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What is the difference between a financial bank guarantee and a performance bank guarantee?

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posted Jun 16 by Amrita

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Difference between bank guarantee and performance bank guarantee

In both financial guarantee and performance guarantee a bank assures its customer’s client that in case the client makes a demand on the bank (i.e. invokes the guarantee) the bank will immediately pay a certain amount. In both cases the guarantees are valid till a certain pre specified date. No claim under the guarantees can be made after that date.
It must be clearly understood that in a performance guarantee the bank does not guarantee to perform. It merely guarantees that if its customer fails to perform it will be liable to pay the guarantee money and its customer’s client is the sole arbiter of its customer's performance.
Where a bank guarantee is to be used for proposal security or earnest money deposit (the two are one and the same thing) it is a financial guarantee. The guarantee merely replaces the security amount. The bank while issuing such a guarantee does not have to assess its customer’s ability to perform; it merely assesses its customer’s ability to pay.

Where a guarantee is required to be given to the tender authorities (the bank’s customer’s clients) for release of mobilization advance (which as CMA Ramesh Krishnan has rightly described as the advance given to a contractor to enable him to start work on the contract) the guarantee is a performance guarantee. The bank while issuing such a guarantee needs to assess whether its customer will be able to start the work within the stipulated time or not. This assessment theoretically is different from a mere credit analysis which is banks’ staple diet.

Similarly a guarantee to be submitted for release of retention money (part of payment usually, around 10%, that tender authorities tend to retain i.e. not release as a security against non-performance of the work delivered by a contractor is a performance guarantee.

answer Jun 17 by Swati Tyagi
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