WEBSITE UNDER CONSTRUCTION - Financing Against Third-Party B

The information, percentage, amount, timeline mentioned below may vary according to location, type of instrument, amount of project and contracts.

This is an estimation and general outline to make our clients understand about Financing Against 3rd Party Bank Guarantee.

EUCMS helps you to find the Financial Guarantee & Business Funding both at the same place. Whereas, other organizations will show you one way only.

1. Definition and Purpose:

§ A bank guarantee is a commitment by a bank (the guarantor) to pay a specified amount to the beneficiary (lender or creditor) if the applicant (borrower or debtor) fails to meet their obligations.

§ Financing against a third-party BG involves using the guarantee as collateral or security to obtain a loan or credit facility from a lender.

§ Common uses include securing working capital, trade finance, or project funding where the borrower leverages the BG to assure repayment.

2. Parties Involved:

§ Applicant: The entity requesting the BG, typically the borrower or a third party providing the guarantee on behalf of the borrower.

§ Issuing Bank: The bank issuing the BG, guaranteeing payment to the lender in case of default.

§ Beneficiary: The lender or financial institution providing the financing, who relies on the BG for security.

§ Borrower: The entity receiving the financing, which may or may not be the same as the applicant.

3. Types of Bank Guarantees Used:

§ Financial Guarantee: Ensures repayment of financial obligations, such as loans or credit facilities.

§ Performance Guarantee: Ensures fulfilment of contractual obligations, though less common in financing contexts.

§ Advance Payment Guarantee:Secures advance payments, sometimes used in trade finance.

§ Deferred Payment Guarantee:Used for installment-based payments, relevant in equipment or project financing.

4. Eligibility Criteria:

§ Creditworthiness: The issuing bank evaluates the applicant’s financial stability, credit history, and CIBIL/CRISIL ratings before issuing the BG.

§ Collateral: The applicant may need to provide collateral (e.g., fixed deposits, cash, stocks, or bonds) to the issuing bank. Liquid assets are preferred, though some banks may accept real estate in exceptional cases.

§ Business Purpose: The BG must be issued for a legitimate business purpose, such as trade, project execution, or tender participation.

§ Bank Relationship: The applicant must have an account with the issuing bank or meet the bank’s due diligence requirements.

5. Terms and Conditions:

§ Guarantee Amount: The BG specifies the maximum amount the issuing bank will pay in case of default. The financing amount is typically aligned with or a percentage of the BG value.

§ Validity Period: BGs have a fixed validity period (e.g., 12 months), with a claim period extending up to 12 months after expiry (as per Indian banking norms). The financing term is usually tied to this validity.

§ Unconditional vs. Conditional:Most BGs used for financing are unconditional, meaning the beneficiary can invoke them without proving default, subject to the terms of the guarantee. Conditional BGs require specific conditions (e.g., proof of non-performance) to be met.

§ Collateral Requirements: The lender may require additional collateral or a cash margin (e.g., 100% of the BG value) from the borrower, depending on the risk profile. Secured BGs (backed by fixed deposits) have lower charges than unsecured ones.

§ Invocation Process: The lender can invoke the BG by submitting a written demand to the issuing bank, adhering to the terms specified in the guarantee (e.g., before the expiry date).

§ Non-Transferability: BGs are generally non-transferable and issued for a specific beneficiary and purpose.

§ Stamp Duty: As per the Indian Stamp Act, BGs require payment of stamp duty, which varies by state and guarantee type, to be legally enforceable.

§ Limitation Period: Under the Indian Limitation Act, 1963, the BG can be invoked within 3 years for private entities or 30 years for government beneficiaries, unless restricted by specific terms.

6. Costs and Charges:

§ Commission Fees: Banks charge a commission, typically 0.5%–3% per annum of the BG amount, calculated quarterly. Secured BGs (e.g., backed by fixed deposits) have lower rates (0.5%–1%), while unsecured BGs may cost 2%–5%.

§  Due diligence Fees : One-time fees for documentation and due diligence, ranging from ₹25,00,000 to ₹1,00,00,000, depending on the value of the Guarantee bank.

§ Stamp Duty and Taxes: Stamp duty (0.1%–0.5% of the BG amount) and GST (18% on commission and processing fees) apply.

§ Collateral Costs: If the borrower provides a fixed deposit or other security, the opportunity cost of locked funds should be considered.

§ Renewal Fees: If the BG is extended, renewal fees similar to the original commission rate apply.

7. Documents Required:

§ Application form for the BG.

§ Counter indemnity cum memorandum of charge (if collateral is involved).

§ Board resolution for corporate entities (private or public limited companies).

§ KYC documents (e.g., PAN, Aadhaar, business registration papers).

§ Financial statements and credit reports of the applicant.

§ Details of the transaction, including purpose, amount, validity period, and beneficiary details.

§ Stamp paper for franking as per state laws.

8. Regulatory Guidelines (RBI):

§ The Reserve Bank of India (RBI) regulates BGs under the Master Circular on Guarantees and Co-acceptances (last updated July 1, 2013).

§ Banks must conduct due diligence to ensure the applicant can meet obligations without relying on the bank to fund invoked guarantees.

§ No BG should normally exceed a 10-year maturity, though banks may issue longer-term guarantees for projects with board approval, considering asset-liability management.

§ Restrictions on unsecured guarantees were withdrawn in 2004, allowing banks to set their own policies on unsecured exposures, subject to board approval.

§ Inter-institutional guarantees (e.g., a bank issuing a BG for a loan from another bank) require the guaranteeing bank to assume at least 10% funded exposure.

§ Banks must avoid issuing guarantees for inter-company deposits or loans to non-banking financial companies (NBFCs) unless specific conditions are met.

9. Legal Considerations:

§ Indian Contract Act, 1872: Defines a contract of guarantee under Section 126 as a promise to discharge a third party’s liability in case of default.

§ Fraud and Special Equities: Courts may issue injunctions against BG invocation in cases of egregious fraud or irretrievable injustice, but such instances are rare.

§ Independent Contract: A BG is independent of the underlying contract between the borrower and lender, meaning disputes in the primary contract do not affect the bank’s obligation to pay upon invocation.

10. Advantages:

§ Enhances borrower credibility, facilitating access to credit without tying up significant working capital.

§ Mitigates lender risk, as the BG ensures repayment even if the borrower defaults.

§ Supports large-value transactions, such as trade or infrastructure projects.

11. What EUCMS will not ask you against your Business Finance?

§ No Collateral & Security 

§ No Margin money 

§ No Insurance 

§ No CIBIL score & Credit Report 

§ NPA no issues 

§ Loan Defaulter / Bankrupt no problem at all 

We will still be able to Finance and Invest in your Business.

You Only need to sign a soft Indemnity Guarantee paper.

Note:

§ Usually we do not take upfront payment or fees. 

§ We only after checking your Financial credentials and credit Worthiness. If you are ineligible & unable to provide cash Backed guarantee or Security against the Business Funding. On the contrary it has high Risk factors ! Only in such cases we charge upfront fees.

§ Because, we believe those who are eligible for the same. They will not knock at the Third Party Guarantee Provider's or Facilitators Door !

§ Please be advised that, EUCMS will cover up the major obligations in favour of you,  to facilitate Guarantor, Insurer and Investment Provider against your Business Project Funding.