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When bidding on government contracts or securing vendor agreements, your client may ask for a Bank Guarantee to ensure you will complete the project. However, bank guarantees are not free, they come with their own charges, hidden fees, commission rates, and calculation methods, which can add up to a huge cost.
In this article we’ll break down how Bank Guarantee charges work in India, compare fees across major banks and explore ways to reduce costs in 2025.
A bank guarantee (BG) is a financial assurance provided by a bank on behalf of a business or individual, ensuring that a specified obligation will be met. If the applicant (the party requesting the guarantee) fails to fulfill their commitment—such as making a payment or completing a contract—the bank steps in to cover the amount specified in the guarantee.
Bank guarantees are commonly used in trade, construction, and large business contracts where the beneficiary (the party receiving the guarantee) needs assurance that they will not face financial loss due to the applicant’s default. They help businesses secure contracts, obtain credit, and fulfill regulatory requirements without tying up large amounts of working capital.
There are two main types of bank guarantees:
Banks charge a fee for issuing a BG, which depends on factors like risk, collateral, and the applicant’s financial standing. Understanding these charges and negotiating favorable terms can help businesses reduce costs while maintaining financial security.
Bank guarantee charges are the costs levied by banks for issuing and maintaining a Bank Guarantee facility. These charges vary based on guarantee type, amount, tenure, and applicant’s credit profile.
These charges have a significant impact on trade finance costs, so it’s essential to negotiate, compare banks and explore alternative BG solutions to save costs.
Bank guarantee charges are calculated based on the amount, risk, and tenure. The core cost is the commission which banks charge as a percentage of the guaranteed amount, quarterly or annually.
Commission=(Guarantee Amount×Applicable Rate×Tenure (in months)/12)
Example Calculation
Commission=(1,00,00,000×2%×18/12) = ₹3,00,000
GST (18%) applies on the commission, making the total charge ₹3,54,000.
Guarantee Amount
Higher amounts get lower percentage rates in tiered pricing and smaller guarantees have a minimum charge.
Types of Bank Guarantee
Tenure of the Guarantee
Charges increase with tenure, often quarterly or annually. Some banks charge a flat annual rate and others pro-rata quarterly for shorter periods.
Creditworthiness of the Applicant
Companies with good financials and existing collateral (like fixed deposits) get lower rates. Higher risk applicants pay an extra premium or may need to furnish additional security.
Understanding these cost factors allows businesses to optimize their working capital strategy, and choose the most cost-effective bank guarantee structure.
Bank guarantee charges vary depending on risk exposure, tenure, security backing and business profile. Below is a comparison of the top banks in India, including commission rates, processing fees, and business benefits.
HDFC Bank provides flexi Bank Guarantees with a structured pricing model based on the applicant’s financial standing. Collateral backed Bank Guarantees (like FD backed) get lower rates.
ICICI Bank offers digital BG issuance through its Trade Online Platform, where businesses can apply, track and renew guarantees with minimal paperwork. It has a tiered commission structure where larger Bank Guarantees get lower rates.
Kotak Mahindra Bank is best for cost-effective Bank Guarantees for MSMEs and exporters, offers discounted rates for businesses involved in international trade. It has flexible tenure options, but unsecured Bank Guarantees above ₹50 lakh require additional security.
SBI, the largest public sector bank in India, offers segment wise pricing, makes it a cost effective option for government contracts and large infrastructure projects. PSU discount is available for priority sectors.
Axis Bank is known for fast processing and minimal paperwork, is a preferred option for businesses that need fast-tracked guarantees. Businesses with strong financials may get collateral-free Bank Guarantees at lower rates.
Choosing the right bank depends on cost efficiency, security requirements, and approval speed, so it’s essential to compare before applying.
Cutting bank guarantee (BG) charges requires a smart approach that uses financial power, alternative instruments and digital solutions.
Banks price BGs based on risk exposure, collateral and relationship value. Businesses can use existing banking relationships, customers with large transaction volumes or strong creditworthiness can negotiate lower commission rates. Offer a 100% margin deposit through full-cash margin or FD-backed BGs and you can reduce charges to as low as 0.5% – 1% per annum.
For companies issuing multiple guarantees, ask for volume-based discounts by negotiating a bundled pricing agreement, and you can cut costs big time. High value customers can also ask for waivers on ancillary fees like processing charges, amendment fees, and renewal costs.
If you want to reduce your direct BG costs, here are some alternatives:
For international trade, Letters of Credit (LCs) can sometimes replace BGs and offer more favorable pricing.
The fintech revolution has brought digital BG solutions to save costs. Platforms like Karbon streamline the process, reducing admin overheads and offering lower fees than banks. Some banks now offer blockchain-based smart guarantees that eliminate paperwork, reduce processing costs and increase transparency.
You can avoid renewal penalties and late fees by using fintech platforms that automate alerts and renewal requests.
By negotiating and using alternative financial instruments and digital solutions, you can reduce your bank guarantee costs.
Bank guarantees can be costly and eat into your profit. Knowing how commission rates, processing fees and collateral requirements vary between banks is key to making informed financial decisions.
Beyond choosing the right bank, businesses should negotiate lower fees, use FD-backed BGs and alternative instruments like surety bonds or letters of credit.
For businesses doing high value international transactions, partnering with financial platforms like Karbon can make the process even smoother, with competitive pricing, faster approvals and reduced admin for international transactions. Remember that reducing Bank Guarantee costs isn’t just about choosing the cheapest option, it’s about structuring financial guarantees in a way that supports long-term liquidity.
While both are financial instruments, a bank guarantee is a promise by a bank to cover the beneficiary’s loss if the applicant fails to perform, while a letter of credit is a payment mechanism where the bank pays the seller once shipping documents are presented. Letters of credit are for payment while guarantees are for non-performance.
Banks generally require applicants to have an account relationship to issue guarantees. However, some banks may issue guarantees to non-customers against 100% fixed deposit collateral or through intermediary arrangements with your existing bank.
Timeline varies by bank and application complexity. For standard guarantees with existing facilities, it takes 3-7 working days. First-time applications or complex guarantees take 2-3 weeks due to credit assessment and documentation requirements. Digital BG platforms can expedite this process to 1-2 days for pre-approved clients.
Yes, bank guarantee commission fees and processing charges are generally tax deductible as business expenses under Section 37 of the Income Tax Act in India as they are expenses incurred wholly and exclusively for business purposes.
Cancellation before expiry requires written consent from the beneficiary. Most guarantees can only be cancelled when the beneficiary returns the original guarantee document with a release letter. Some guarantees have specific cancellation clauses that allow early termination under defined circumstances.
Direct guarantee is issued by the applicant’s bank to the beneficiary. Indirect guarantee involves two banks – the applicant’s bank (instructing bank) requests a local bank in the beneficiary’s country (issuing bank) to issue the guarantee. Indirect guarantees are common in international transactions and incur additional costs due to involvement of two banks.
Yes, but with higher collateral requirements. New businesses need to provide 100% cash margin or fixed deposits as security. As the business establishes a track record, these requirements reduce.
Besides the above, standby letters of credit (SBLCs) are used in international trade for US-based transactions. For smaller contracts, some businesses use advance payment bonds, retention bonds or even escrow arrangements as alternatives to bank guarantees.
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