What are bank guarantees?

1. A bank guarantee is a bank’s promise that liabilities of a debtor will be met if he does not fulfi l contractual obligations.

2. A performance guarantee kicks in if services or goods are not provided to the buyer by the seller as per the specifi cations mentioned in the contract.

3. A bid bond guarantee ensures that the winning bidder of a project accepts and executes it as per contract. Else the owner can invoke the guarantee and forfeit the amount.


4. A financial guarantee is given to related parties if one company takes on the financial obligation of another company and fails to meet the financial obligations.

5. Banks issue bank guarantees in return for a guarantee fee and against a collateral for security.


The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta