Prepared by :

Md. Mosharraf Hossain Mazumder

Executive Vice President &
Head of Human Resources Division
Export Import Bank of Bangladesh Ltd.
Head Office, Dhaka
 BANK GUARANTEE

A guarantee is promise made by the person/organization (or guarantor) to the Banker that he will pay
the present or future debt in case of default by the principal debtor. So the guarantor is undertaking to
repay the debt in case it is not the principal debtor.

The contract of guarantee has been defined under section 126 of the contract act 1872., “A Contract of
Guarantee is a contract to perform the promise or discharge of liability of a third person in case of his
default.
The person who gives the guarantee is called “Surety”
The person on whose behalf the guarantee is given is called the “Principal Debtor”
The person in whose favour guarantee is given is called the “Creditor or Beneficiary”

Contracts of guarantee are usually entered into

(a) to secure the performances of something
(b) to secure the honesty & fidelity of someone or
(c) to secure someone from injury arising out of some wrong committed by another.

A Guarantor is responsible to pay the amount of the debt to the creditor only after the creditor
demands repayment of the debt from the principal debtor or the debts becomes payable on due date
and the debtors makes a default.

Formalities before issuing a Bank Guarantee :

A person may be existing or prospective client may approach our bank for issuing a Bank Guarantee in
favour of Govt. Office/Semi Govt. Office/Airlines / Customs authority /supplier or like any other office of
a definite amount and upto specific period alongwith the draft proforma of the guarantee.

Fiorstly, we will consider whether the proposal of the person is acceptable or not. Then we will ask the
client about the security against the guarantee.

Branch RM of the bank could issue Bank Guarantee against 100% cash or quasi cash (MTDR,
Scheme receipts of our Bank) margin after obtaining necessary charge documents and commission
and thereafter post facto approval to be obtained from Head Office.

Normally Bank Guarantee issued on non judicial stamp as per proforma supplied by the concerned
department/office.
If the client offer some percentage of cash margin and the rest percentage covered by landed property,
the proposal for sanction of the bank guarantee to be forwarded to Head Office after observing all
formalities like other investment proposal. Branch will issue Bank guarantee after obtaining
sanction/approval letter and issue authority from Head Office upon satisfactory completion of
documentations as per sanction letter.

Charge documents :

i) Demand Promissory Note

ii) Letter of Undertaking
iii) Letter of Guarantee (Personal Guarantee)
iv) Counter Guarantee.

Accounting for issuing Bank Guarantee :

Dr. Customer Liability
Cr. Bankers Liability

Dr. Client’s MSTD/Al Wadia CD A/C

Cr. Margin on Bank Guarantee
Cr. Commission on Bank Guarantee
Cr Vat

Commission / Charges :
For Bid Bond, Performance Bond, Mobilizing Guarantee etc. :
Margin 1% to 99% cash & : 0.50% per quarter + VAT and part thereof with minimum
Collateral Tk. 500.00
100% cash margin : Tk. 500.00 + VAT per deal but not exceeding 1 year
100% covered by : 0.25% per quarter + VAT and part thereof with minimum
MTDR/SSS/MIS or other deposit Tk. 300.00

For Open Bank Guarantee :

Margin 1% to 99% cash & : 0.50% per quarter + VAT
Collateral
(The client have to build up 100% cash
security/eligible security in phases within a
particular time.)
In case of goods cleared under : 0.25% per quarter + VAT
MPI i.e. for Customs Guarantee
(Sufficient cash margin is to be obtained and
rest amount upto 100% shall be built up)
100% covered by : 0.25% per quarter + VAT but to be realize for 1 year at the
MTDR/SSS/MIS or other deposit time of issuance.

(Stamp charge will be borne by the client and MTDR/Instrument confirmation/Reconfirmation fee@ Tk. 100.00
per case/instrument)
TYPE OF GUARANTEE:

There are mainly 2 (two) types of Guarantee:

SIMPLE GUARANTEE :

A simple guarantee is given in respect of a specific transaction or promise undertaken by the Principal
debtor. It comes to an end when the specific Promise or transaction is fulfilled.

CONTINUING GUARANTEE :

When a guarantee is given in respect of a series of promises or transactions, it is called a “Continuing

Guarantee”. The surety specified the amount upto which, and the period within which, he shall remain
liable as a surety. The guarantee taken by banks is usually a continuing guarantee, which holds good
as security although the balance is the debtor’s account may fluctuate from time to time.

Type of Guarantee that are generally issued by the bank:

1) Bid-Bond / Security deposit :

This is also called tender or bid guarantee and is generally sought for 2 per cent to 5 per cent of the
contract amount. In case of default of the tender at whose request the guarantee is extended, the
beneficiary may en-cash the same.

2) Performance Guarantee :

Guarantees which are extended in consideration of specific performance of contract are called
performance guarantee. Performance guarantees are given to Government or Corporation on behalf of
contractors undertaking to make payment of penalty in the event of non-fulfillment of their performance
of contract or supplying goods as per contract.

3) Shipping Guarantee :

Banks give guarantee/indemnity to shipping companies for release of goods in the absence of shipping
documents, in case goods arrive before receipt of such documents by the consignee and are incurring
demurrage or original shipping documents have been lost after retirement from bank.
4) Customs Guarantee :

This guarantee is issued in favour of customs authority on account of custom duties/excise duties on
imported goods and machinery or export commodities on behalf of clients.

5) Advance Payment Guarantee :

This enables the employer to get a refund of advance payments made in the event of default by the
contractor. It is issued for the full amount of the advance payment, but may contain reduction clauses,
which enable a reduction in the maximum amount upon evidence of progressive performance.

Claim of Guarantee:

In case the guarantee is presented for encashment and the balance of customer's account is sufficient
to cover the amount of guarantee plus cash margin held, the same should be paid by a Pay-Order to
the debit of customer's account. Before settlement of claim under guarantee furnished by the bank, it
must be ensured that the claim is justified as per terms of guarantee. The customer shall also be
informed as usual before settlement of the claim.

If the balance is not sufficient, the customer shall be asked to deposit the amount of shortfall
immediately and in case of his failure, bank will create force Investment (IBP/IBB) against the party
after obtaining approval from Head Office and settle the claim.

Steps to be taken by a Banker after expiry of validity of a Bank Guarantee :

After expiry of the validity period of a Bank Guarantee, the party may be asked to collect the original
Bank Guarantee duly released from the respective office for cancellation by the issuing authority. If he
fails to do so, the Bank will write letter to the concerned authority for return the original Bank Guarantee
After receiving the Bank Guarantee, branch will cancel the same with note in the Guarantee issue
register and they will keep it into the closed Bank Guarantee file. They will release the securities which
were obtained against the guarantee and reverse the liability voucher as under :

Dr. Bankers Liability

Cr. Customer Liability

Dr. Margin A/C

Cr Client’s MSTD/Al Wadia CD A/C
ISSUANCE OF FOREIGN BANK GUARANTEE AND ITS DIFFERENT TYPES :

Sometimes Foreign Correspondent on behalf of its customer requests the Bank in Bangladesh to issue
a guarantee in favour of beneficiary in Bangladesh. When the Authorized Dealer issues the guarantee
against Counter Guarantee of Foreign Correspondent is called Foreign Bank guarantee.

Normally there are two major types of Foreign Guarantees that Bank issues
one Bid Bond and another Performance Bond/Guarantee.

Generally Foreign Guarantee is issued in the Convertible currency such as, Dollar, Pound Starling,
Yen, Deutsche Mark on in the Domestic Currency of the issuing country. Foreign letter of guarantee
may be issued other than the above currency provided Foreign Correspondent undertakes that
reimbursement claim would be settled in the convertible currencies.
1 An authorized dealer may without prior approval of Bangladesh Bank, issue guarantee Bid Bond,
or Performance Bond in foreign currency on behalf of non-resident firm/company-favouring
residents in Bangladesh provided a Back-to-Back guarantee covering the guaranteed amount
from an overseas correspondent or other Band abroad is held by the Authorised Dealer. The
Authorised Dealer should satisfy itself about the bonafieded of the overseas guarantee before
issuing its own Guarantee/Bid Bond/Performance Bond there against.

2 Non-resident international agencies may demand Bank guarantees from non-resident contractors
against supply of materials/down payment for the on going projects in Bangladesh financed by
them. Such guarantee on behalf of a non-resident contractor in favour of the non-resident
beneficiary may be issued by an Authorised Dealer against 100% Counter Guarantee from a
reputed international Bank abroad, or against 100% cash collateral in Foreign Exchange received
from aboard through Banking channel.

3 Authorised Dealers may not, without prior approval of Bangladesh bank furnish guarantees to or
hold collaterals on behalf of overseas Bank branches or correspondents in respect of credit
facilities or guarantees to be extended by them on for any other purpose.

4 Authorized Dealers may furnish Performance Bonds/Guarantees in favour of overseas buyers on

account of Bangladeshi Exporters subject to the following donations.
A The tender floated by the Freeing buyer call for Bank Guarantees/Performance Bond.
B The tender is a bonafide merchandise exporter.
C There is no export bank on the commodity to be supplied.
D The past performance of the tendered (exporter) is considered satisfactory by the
Authorised Dealer.
Procedure for issuance of Foreign Bank Guarantee :

1. That the foreign correspondent has requested to issue Guarantee under tested Telex or
through SWIFT or through letter duly signed by two authorised signatories. The test of the
Telex/SWIFT/signatures must be agreed/verified.

2. That the name of the beneficiary, context, terms & conditions of the guarantee is clearly
incorporated.

3. The amount of guarantee and validity period has been mentioned.

4. The Foreign correspondent has indemnified and undertaken to pay the claim or demand if any
loss arises out of guarantee issued at their request.

5. That the foreign correspondent provided counter guarantee remains valid upto additional 30
days after expiry of the guarantee to facilitate lodging of claim and settlement thereof

6. That the purpose, terms and conditions of the guarantee are permissible as per rule of
Bangladesh Bank.

7. Approval for issuance of the guarantee to be obtained from the competent authority.
 Investment against Work Order / Supply Order

Investment allowed against assignment of work order for execution of contractual work falls under this
head. This investment is generally allowed for a definite period and specific purpose. It is not a
continuous investment.

Evaluation of the investment client :

1) The client should have a well operated Al-Wadia Current Deposit account with the branch.
2) He is a genuine contractor having enlistment with the work entrusted authority/office.
3) His past record for doing such type of work order business.
4) He is a man of integrity and commitment.
5) There is no adverse report about the means standing, respectability of the investment client.
6) The prospective investment client is not a defaulter borrower of other bank/financial
institution and his CIB report is clean.
7) His repayment track record is good.
8) Where necessary the investment is secured by adequate collateral.

If the bank is satisfied with all these information, he may ask the investment client to submit following
paper/documents.

1) Application in standard format along with three copies of passport size photograph of
investment client.
2) Original work order, which must contain date of issue, work order no. amount of work order,
date of start and date of completion of the work order.
3) Certificate of the work entrusting agency regarding progress and position of the work, if the
work is already in progress.
4) Certificate in respect of bill paid and bill pending issued by the competent authority.
5) Documents/papers of the property, if the investment is required to be secured by collateral
security.
6) Valuation of the property should be done by the banks enlisted surveyors.

After receiving the papers & documents, the Branch manager/investment officer must personally verify
the genuineness of the work order and related papers. They should also ensure that the time of
completion of the work mentioned in the work order is sufficient for completion. If not the investment
client should be asked to get the time extended from respective authority. Satisfaction report should be
taken from Bank’s Legal Advisor regarding landed property offered as security.
Therefore, the investment proposal to be dispatched to sanctioning authority and after sanction of the
investment, the following documentations to be completed :

i) Sanction letter incorporating all essential terms & conditions should be accepted & signed
by the client.
ii) Registered mortgage of the landed property under the guidance & supervision of the BLA, if
the investment is collateral secured.
iii) Registered irrevocable Power of Attorney duly Notarized, drafted by BLA.
iv) Power of Attorney (drafted by BLA) to collect cheques, bills, security money by the Bank
against the work order from the concerned authority.
v) A letter alongwith the power of attorney to be sent to the concerned authority requesting
them to assign all payments cheques, drafts Pay Order in favour of the bank.
vi) Letter of confirmation from the work entrusting agency to the effect that they will issue
cheques, bills, security money cheque against the work order in favour of the Bank.
vii) Charge documents duly filled in & stamped as under :

 DP note
 Letter of arrangement
 Letter of disbursement
 Letter of lien etc.

if collaterally secured :

 Original title deed alongwith bia deeds,

 CS/SA/RS Khatian
 valuation Certificate
 Mutated parcha with DCR
 NEC with searching receipt (Non Encumbrance Certificate).
 Upto-date rent receipt
 BLA’s opinion (Bank’s Legal Advisor).
 Certificate of satisfaction regarding documentation by BLA
 Location Map
 Approved Plan of construction
 NOC & lease deed (if it is a lease hold property.)

After obtaining/completing all these papers/formalities and disbursement approval from Head Office,
the Bank may disburse investment money phase-wise obtaining the progress report or supervision the
progress of the Work. No Investment shall be disbursed after expiry date of the Work Order. Close
liaison to be maintained with the work order issuing authority for this type of investment. Investment
amount should be adjusted proportionately/gradually from the cheque/bill against the work order s per
terms of the sanction letter.
Net value of the awarded work order will be calculated under the following manner :

For Example :
Awarded Work Order value : Tk. 10,00,000.00
(-) Security Money 10% : Tk. 1,00,000.00
(-) Vat 4.50% : Tk. 45,000.00
(-)Tax 4% : Tk. 40,000.00
Net work order value : Tk. 8,15,000.00 [On Net Work Order value,
Bank may generally finance upto 35% or any % (collaterally secured) as per Head Office sanction].

Repayment/Realization :

Bank will realize 40% proportionately from each and every receivable bills to adjust the investment
deal. The rest amount will be refunded to Client for completion of rest of the work. If the bank, invest
more than this percentage then the realization will be accordingly.

Investment against work order / supply order is of high risk, so additional attention to be paid
by the branch towards disbursement & recovery of such investment.