Over the years banks have been in business of guarantees which generated handsome commissions. However, past few years of downturn have given lessons with sleepless nights to issuers. The beautiful business turned into ghost. During the growth period few years back mostly in infrastructure/EPC long period guarantees (Performance/Mobilzation/Advance) were issued in general however what could not be noticed was the insertion of onerous clauses or deletion/compromise of standard clauses. This along with unconditional nature of the guarantees gave upper hand to the beneficiaries and allowed freedom to the borrower in diversion of funds. Many standard clauses in BGs such as auto reduction in BG with performance of contract or effectiveness of BG only on crediting the advance payments to the contractors account with the BG issuance bank could have helped. It’s not that bankers had not objected to such deviations however going by the experience I can say that to some extent it was stubborn nature of the beneficiaries taking the benefit of cut throat competition in banking. But does it not mean that regulators need to control competition or three regulator/appex association of banking need to define standard clauses which can not be comprised ? Further, any large BG is as good as a loan and requires the equal due diligence and monitoring. Lessons already learnt.
