Closure of Bank Guarantee facility
Ajay
(Querist) 13 October 2017
This query is : Resolved
We are doing business of civil contracts with various govt organisations whereby we have submitted them Bank Guarantees (BGs) issued by our existing bank �X�. Bank X is a scheduled Co-operative Bank, who has sanctioned us a bank Guarantee facility. We have availed BGs for submission to various beneficiaries- govt organisations (within the frame of available sanction). Some of our clients- govt organisations do not accept BGs issued by Scheduled Co-operative banks due to their internal norms/ guidelines. Hence, our existing bank X was generally approaching a Nationalised Bank for the BG issuance. This caused lots of trouble such as high BG commission payment and delay in availing the BG. However, now various BGs (including those issued by bank X and some by Nationalised banks through bank X) are valid for a period ranging up to maximum 11 years (as per the requirement of that particular beneficiary). We decided to close down the availed BG facility with bank X to avoid the inconvenience caused to us and also because other bank �Y� is ready to provide BGs at lower BG commissions. Bank Y is a Scheduled Commercial bank, which is acceptable by our clients- govt organisation for BG. Bank Y has sanctioned us the BG facility as per our requirement and agreed to provide a Counter BG to Bank X for the maximum period of presently valid/ outstanding BGs. Bank Y has enlisted all the BGs presently valid (issued by/ through bank X) and issued a Counter BG for the total amount of valid BGs for the maximum BG validity period Plus 1 month additional as Claim period. Now, Bank X is resisting our application for closure of BG facility by demanding 100% deposits against all BGs valid beyond 3 years from now; whereas bank Y is ready with Counter BG of the complete BGs outstanding. Bank Y has quoted �RBI Master Circular on Guarantees and Co-Acceptances DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 01, 2015 Para No. 2.4.2 regarding Restrictions on Inter-Institutional Guarantees� to support their stand over provision of Counter BG to a bank. Bank X is stating that there is no directive making acceptance of Counter BG a necessary aspect for their bank.
Alternately, Bank X has allowed the replacement of their BG with a freshly issued BG of Bank Y directly with the respective beneficiary- govt organisations. This procedure may not be acceptable to certain beneficiary considering that BG is part of our agreement with the govt organisation. Secondly, this will require spending for payment towards BG commission (now to bank Y), stamp duty over the BG amount and also deposition of a margin security deposit. Bank Y has conveyed that although they can issue a Counter BG to Bank X, they cannot issue unsecured BGs directly to our clients on our behalf. Hence the procedure of replacing the BGs directly with the beneficiary is not acceptable to us.
Presently, it is already been nearly 2 months from our first request to bank X for closure of bank Guarantee facility. We have requested bank X to accept the Counter BG for the complete amount of outstanding BGs and simultaneously release our marginal deposits (for appropriate deposition further, with bank Y) and finally, release of our property mortgage (for appropriate deposition with bank Y). Bank X is not willing to accept Counter BG and we are helpless because our requirement of fresh BGs is held up. This is causing losses to us due to delay in the transition from one bank to another. Please provide valuable tips in the matter.
Rajendra K Goyal
(Expert) 22 October 2017
The stand of Bank X is quite justified in not releasing mortgaged property during the currency of BG. It is a credit decision and there seem no reason why Bank X should accept your offer of counter guarantee by releasing tangible security with it and not demand 100% margin. Counter guarantee is not a good substitute of tangible security..
Get permission from the beneficiary department to replace the existing BG, if permitted may get it issued from your new Banker and replace the existing BGs.
