bank guarentee for exports

8/4/2019 Bank Guarentee for EXPORTS

1/20

BANK GUARANTEE ON EXPORT

PRESENTED BYChunduru VSN Pavan ManojS M Azharul HassanSandeep SudheendranApoorva Gupta


2/20

Introduction

A bank guarantee is a written contract given by abank on the behalf of a customer. By issuing this

guarantee, a bank takes responsibility for paymentof a sum of money in case, if it is not paid by thecustomer on whose behalf the guarantee has beenissued. In return, a bank gets some commission forissuing the guarantee.


3/20

Any one can apply for a bank guarantee, if his or her company has obligations

towards a third party for which funds need to be blocked in order to guarantee

that his or her company fulfills its obligations (for example carrying out certainworks, payment of a debt, etc.).

In case of any changes or cancellation during the transaction process, a bank

guarantee remains valid until the customer dully releases the bank from its

liability.

In the situations, where a customer fails to pay the money, the bank must

pay the amount within three working days. This payment can also be refused

by the bank, if the claim is found to be unlawful.


4/20

Benefits of BankGuarantees

For Governments1. Increases the rate of private financing for key sectors

such as infrastructure.2. Provides access to capital markets as well ascommercial banks.3. Reduces cost of private financing to affordablelevels.4. Facilitates privatizations and public privatepartnerships.5. Reduces government risk exposure by passingcommercial risk to the private sector.


5/20

For Private Sector1. Reduces risk of private transactions in emerging countries.

2. Mitigates risks that the private sector does not control.3. Opens new markets.4. Improves project sustainability.


6/20

Legal Requirements

Bank guarantee is issued by the authorised dealers

under their obligated authorities notified videFEMA 8/ 2000 dt 3rd May 2000. Only in case ofrevocation of guarantee involving US $ 5000 ormore need to be reported to Reserve Bank of India

(RBI)


7/20

Export Guarantee Corporation Of India (ECGC)

The government of India set up the Export Risks Insurance Corporation

(ERIC) in July 1957 in order to provide export credit insurance support

to Indian exporters. To bring the Indian identity into sharper focus, the

corporation

s name was once again changed to the present ExportCredit Guarantee Corporation of India Limited in 1983. ECGC is a

company wholly owned by the government of India.

Being essentially an export promotion organization, it functions under

the administrative control of the Ministry of Commerce, Government of

India. It is managed by a Board of Directors comprising representatives

of the Government, RBI, Banking, Insurance and exporting community.


8/20

Role Of ECGC of India

ECGC was established in year 1957 by theGovernment of India to strengthen the exportpromotion drive by covering the risk on exportingcredit. The goal of ECGC is to provide cost-effectiveinsurance and trade related services to meet the needsand expectations of the Indian export market. Itprovides a range of credit risk insurance cover to

exporters against loss in export of goods andservices. ECGC also offers guarantees to banks andfinancial institutions to enable exporters to obtainbetter facilities from them.


9/20

Services provided by ECGC toexporters

1. To provide risk cover to the exporters against the risk associated in world market,viz., political risk and commercial risk.

2. To provide exporters information regarding credit-worthiness of overseas buyers.

3. Provides information on approximately 180 countries with its own credit ratings.

4. To help exporters to obtain financial assistance from commercial banks and otherfinancial institutions.

5. To provide other essential services which are not provided by other commercialinsurance companies.

6. To assists exporters in recovering bad debts.

7. To help exporter to develop and diversify their exports.

8. ECGC has also made a foray into information services by signing an alliance withM/s Dun & Bradsheet Corporation, the largest database company in the world, toprovide information on domestic as well as foreign business companies, exporters,

importers banks and other institutions.


10/20

Financial Guarantees issued byECGC to banks

In order to provide financial assistance to the exportersthrough commercial banks and other financialinstitutions, ECGC guarantees various loans provided by

these financial intermediaries to the exporters. Due to theguarantees given by the ECGC, commercial banks canliberally lend money to the exporters. The nature ofguarantees provided by the ECGC depends upon thepurpose of finance.


11/20

Types of Guarantees offered ECGC:

1. Packing Credit Guarantee:- Any loan given by banks to an exporter at

the pre-shipment stage against a confirmed export order or L/C qualifies

for PCG. The guarantees assure the banks that in the event of an exporter

failing to discharge his liabilities to the bank, ECGC would make good a

major portion of the banks loss; bank is required to be co-insurer tothe extent of the remaining loss. Features of this guarantee are:

Any loan given to an exporter for the manufacture, processing,

purchasing or packing of goods meant for export against a firm order or

Letter of Credit qualifies for PCG.

Pre-shipment advances given by banks to parties who enter into

contracts for export of services or for construction works abroad to meet

preliminary expenses in connection with such contracts are also eligible

for cover under the guarantee.


12/20

The guarantee, issued for a period of 12 months based ona proposal from the bank, covers all the advances that maybe made by the bank during the period to an individualexporter within an approved limit.

Approval of ECGC has to be obtained if the period forrepayment of any advance is to be extended beyond360 days from the date of advance.

Whole-turnover Packing Credit Guarantee can be issued to

banks which wish to obtain cover for packing creditadvances granted to all its customers on all India basis.Under this option, premiums are lower and higherpercentage of cover is offered.


13/20

2. Post shipment Export Credit Guarantee: Banks extend post-shipment finance to

exporters through purchase, negotiation or discount of export bills or advances against

such bills. The post-shipment credit guarantee provides protection to banks against non-

realization of export proceeds and the resultant failure of the exporter to repay theadvances availed. However, it is necessary that the exporter concerned should hold

suitable policy of ECGC. The percentage of loss covered under this guarantee is 75%.

Features of this policy are:-

Individual Post-Shipment credit Guarantee can also be obtained for finance grantedagainst L/C bills, even where an exporter does not hold an ECGC policy, provided that

the exporter makes shipments solely against letters of credit.

This guarantee can also be issued on whole turnover basis wherein the percentage of

cover under shall be 90% for advances granted to exporters holding ECGC policy.Advances to non-policyholders are also covered with the percentage of cover being 65%.


14/20

3. Export Production Finance Guarantee:- This guaranteeenables banks to sanction advances at pre-shipment stage tothe full extent of the domestic cost of production. Here again,the bank would be entitled to 66.67% of its loss from thecorporation.

4. Export Finance Guarantee:- This guarantee covers post-shipment advances granted by banks to exporters againstexport incentives receivable in the form of duty drawback. The

percentage of loss covered under this agreement is 75%.

5. Export Finance (Overseas Lending) Guarantee:- If a bankfinancing an overseas project provides a foreign currency loanto a contractor, it can protect itself from the risk of non-

payment by obtaining Export Finance (Overseas Lending)Guarantee. The percentage of loss covered under thisguarantee is 75%.


15/20

6. Export Performance Guarantee:- This is akin to a counter-guarantee to protect a bank against losses that it may suffer on

account of guarantees given by it on behalf of exporters.Exporters are often called upon to furnish a bank guarantee tothe foreign parties to ensure due performance or againstadvance payment or in lieu of retention money. The ExportPerformance Guarantee protects the banks against 75% of the

losses. In the case of bid bonds relating to exports onmedium/long term credit, overseas projects and projects inIndia financed by international financial institutions as well assupplies to such projects, guarantee is granted on payment on25% of the prescribed premium. The balance of 75% becomes

payable by the bankers if the exporter succeeds in the bid andgets the contract.


16/20

Types of Bank Guarantees

Direct Bank Guarantee : It is issued by the applicant's bank(issuing bank) directly to the guarantee's beneficiary withoutconcerning a correspondent bank. This type of guarantee isless expensive and is also subject to the law of the country in

which the guarantee is issued unless otherwise it is mentionedin the guarantee documents.

Indirect Bank Guarantee With an indirect guarantee, a secondbank is involved, which is basically a representative of the

issuing bank in the country to which beneficiary belongs. Thisinvolvement of a second bank is done on the demand of thebeneficiary. This type of bank guarantee is more timeconsuming and expensive too.


17/20

Tender Bond

This is also called bid bonds and is normally issued in support of a tender in

international trade. It provides the beneficiary with a financial remedy, if the

applicant fails to fulfill any of the tender conditions.

Performance Bonds

This is one of the most common types of bank guarantee which is used to secure the

completion of the contractual responsibilities of delivery of goods and act as security

of penalty payment by the Supplier in case of non-delivery of goods.

Advance Payment Guarantees

This mode of guarantee is used where the applicant calls for the provision of a sum

of money at an early stage of the contract and can recover the amount paid in

advance, or a part thereof, if the applicant fails to fulfill the agreement.

Payment Guarantees

This type of bank guarantee is used to secure the responsibilities to pay goods and

services. If the beneficiary has fulfilled his contractual obligations after delivering

the goods or services but the debtor fails to make the payment, then after written

declaration the beneficiary can easily obtain his money form the guaranteeing bank.


18/20

Loan Repayment Guarantees

This type of guarantee is given by a bank to the creditor to pay the amount of loan

body and interests in case of nonfulfillment by the borrower.

B/L Letter of Indemnity

This is also called a letter of indemnity and is a type of guarantee from the bank

making sure that any kind of loss of goods will not be suffered by the carrier.

Rental Guarantee

This type of bank guarantee is given under a rental contract. Rental guarantee is either

limited to rental payments only or includes all payments due under the rental contract

including cost of repair on termination of the rental contract.

Credit Card Guarantee

Credit card guarantee is issued by the credit card companies to its customer as a

guarantee that the merchant will be paid on transactions regardless of whether the

consumer pays their credit


19/20

How to Apply for BankGuarantee

Procedure for Bank Guarantees are very simple andare not governed by any particular legalregulations. However, to obtained the bankguarantee one need to have a current account in thebank. Guarantees can be issued by a bank throughits authorised dealers as per notifications mentionedin the FEMA 8/2000 date 3rd May 2000. Only in

case of revocation of guarantee involving US $5000/ or more to be reported to Reserve Bank ofIndia along with the details of the claim received.


20/20

Bank Guarantees vs.Letters of Credit

A bank guarantee is frequently confused with letter ofcredit (LC), which is similar in many ways but not the samething. The basic difference between the two is that of theparties involved. In a bank guarantee, three parties areinvolved; the bank, the person to whom the guarantee isgiven and the person on whose behalf the bank is givingguarantee. In case of a letter of credit, there are normallyfour parties involved; issuing bank, advising bank, theapplicant (importer) and the beneficiary (exporter).

Also, as a bank guarantee only becomes active when thecustomer fails to pay the necessary amount where as in caseof letters of credit, the issuing bank does not wait for thebuyer to default, and for the seller to invoke theundertaking

bank guarentee for exports

Documents