Bank Guarantee
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Principles and Practices of Banking — JAIIB.
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Free sample — 8 of 66 rapid-fire Q&A cards.
What is a Bank Guarantee?
A Bank Guarantee is a contract by which a bank (guarantor) undertakes to pay a specified sum to a beneficiary if the applicant (principal debtor) fails to fulfill a contractual or legal obligation.
What is the primary obligation of a bank when a guarantee is invoked?
Bank must pay the beneficiary immediately without question.
What is the difference between a primary liability and a contingent liability in a bank guarantee?
The bank's liability under a guarantee is contingent — it arises only if the principal debtor defaults. Until invocation, the guarantee represents a contingent liability for the bank.
Who is called the 'applicant' or 'principal' in a bank guarantee?
The borrower or customer on whose behalf guarantee is issued.
Under which Act are bank guarantees governed in India?
Bank guarantees are governed by the Indian Contract Act, 1872, specifically Sections 126 to 147 which deal with contracts of guarantee, surety, principal debtor, and creditor.
Who is the 'beneficiary' in a bank guarantee?
The party in whose favour the bank guarantee is issued.
Who are the three parties involved in a Bank Guarantee?
The three parties are the Applicant (principal debtor who requests the guarantee), the Beneficiary (in whose favour the guarantee is issued), and the Guarantor Bank (which issues the guarantee).
What does 'guarantee commission' refer to in bank guarantees?
Fee charged by the bank for issuing the guarantee.
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