What is a Bank Guarantee?
An assurance between two external parties, a buyer or a seller, in the form of a contract that the bank provides as a security for an applicant or beneficiary, is called a bank guarantee. It acts as a risk management tool for the beneficiary or applicant because if the applicant or beneficiary cannot fulfil liability or gets defaults, then the bank will uphold the contract until completion and cover it.
Bank guarantees serve a crucial purpose for small businesses through their due diligence process. The bank provides credibility to both applicants as trustable business partners for the beneficiary.
In short, both engaged applicants co-sign that particular contract, and the bank puts its seal of approval to confirm the trustworthiness of both applicants. Bank guarantees are of two main kinds financial bank guarantees and performance-based guarantees.
Financial bank guarantee:
In a financial bank guarantee bank assure that buyer repays debts to the seller. If the buyer fails to do so, then the bank will fulfil it.
Performance-based guarantee:
In a performance-based guarantee, the beneficiary may sue the bank for damages if the bank fails to fulfil the guaranteed contractual obligations. The beneficiary will claim the contract, the bank, for any losses from the counterparty’s failure to provide the services as promised.
What is a Fixed Deposit
In fixed deposits, the bank blocks a certain amount for a defined period. It offers a higher interest rate to investors than regular saving accounts until maturity. A separate account is may or may not require for a fixed deposit.
In different countries, it is named differently. In Canada, Australia, and New Zealand it is termed a term deposit or time deposit. In India and the United States, it is called a fixed deposit, and in the United Kingdom, it is called a bond.
A fixed deposit is money that cannot be withdrawn until maturity. Some banks offer additional services to FD holders in fixed deposits, such as loans against FD certificates at the lowest or most competitive interest rates. In uncertain economic conditions, the banks will offer fewer interest rates to the beneficiary.
However, the average interest rate banks offer FD holders may vary between 4-7.50% depending on tenures. The tenure for a fixed deposit may be from 7, 15, or 45 days to 1.5 years, or it can be as high as ten years. In fixed deposit, your investment is insured by deposits insurance and credit guarantee corporation (DICGC).
Difference Between Bank Guarantee and Fixed Deposit
In bank guarantee, the bank is liable for paying money if the applicant or beneficiary is unable to fulfil liability or gets defaults. The bank will uphold the contract till completion and cover it.
In contrast, in fixed deposits, the bank guarantees deposit insurance to the applicant for a defined period with a higher interest rate to investors than in regular saving accounts until maturity.
Comparison Between Guarantee and Fixed Deposit
| Parameters | Bank Guarantee | Fixed Deposit |
| Definition | In a bank guarantee, the bank is liable for paying money if the applicant or beneficiary cannot fulfil liability or defaults. | In fixed deposits, the bank guarantees deposit insurance to the applicant for a defined period with a higher interest rate than in regular saving accounts until maturity. |
| Objective | The objective of a bank guarantee is to develop trustworthiness between applicants and the contracts. | In a fixed deposit, a lumpsum amount is deposited to a bank for a specific period with an agreed interest rate. |
| Payment | Payment is made on the failure of the agreement. | In a fixed deposit, the payment is made to the depositor at the end of maturity. |
| Suitability | It is suitable for government contracts. | It benefits individuals doing jobs, business, or as an investor. |
| Benefits | It provides security to the applicant to make payments later for goods and services. | It helps depositors to earn a return on investment for a defined period. |
References
- Dukelow, F., 2016. State to the rescue: The bank guarantee and Ireland’s financialised neo-liberal growth model. In Defining events (pp. 143-160). Manchester University Press.
- Puyok, A. and Sukhani, P.R., 2020. Sabah: a breakthrough in the fixed deposit state. The Round Table, 109(2), pp.209-224.