RETENTION BANK GUARANTEE - AN OVER VIEW

The main intention of submitting Retention bank guarantee is for the earlier release of retention money from the client or contractor as the case may be.

As a common practice, and as per the  contract agreement ( letter of acceptance /Local purchase order)  , the client can release the fund to the main contractor can  release the fund to the sub contractor only after deducting certain amount b which known as Retention money.

Volume of retention money would specified  in the contract agreement. Normally it is 5% or 10% of the contract value. client will release such retention money to the contractor as per the clause mentioned in the contract agreement for eg. after two years of completion of the work, or after defect liability period(DLP),after 6 months from defect liability period.etc..

By submitting retention bank guarantee , the contractor can get the retention money earlier than the retention maturity period. So the contractor can utilize this fund for the business. hence it helps to create additional liquidity of fund to the business.

Retention money normally hold by the client to set aside the losses happens during the  DLP period or any retention maturity period. If no such losses happens, then the client can release the retention money on the maturity date.

On submission of the bank guarantee, the contractor can get the retention money earlier than the maturity period. and if any losses is happens during guaranteed period, then the client can submit the Retention guarantee to the bank and can claim the compensation from the bank and subsequently bank will recover this amount from the contractor.

PERFORMANCE BANK GUARANTEE - PRACTICAL ASPECT

A performance bank guarantee provides a secure promise of compensation amount  by the bank  to the customer in the event that a supplier or sub contractor  does not meet delivery terms or other provisions in the contract. 

As per the agreement between the supplier and the customer, the supplier submit  the performance guarantee to the customer as a security for the proper performance of the contract.

If any breach of provisions of performance of contract or subcontract, then the customer can submit this performance guarantee to the bank and can claim for the compensation amount mentioned in the Performance Guarantee from the bank.

 Normally the customer will return the performance bank guarantee to the sub -contractor or supplier only after completing  the defect liability period (DLP) of that  particular contract and after particular agreed period  after completing the delivery of goods respectively.

Performance bank guarantee amount normally equal to 10% or 5% of total contract amount or LPO amount of the subcontract  or supplier respectively. It also depend on the negotiation and agreement between the parties concerned  in the contract.

Example.  A Ltd ordered 100 TV from B Ltd for AED 100,000/-  and A Ltd asked for a performance bank guarantee for AED 10,000/- ( as 10% of LPO amount)  for a period of 1year after the delivery of T.V.

 BLtd submit the performance bank guarantee to A Ltd. And out of the 100 TVs 5 Tvs are not working and A Ltd asked to B Ltd to replace it. And B Ltd not willing to replace it. Then A Ltd submit this performance guarantee to the Bank and can claimed for compensation amount of that 5 TVs.

Based on A Ltd’s claim for compensation  and documents verified, bank will award the compensation to A Ltd and bank will recover this  amount from B Ltd. This is the working aspect of performance Bank Guarntee.

ADVANCE PAYMENT BANK GUARANTEE - MEANING

Advance Payment Bank Guranatee  used as a security against Advance Amount paid. For Example, when any customer give any advance amount to their supplier and then that customer have no surety that supplier will deliver the goods or render the service on time and as per the agreement.

In such cases as per the agreement between the supplier and the customer, when the customer give advance amount to the supplier at the same time the supplier required to submit the Advance payment bank guarantee  to the customer  carrying the same amount of advance paid.

In this case , if supplier did any breach of contract, then the customer can submit this  Bank Guarantee to the bank and can claim for the amount mentioned in the bank guarantee.

Normally the customer  will return this advance payment bank guarantee to the supplier , when the supplier delivered the goods or render the services equal to the advance amount received.

BANK GUARANTEE - INTRODUCTION

Bank guarantee is a promise from bank or any  finanacial institution that they will honour  the  agreed finanacial  obligation incase the clinet not full fill the same. It is actually a facility provided by banks to it’s clients  and this facility have some agreed  maximum limit say 1 million or 2 million etc.

Bank Guarantee  issuing  for a specific period of time. For eg  3 months, 6 months , 1 year etc… or up to certain specific date (  eg.up to 31march 2017 ). Once the bank guarantee completed  it’s  validity period or maturity period, then such bank guarantee required to  renewed for further period  , if  required.

Once the validity of bank Guarantee expired, then such Bank Guarantee have no legal validity and the holder of that bank guarantee can’t claim to the bank for the  guaranteed amount  for  the breach of duty  or non performance from client. So validity of bank guarantee is one of the most important thing while maintaining a bank guarantee.

Bank guarantee should be for a specific person. That means in the bank guarantee it’s self mention the name of the ‘’beneficiary of the bank guarantee ‘’. So only that specific beneficiary can claim for the guaranteed amount from the bank.

Advance payment bank Guarantee,  Performance Bank Guarantee,  Retention bank guarantee, Tender Bond etc are some of the commonly used bank guarantees.

Each type of bank guarantees are used for separate specific purposes. 

Examples:-

1)Tender Bonds used for submitting tenders for getting any new contract  or project.

2)Advance Payment Bank Guranatee  used as a security against Advance Amount paid.

3)Performance Bank Guatantee used as a security  for the proper performance of the contract or delivery of goods.

4)Retention Bank Guarantee used as a security for the earlier  release of retention money .

BANK FACILITY LETTER ---- AN INTRODUCTION

Bank facility letter is letter issued by the bank to their customer. Every year or periodically  bank will make some amendment  on this letter according to the negotiation of the customer and according to the revised business rules of the banks.

It is an agreement between the bank and any corporation. In this letter bank will mention the details of the bank facilities which are offered to that particular customer. Its terms  varing to customer to customer depends on their credit worthness and financial stability.

In this facility letter bank will explain what are the facilities they are offered to that particular customer and its  maximum monitory limit and how much bank will charge to them by way of bank commission, bank charges , and bank interest ect.

Over draf facility, Bill discounting facility, Letter of credit facility, Bank guarantee facility etc are some of the common bank facilities used in business world. Bank will provide separate maximum limit for each such facilities. And separate bank charges for each facilities.All such details are mentioned in that Bank facility letter.

Before issuing bank facility letter , bank will analyse the financial position ,credit worthness, volume of business,  furure growth potentials,Value of fixed assets etc of that particular organization from their last few years financial statement and current years budgets.

 In short  companies  those companies having good  financial position will get all bank facilities with less cost because bank knows that companies can pay their debts on time without any problems. More over bank will monitor these companies financial position time to time . Most of the banks will ask to these companies to submit their quarterly financial statement  and monthly business details to bank on or before the specified date agreed previously at the time of negotiation.

Normally If any company’s financial position is not good, then the  bank will not provide any bank facilities to them or will  provide only few facilities with minimum monitory limit with high cost( bank charges, bank interest ect). Because bank having only reasonable assurance that  such company can pay their debts on time. So bank will charges high cost due to the high risk.

BANK RECONCILIATION STATEMENT - IMPORTANCE

Bank Reconciliation statement is a statement which shows the reason for difference between bank statement received from bank and bank book balance on a particular date say end of every month  or any  other date…

Here we tried to find out the reason for the difference. And ensure that such reasons are genuine .Most of the  small scale companies will do their bank reconciliation at the end of each month and make agree with the balance of  bank statement. But  in large scale companies required to do the reconciliation every day.

In short duration between two bank reconciliation and  frequency  of bank reconciliation will vary depends  on the number  and volume of  bank transactions in that particular organization or company.

Bank reconciliation gives a clear picture regarding the  banking transactions of that company. It shows that how many cheques are issued but not cleared, how  many  cheques are received but not deposited in the bank, details of stale cheque etc.

Some of the common reasons for the preparation of  bank reconciliation statement are as follows:-

1) C heque received from customer but not submitted in bank for clearance  or submitted but bank not       credited the amount in your Bank Account.

2) Cheque received and deposited in bank Account but same is not recorded in our books of Accounts.

3)Cheque issued to suppier or party  but not submit by supplier in bank.

4) Bank charges not recorded in books of accounts.

5) Bank interest or dividend  ect.  received in bank  but not recorded in books of accounts.

6) Any transaction with bank not recorded in books of accounts.

7) Cheque issued  and  party submitted in bank but dishonoured .

ACCOUNT PAYABLES & ACCOUNT RECEIVABLES ---- DIFFERENCE

Account payables are an amount a company owes to others because of purchase of any goods or services on credit . It is a liability to pay to another one.

Where as  Account Receivable is a current Asset to get the amount from another person. Only credit transaction  can create Account Payable and Account Receivable.

Normally when any goods purchased from any person on credit, then in the books of accounts of purchaser, treat this transaction as Account Payable because there is a liability to make payment to the supplier. Likewise the books of accounts of seller treat this transaction as Account receivable because  is is a receivable amount from purchased.

For Example :- A sells some goods to B  for AED 10,000/- Here B is the purchaser and A is the seller  and ‘’B’’ responsibility is to make payment to ‘’A’’ so  in the books of ‘’B’’ this transaction treated as                        ’’ Account Payables ‘’. And in this transaction, ‘’A’’ is the seller and ‘’A’’ required to get AED 10,000/- from ‘’A’’ so in the books of ‘’A’’ , this transaction treated as Account Receivables