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Guarantee and Security with its classification & responsibility

Guarantee and Security detail is related to loan/ credit or investment purposes in banking. The bank is a financial institution that always tries to invest in the businessman Thus needs guarantee and security in different ways.

Guarantee: It is an undertaking by the guarantor to the banker for payment of the debt of the principal debtor if he fails to perform his commitment.

What is the purpose of a guarantee?

  1. To secure the performance of something.
  2. To secure the  Honesty and fidelity of someone.
  3. To secure someone one from injury arising out of some wrong committed by another.

Guarantee and Security:What are the types of guarantees?

Mainly two types 1. Specific guarantee 2. continuing Guarantee

  1. Specific Guarantee: Specific Guarantee means a Guaranteefor one specific transactionin  this type the liability of the surety or guarantee Extend only to a single transaction. specific guarantee is used for bid Bond performance and shipping guarantee.

Types of Specific guarantee:

1. Tender or bid guarantee

2. Performance guarantee

3. Shipping guarantee

2. Continuing guarantee: A continuing guarantee is that which extends to a series transaction.

Types of continuing guarantee

  1.  Custom guarantee
  2.  Advance payment guarantee
  3.  Payment undertaking guarantee
  4. Miscellaneous bank guarantee.

Responsibility of guarantee:

 A Guarantor is responsible to pay the amount of the debt to the creditor. Only after the creditor demand repayment of the debt from the principal debtor or the debt became payable on the due date. And the debtor makes a default.

What do you mean by performance Guarantee and counter-guarantee?

Performance guarantee: Guarantees which is issued in consideration of the specific performance of the contract are called performance guarantee. This type of guarantee would require a higher cash margin  with Collateral security. Covering the guarantee amount power of attorney to collect the bill from the beneficiary (Government, organization, institution, Corporation and companies)

Counter-guarantee: A Guarantee is given by a customer to his banker against which the bank issues a guarantee on behalf Of his Customer. Simply counter-guarantee means a written undertaking of the party to indemnify the guarantee issuing authority. Expressing that if any losses arising in the future against the Said guarantee he would liable for the same and adjust the liability.

Write five rights of the guarantor.

  1. The right to obtain a copy of the letter of guarantee and any other documents in relation to the loan transactions.
  2. The right to seek  advice from lawyer before signing the contract of guarantee
  3. The right to know the information on the outstanding balance of the account of the borrower with their financial institution Subject to the borrower consent.
  4. The right to call upon the borrower to pay off the loan to release the guarantor from all liabilities under the guarantee
  5. The right to be indemnified by the borrower for any payment made to The principal institution.

In which situation a Guarantor can withdrawal his guarantee?

Surety will be discharged from his liability in the following cases

  1. By notice of death

2.  variation in the terms of the original contract between the principal debtor or creditor

3. by release or discharge of the principal debt

4 By invalidation of the contract of guarantee

What is security?

Security is the source of recovery of bank dues.

Security is Two types primary security and Collateral security

Primary security: Primary security is one that is deposited by the borrower himself and that provides the main cover for the investment made. Primary security may be either personal security or personal security or both.

Collateral security: Collateral security is security belonging to and deposited by the borrower himself or by a third party to secure investment. Building, factory and other valuable goods can be taken as Collateral security.  Collateral security may be  direct or indirect

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