FINANCIAL GUARANTEES

TEAM MEMBERS:

HARJEET SINGH
SAKSHAM AGARWAL
J. SUPRIYA
IVNEET KAUR
KARAN ARORA
KANIKA AGARWAL
 FINANCIAL GUARANTEES:

In legal terminology, a contract of guarantee is a contract to

perform the promise or discharge the liability of a third person
in case of his default.

THREE PARTIES:

Guarantor
Creditor Principal
debtor
 Guarantor
Debtor

Principal
Defaulter Creditor
debtor
 ADVANTAGES OF FINANCIAL GUARANTEES

 Minimizes risk of lender

Help the debtor to secure a more attractive interest rate on

the loan or other debt instrument

Improves Credit rating of the borrower

Offers financial protection to the exporter

Encourage the flow of credit to small borrowers

CLASSIFICATION OF FINANCIAL GUARANTEES:

SPECIFIC CONTINUING

IMPLICIT EXPLICIT

SECURED UNSECURED

PERFORMANCE FINANCIAL
 SUPPLIERS OF GUARANTEES:

FINANCIAL SPECIALISED
INSTITUTIONS PUBLIC
LIKE BANKS, GUARANTEE
INSURANCE Cos INSTITUTIONS:
DICGC, ECGC
FINANCIAL
GOVERNMENT INSTITUTIONS
LIKE IDBI,ICICI PERSONAL
 PERSONAL GUARANTEES

A personal guarantee is a pledge, by someone other than the

named borrower, that he or she promises to pay any
deficiencies on a specific loan.
It is considered as the oldest form of guarantee service. It
represents an unorganized and therefore, scattered and
decentralized method of rendering the service.

Personal guarantees are more in use for consumption and

social transactions and when the loan amount is small, in
many cases they are in the oral rather than written form.
Personal guarantees play an important role in the agricultural
sector where loans are given by cooperative institutions, agro-
industries corporations on the basis of guarantees given by big
land-owners .

Personal guarantees are mainly for short term credit and are
estimated to account for 6% of total borrowings.
Personal guarantees are also used in organized sector but
it has been seen that over a period of time the volume of
these guarantees has been reducing.
Earlier banks and lending institutions used to give loans
on the basis of guarantees from managing agents,
directors and managerial personnel. But this has declined
due to change in the institutional set-up.

The two major reasons for the reduction in this practice

have been: -
1. Abolition of the managing agency system led to the
disappearance of reputed , prestigious and credit- worthy
personal guarantors.

2. Rise of a new entrepreneurial class, professionalism of

managerial cadres, and improvement in the technique of
financial and technical appraisal of proposals for assistance,
the need to obtain guarantees has declined.
 GUARANTEES BY GOVERNMENT

Central and state government cooperative banks face problems like

• Shortage of resources
• High rate of default on loans

to deal with these challenges the banks rely on RBI and

commercial banks by issuing them debentures or keeping deposits
etc.
But these commercial banks do these operations only on the basis of
guarantees provided by the state and central government

The governments also provide guarantees on behalf of public

sector enterprises to cover their borrowings they also provide
counter guarantees in respect of bank guarantees extended on
behalf of public corporations and other bodies.
GUARANTEES BY FINANCIAL INSTITUTIONS

The market for credit guarantees in India can be

considered as well developed because commercial
banks, insurance companies and statutory financial
institutions at both state and central level provide
guarantees.

The diversification of the credit guarantee markets

has taken place in the last few decades.

While these institutions do provide guarantees it can

be considered as a side business for most of them .
Often the work of credit guarantee is related to their
other business.
 COMMERCIAL BANKS
Guarantee business is done on a significant scale by commercial
banks. The banks provide guarantees on behalf of their
customers for the fulfillment of obligations undertaken by them.

Banks provide two types of guarantees:

• performance guarantees.
• financial guarantees.

Performance guarantees are those where the banks undertake to

guarantee the performance of contracts entered into by their
customers in respect of construction work, supply – purchase of
goods etc . They also guarantee export performance in case of
import of machinery, etc.
Financial guarantees are of several types: -

a) Those in the nature of service facility.

b) Guarantees to cover import of goods or purchase of

indigenous machinery.

c) Guarantees to cover loan payments.

d) Guarantees in lieu of inland letters of credit.

The maturity period of loans guaranteed by the banks is
majorly short term. The guarantee commission charged by
them is usually 1 percent p.a.. Generally banks provide
these services to large well-established businesses.

The main agenda of banks in any case is to reduce their risk

in the guarantee business. To do so the banks issue secure
guarantees whenever possible.

These guarantees are secured by deposit of cash, lodgment of

securities, or tangible assets, and a reduction in the drawing
power of the debtor.

The banks also provide unsecured guarantees depending on

the status of the customer, his standing with the bank, the
purpose etc.
 INSURANCE COMPANIES

Insurance companies issue four types of guarantees:

a) Related to performance of non-financial contracts.
b) On behalf of hire-purchase companies.
c) Guarantees to cover deferred payments.
d) Guarantees to cover term loans from banks.

While guaranteeing loans from one company to other

companies, or dealers, insurance companies do not follow
the practice of issuing blanket guarantees.

The concerned company has to obtain a credit guarantee for

each dealer or each debtor company, separately.
The maturity period of guarantees ranges from 6
months to 1 year, however, it may be longer in case
of deferred payment guarantees.

The guarantee commission charged by them is

usually 1% p.a. and a significant part of their
guarantee business covers medium and long term
loans.

A significant portion of guarantees issued by

insurance companies is given to banks or financial
institutions like IDBI, ICICI, etc. who, in turn, give
guarantees to creditors, suppliers or contract giving
parties.
 OTHER FINANCIAL INSTITUTIONS
The availability of guarantee service in India has increased
significantly since 1950 because of the creation of many new
statutory financial institutions and their expansion.

These financial institutions extend guarantees for different

purposes like: -
 IFC extends guarantees for loans raised by industrial concerns
from scheduled banks or state co-operative banks.
 The ICICI guarantees loans from other private investment
sources.
 The IDBI guarantees deferred payments due from industrial
concerns, loans raised by them in the stock market or from
scheduled banks.
The NSIC guarantees loans from banks and similar institutions
to small industrial units.
 SPECIALIZED PUBLIC GUARANTEE
INSTITUTIONS

These institutions was set up by the Government during the past

three decades.

The Objective behind creating these institutions was to :

Provide direct credit to priority sectors

Provide them with specific clients and purposes

These institutions are:

1) Credit Guarantee Organization

2) Deposit Insurance and Credit Guarantee

Corporation(DICGC)

3) Export Credit and Guarantee

Corporation( ECGC)
 CREDIT GUARANTEE ORGANIZATION

CBO was a part of RBI and was appointed as an agent of the

government of India.

It was introduced permanently in January 1993.

It guarantees loans from lending institutions to the small scale

industrial units.
The eligible Debtors could be engaged in:

Manufacturing & Processing

Preservation Of Goods
Mining & Quarrying
Servicing And Repairing Of Machinery
Purchasing Medical Equipments
Laboratories & Agro-service Centers
The eligible institutions whose loans to small industrial units
were guaranteed by the CGO were:
Commercial Banks
State Financial Corporations
State , Central & Urban Co-operative Banks
Regional Rural Banks

It only offers financial guarantees.

The extent to guarantee cover provided by CGO was not over

100% in all cases.
The CGO provides wide range of Credit facility.

The rate of guarantee commission charged by CGO is much

lesser then commercial banks & insurance companies.
 Deposit Insurance and Credit Guarantee
Corporation (DICGC)
The DICGC came into existence in 1978 after the merger of Credit
Guarantee Corporation(CGC) with the Deposit Insurance
Corporation .

It guarantees loans to a wide spectrum of borrowers such as:

Transport Operators
Retail Traders
Professionals
Self-employed Persons
Business enterprises

It cover diverse type of credit institutions. It includes commercial

banks, central , state and primary level cooperative banks, RRBs
,SFCs and service cooperative societies.
The DICGC operates on the 5 credit guarantee schemes:
 Small loans Guarantee scheme,1979
 Small loans ( Financial Corporations) Guarantee
scheme,1971
 Service Corporative socities Guarantee scheme,1971
 Small loans (Co-operative banks) Guarantee scheme,1984
 Small loans( Small scale industries) Guarantee
scheme,1981
 Guarantee cover is usually 75% of the amount of default
 The maturity of loan guaranteed varies between 5 months to 5
years
 EXPORT CREDIT AND GUARANTEE
CORPORATION( ECGC)
ECGC was set up in 1964 with the objective of offering
financial protection to the exporter and improving the financial
standing.

Different types of financial guarantees provided by ECGC are:

Packing credit guarantee
Post shipment export credit guarantee
Export finance guarantee
Export production finance guarantee

Non financial guarantees by ECGC are :

Export performance guarantee
Transfer guarantee
Investment insurance guarantee
LETTER
23 FEB, 2010:
RBI to shed 80% risk weight
on govt-backed power loans

The Reserve Bank of India has

decided to reduce the risk weight
from 100% to 20%, when such
loans are guaranteed by states.

Unlocking Rs 30,000 crore for the

sector that is struggling to meet
the capacity targets for the
Eleventh Plan period.
20 AUG, 2010
Jet Airways seeks RBI nod to
raise Rs 3,450 cr via ECB

Jet Airways is knocking on the doors of

RBI to raise foreign currency loans to
repay expensive rupee loans from local
banks.
Under current regulations, foreign
currency loans, better known as external
commercial borrowings (ECBs), cannot
be used to refinance domestic loans.
Jet has also proposed that the loans could
be fully or partially guaranteed by the
Indian banks and secured against credit
card realisations outside India.
22 AUG, 2010
Fixed deposits to fetch higher
returns

The deposits rates will go up as surging

investments and monetary tightening
have drawn out excess liquidity from the
banking system. 
Over the past one year, fixed deposit
interest rates had gone down from around
nine percent to around five percent.
 As the economy started reviving, banks
moved from being net lenders to net
borrowers of funds from the Reserve Bank
of India (RBI). This spells good news for
individuals investing in term deposits.
Cont...
In case of banks' fixed deposits,
the Deposit Insurance and
Credit Guarantee Corporation
of India guarantees repayment
of Rs 1 lakh in case of default.
There is no such guarantee
offered on company deposits
and the safety of your deposit
depends on the financial
position of the company.
For non-banking financial
services (NBFCs), the RBI has
made it mandatory to have an
'A' rating to be eligible to
accept public deposits.
Cont..
Investors should ideally go for 'AAA'
or 'AA' rated schemes. Most
companies accept fixed deposits for a
period ranging from 1-5 years.
Compared to mutual funds or bank
fixed deposits, company fixed
deposits are rather illiquid.
In most cases, premature withdrawal
is not allowed before completion of
three months. If you wish to withdraw
between the third and sixth months,
you invariably get zero interest
income. If you wish to withdraw
between the sixth and the twelfth
months, you get three percent less
than the guaranteed returns.
26 MAR, 2010
Bharti takes SPV route for safe ride
into Africa

Bharti Airtel, which taking over Zain

Telecom’s African assets, has formed two
special purpose vehicles (SPVs) in the
Netherlands and Singapore to execute the
$10.7-billion deal with a lower financial
risk.
Zain has also agreed to compensate Bharti
for legal costs in case an ownership
dispute erupts over the crucial Nigerian
operations that contribute 36% to its
Africa revenues. The guarantee from Zain,
known as an indemnity, will be valid for
some years.
Cont..
SPVs are companies formed to
carry out a specific transaction.
These SPVs, whose dealings will be
guaranteed by Bharti, will own the
African assets of Kuwait’s Zain.
The SPV has to repay the debt from
the cashflows of the African
business. But Bharti will have to
step in in case of a default.
11 Mar, 2010
Govt may let FIs guarantee
infrastructure bonds
The government is weighing a proposal to allow
financial institutions to guarantee bonds issued by
infrastructure providers, a move which is expected to
help channelise more funds for building roads, ports,
airports and power projects.

State-owned insurance firms have been prominent in

infrastructure investment and the government
believes that measures such as offering a guarantee
may provide comfort to private insurance companies
and prompt them to put money in infrastructure bond
offerings.
The government-backed India Infrastructure Finance
Company, or IIFCL, has appointed a consultant to vet
this proposal.
5 Apr, 2010
Banks to seek RBI help to
secure govt guarantee for
education loans

CEOs of large commercial banks

will seek the support of the Reserve
Bank of India to secure a
government guarantee for
education loans.

Banks will request the central bank

to take it up with the government to
provide a guarantee, at least for
loans below Rs 4 lakh,
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