Question
Which of the following statements are correct regarding
the issuance of a bank guarantee? A. Banks should comply with Ghosh Committee recommendations while issuance of bank guarantee B. All bank guarantees have an expiry period and expiry date. C. The banks are not allowed to issue bank guarantee in favor of other banks and financial institutions . D. Banks are required to maintain capital against the non-fund-based facilities like Bank Guarantee.Solution
A bank guarantee is a commitment by a bank to pay a beneficiary on behalf of a customer who is unable to fulfill a payment obligation. The bank acts as a guarantor, and is responsible for the customer if they are unable to make the payment. Bank guarantees can be performance guarantees (PG) or financial guarantees (FG). All bank guarantees have an expiry period and expiry date. As per RBI guidelines, Bank guarantees should generally not extend beyond 10 years. However, banks can issue guarantees for longer periods if they consider the impact on their Asset Liability Management. Ghosh Committee Recommendations on BG:
- BGs should be issued in serially numbered security forms;
- While forwarding the BGs to the beneficiaries, caution them to verify the genuineness of the guarantee with the issuing bank.
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