A bank guarantee is a written undertaking by a bank, at the request of its customer (the applicant), to pay the beneficiary a stated sum on receipt of a demand that complies with the guarantee's terms, irrespective of disputes between the applicant and beneficiary. It is an independent contract between the bank and the beneficiary. Common types in trade and construction are performance guarantees, advance payment guarantees, retention money guarantees and bid bonds. The beneficiary must invoke it within its validity (and any claim period); courts restrain payment only for established fraud or special equities causing irretrievable injustice.
How bank guarantees work in India
The applicant arranges the BG with its bank against margin or a credit limit. The BG names the beneficiary, the amount, the validity date, the claim period and the conditions for demand (often an unconditional demand stating the applicant has failed to perform). To invoke, the beneficiary sends a written demand to the issuing bank, in the form the BG requires, before expiry; the bank verifies compliance and pays. The applicant can sue the beneficiary later for wrongful invocation, but cannot usually stop the bank paying. If the beneficiary misses the expiry or claim period, the BG lapses and the bank is discharged.
| BG type | Who gives it | Secures |
|---|---|---|
| Performance BG | Contractor/supplier to client | Due performance; typically 3% to 10% of contract |
| Advance payment BG | Contractor to client | Refund of mobilisation advance |
| Retention BG | Contractor to client | Replaces cash retention |
| Financial BG for supplies | Buyer to supplier | Payment for goods supplied on credit |
Why it matters for getting paid
A supplier holding a buyer's financial BG has the best security available: a bank that must pay on demand. Diary the expiry and claim dates; invoke in time and in the prescribed form. For contractors, understand that a client can invoke a performance BG with little recourse at the time, so negotiate conditional wording where possible. See letter of credit, security deposit and retention money.
How FundRaksha uses it
When a client holds a BG, FundRaksha's advocates check validity and claim periods first and prepare the invocation letter in the exact form required, so payment comes from the bank rather than through litigation. Where a client's own BG has been wrongly invoked, they pursue the beneficiary for the amount. Fee: 30% of recovery; dedicated advocate within 24 hours.
Worked example (hypothetical)
A Mumbai steel supplier agrees to supply a fabricator on 60-day credit against a financial BG of ₹50,00,000 valid until 31 March with a claim period to 30 June. By February, ₹42,00,000 of invoices are overdue and the fabricator is not paying. On 10 March the supplier's advocate sends a demand to the issuing bank's branch, in the BG's prescribed form, stating the fabricator has failed to pay ₹42,00,000 and demanding that sum. The bank verifies the demand against the BG terms and pays ₹42,00,000 on 18 March. The fabricator's attempt to obtain an injunction fails because no fraud is shown. The supplier claims the remaining interest separately from the fabricator.
Last reviewed: 2026-10-08. Information for Indian businesses; not legal advice.