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BANK GUARANTEE &
LETTER OF CREDIT
Submitted by
Anil Nandyala (B11005)
Ankita Singh (B11007)
Sumit Khandelwal (B11048)
AGENDABank Guarantee
DefinitionProcess FlowTypes of Bank GuaranteeBenefitsBank ChargesDocuments RequiredBG Assessment
AGENDA (CONTD)Letter of Credit
DefinitionTypes of Letter of CreditProcess FlowLC DiscountingHedgingBenefitsCommon Reason for LC failureDocuments RequiredAssessment of LC
BANK GUARANTEE An assurance by the bank ensuring that
the liabilities of a debtor will be met Ensure payment to beneficiary in case
of non-performance by applicant Aim at preventing frauds and helping
banks serve genuine customers Facilitates more confidence to do the
business Issued for a period till the execution of a
contract
PROCESS FLOW
TYPES OF BANK GUARANTEE Performance guarantee
Fix the financial liability upon the banker in the event of failure in performance
Advance payment guarantee Provides security to importer if exporter does not
deliver under the terms and conditions Deferred payment guarantee
Customers make payment in certain installments and on specified dates
Foreign bank guaranteeIssued in foreign currency to beneficiary
outside the country for overseas obligations
BENEFITS Reduces many business transactions
risks Reliable security instrument in both
international and domestic trade Provides immediate funds to the
business in the form of payment guarantees
Gives ample time to make payments in case of deferred payment guarantees
Provides better negotiable terms and conditions to the buyer and seller
BANK CHARGES Limit Based BG:
Working Capital Finance is required1% fees charged
FD based BGFor foreign BG you have to 110% marginFor Inland BG you have to keep 100
%margin5500 is the minimum fees charged on BG
DOCUMENTS REQUIRED Address Proof Identity Proof Business Proof Last 3 years P&L and BS(duly signed by CA) Last 1 year Bank Statement of the firm If existing loan, detailed document of the
same Individual IT Returns of the
individual/partners/directors for the last 3 years
SEBI formalities in case of listed companies
BG ASSESSMENTSr .No. Particulars Amount
A Value of contracts expected to be bid 1000.00
B EMD Guarantee (generally 3% to 5% of A), Here we will assume 5%
50.00
C Expected value of the new contract (25% of A), It may vary from company to company
250.00
D Performance Guarantee (Normally 10% of C) 25.00
E Advance Payment / Security Deposit Guarantee (5% of C),This may vary from project to project.
12.50
F Fresh Guarantees required (B+C+D+E) 337.50
G Existing bank guarantees (Assumption) 100.00
H Guarantees expiring during the year 25.00
I Guarantees requirement (F+G-I) 412.50
J Total guarantees limits required 412.50
LETTER OF CREDIT
LETTER OF CREDIT An arrangement where by bank at
customer’s request undertakes to pay his creditor
Used worldwide for settlement of trade between exporter and importer
Sophisticated and popular method of payment
PROCESS FLOW
TYPES OF LETTER OF CREDIT Revocable L.C
Can be cancelled at any time by any party without consent
Irrevocable L.CCannot be cancelled at any time without
advising the seller Sight L.C
Documents are released to creditor on payment
Usance L.CDocuments are handed over on
commitment on payment at a future date(available to 180 days)
LETTER OF CREDIT DISCOUNTING Seller discount’s the bill
DISCOUNTING:DurationInterest rates
HEDGING Forwards or Future contracts Options
BENEFITS Opens door to international trade by
provide secure payment Bank substitutes to buyer Bank Expertise is made available to help
complete trade transactions completely Payment for the goods shipped can be
remitted to your own bank or bank of your own choice
Payment will be made to seller when T&C of the L.C are compiled with
Importer can control shipping dates for the goods being purchased
COMMON REASONS FOR LC FAILURE Time Lines
Shipment failsDocuments on timeExpiry of LC
Discrepancy Within LC Compliance with Documents &
Conditions
DOCUMENTS REQUIRED Commercial Invoice Transport Documents
Bill of LadingAir bill
Insurance Documents Inspection Certificates Certificate of origin
ASSESSMENT OF LC
Assessment of LC Rs in Mn Rs in Mn
Total Purchase A 100
Purchase under LC (x%) B=A*X% 60
Period under LC (Y days) Y 30 days
Lead Time under LC inCase of offsite
Z 90 days
LC Requirement C=(B*(Y+Z)/365) 19.73
THANK YOU