kick in. Other than that the policy will also deduct depreciation. There are add-on covers that you can buy to make sure you don't pay these costs from your pocket.

In the case of damage to your car, the insurer will assess the cause of loss. In case of loss due to an illegal activity like driving under the influence of alcohol, the insurer can deny your claim.

Theft claim

The process of making a claim for theft of vehicle is slightly more detailed. You first need to inform the police station in your area about the theft and register a first information report. The police can take about 90 days to try and track your car, failing which it issues a non-traceable report.

Give that report to your insurer, along with other documents such as your policy and vehicle registration certificate. Note that at the time of inspection, the insurer will ask you for the keys of your vehicle. It's important to have the car keys in order to prove that the car was stolen.

After submitting the report, the insurance company will also make some enquiries at its end. After all procedures have been undertaken, the insurer will settle the claim.

SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com