Difference Between Bank Guarantee and Fixed Deposit

Edited by Diffzy | Updated on: September 21, 2022

       

Difference Between Bank Guarantee and Fixed Deposit Difference Between Bank Guarantee and Fixed Deposit

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Introduction

Bank Guarantee is a promise made by the bank to the buyer on behalf of the seller, and for the seller providing services on goods or credit. The bank is called the surety. The buyer is the applicant and the seller the beneficiary. If the applicant fails to pay, the bank assures the seller that it will reimburse the amount.

Fixed Deposits are a type of term deposit that entails a fixed amount of money being deposited into the bank for a set period. The money can be repaid at a later date with the interest earned. Banks and financial institutions can offer fixed deposits.

Bank Guarantee vs. Fixed Deposit

Bank Guarantee is different from a Fixed deposit. In a Fixed deposit, the bank guarantees the applicant's deposit insurance for a set period.

Difference Between Bank Guarantee and Fixed Deposit in Tabular Form

Table: Bank Guarantee vs. Fixed Deposit
Parameter for Comparison
Bank Guarantee
Fixed Deposit
Concept
Bank Guarantee is a guarantee that the seller will pay the applicant.
A plan in which money is placed in a bank for a set period.
Objectives
It allows individuals to purchase goods, and equipment, and borrow money.
It is our goal to help investors and then uses idle savings to earn interest.
Payment
Failure to fulfil a commitment is grounds for payment.
The payment is made for a specific period but can be repaid at a later date.
Suitability
Bank Guarantee is particularly suitable for government contracts.
Fixed Deposits are especially useful for people who work, invest, or run businesses.
Advantage
Bank guarantee provides security to applicants for the payment of goods and services at later stages.
It allows the depositor to get higher returns on his money.

What is Bank Guarantee?

Bank Guarantee is a promise made by the bank to the buyer on behalf of the seller, and for the buyer who receives goods or credit. The bank is called the surety. The buyer is the applicant and the seller the beneficiary. If the applicant fails to pay, the bank assures the seller that it will reimburse the amount.

Security is provided by the bank to applicants in order to pay for goods or services at later stages. If the bank guarantees are of a secondary nature, then there is no liability. Bank Guarantee is offered only by banks and not any other firm or organization.

Merchants are at greater risk than banks. This is when an applicant cannot pay a certain amount to a seller.

What is the Work of Bank Guarantees?

  1. A seller may demand a loan from an applicant.
  2. The seller and the applicant agree that a bank guarantee is necessary when they apply for a loan.
  3. The applicant then asks the bank for a guarantee to the seller's loan.
  4. The bank guarantees are then provided to the seller of goods or credit, and the buyer/applicant.

There are two types of bank guarantees:

  1. Financial Guarantee
  2. Performance Guarantee

Different types of bank guarantee

  • Deferred payment guarantee: A bank guarantee or payment guarantee is offered to an exporter for a specified time or for a specific period. The seller will credit the buyer if the buyer's bank guarantees that it will pay any outstanding dues to the seller. This type of guarantee will allow the bank to make installments for any failure to supply raw materials, machinery, or equipment.
  • Financial guarantee: A financial guarantee is a guarantee that money will be repaid to the bank if the party fails to complete a project or operation. The financial guarantee agreement states that if there is any delay in the completion or payment, the bank will pay the amount.
  • Advance payment guarantee: This type of guarantee will require the seller to make a payment in advance. The buyer will be entitled to a full refund if the seller fails or is not able to deliver the product or service on time.
  • Bank guarantee for foreign banks: A bank provides a guarantee on behalf of a borrower. This guarantee will be provided on behalf of the foreign beneficiary/creditor.
  • Performance guarantee: If the service or operation is not delivered on time, the bank will pay monetary compensation. Even if the service was not delivered as promised, payment will be required.
  • Bid bond guarantee: This type of guarantee will allow for a supply bidding process. The contractor will conduct this process for the owner of the infrastructure, industrial projects or other types of operations. The contractor will ensure that the highest or best-qualified bidder has the ability and authority to execute the project according to his or her requirements. As a proof of guarantee, the bid bond will be presented to the owner of the project. The bond will indicate that the project must be designed according to the bid contract.

Is it possible online to apply for Bank Guarantee?

Online application for Bank Guarantee is possible.

What if I have a savings or checking account?

If you have a savings account, you can choose Bank Guarantee. Bank Guarantee is available to ICICI Bank customers for non-commercial purposes, such as education or employment. To submit a request, however, you will need to visit the branch.

What is the time it takes for the Bank Guarantees to be issued?

The time it takes for the Bank Guarantees to be issued may vary depending on which bank they are issued by. ICICI Bank will issue the Bank Guarantee within three hours after receipt of all relevant documents.

What documents must I submit for Bank Guarantee if I have a current bank account?

If you have a current account, here is a list of documents you must submit:

  • Formulation
  • Text of Bank Guarantee (Word Format).
  • Stamp paper (According To State Stamp Act).
  • The Board Resolution must be given in the case of a Private/Public Limited Company

What security is required to obtain a Bank Guarantee?

Bank Guarantee is offered against collateral or 100% of the Fixed deposit that is available. The performance of the previous year is taken into consideration when the bank offers a Bank Guarantee.

What is a Fixed deposit?

Fixed Deposits are a type of term deposit that entails a fixed amount of money being deposited at the bank for a set period. It is then repayable at a later date along with any interest earned.

Fixed Deposit accounts are so named because the depositor must only invest in one amount when the fixed account opens. After the fixed period ends, the account will be closed and the money is returned along with the interest. Fixed Deposits only require a one-time investment.

Fixed deposits yield higher returns. The tenure of a fixed deposit can range from 6 days up to 11 years. You can earn and save money by investing in Fixed Deposits. A fixed deposit is ideal for people who work, own businesses or are investors. Fixed deposits can be offered by both banks and financial institutions that are not banking.

What is an FD account?

Fixed deposits are essentially a way to lock your money for a set period of time. The principal amount can earn interest over the term on a cumulative basis. After each interval, the interest earned is added to your principal amount.

Flexible tenures allow you to manage multiple FD accounts across different tenures. This will allow you to make more money on your investments. Senior citizens can get additional rates, which are usually 0.25 to 0.65% higher than the current rate.

NRIs (Nonresident Indians), can also open Indian FD accounts. These accounts can be opened in NRE (Nonresident External) or NRO (Nonresident Ordinary).

A bank can open a term deposit account if you have a savings account. Some banks will allow you to open an FD account even if there is no savings account. These banks require that you complete a KYC procedure. This means you will need to provide relevant documents such as ID proof and address proof.

Different types of Fixed Deposits

Normal Fixed Deposits

  • For a fixed term, deposit money.
  • Tenure can last from 7 to 10 years.
  • The interest rates on savings accounts are usually higher than those in savings.

Fixed deposits for tax-saving purposes

  • Tax exempt on the principal deposit amount up to Rs.1.5 million in a calendar-year
  • You cannot withdraw the amount during the lock-in period of five years.
  • Only one lump sum deposit allowed

Senior Citizen Fixed Deposits

  • For individuals over 60 years old, this applies.
  • Senior citizens can be eligible for special rates
  • Flexible tenures.

Cumulative Fixed Deposits

  • Interest is added every quarter or annually and paid at maturity.
  • This will help you to increase your savings.

Non-Cumulative Fixed Deposits

  • You can choose to receive interest monthly, quarterly or half-yearly.
  • For pensioners who are looking for regular income, it is a better option.

Flexible Fixed Deposits

  • Fixed deposits are tied to your bank account
  • Money moves between your savings and FD accounts.

Fixed Deposit Account Features

  • More secure than other investment vehicles
  • You can earn interest for a set period of time.
  • Flexible tenures up to 10 Years
  • There is no cap on the maximum amount that can be deposited.
  • Senior citizens may be eligible for additional rates

Eligibility Criteria to FD Investment

These entities can open an FD account for India:

  • Indians
  • NRI
  • Minors
  • Senior citizens
  • Companies
  • Firms that are partners
  • Joint investors or individuals
  • Societies and clubs
  • Sole proprietorship

Fixed Deposits: The Advantages

Fixed deposits offer many benefits, including

  • Low risk: Market risks don't affect your fixed deposit returns.
  • Insurance: Deposits are insured up to Rs.15,000 by the RBI
  • Loan against FD: You can get loans up to 90% of the deposit amount, at very low-interest rates. This is usually 2% higher than the FD rate.
  • Easy liquidity: You can quickly liquidate your FD in an emergency and release the funds.
  • Regular income: The interest sum can be credited to your account on a monthly basis, quarterly or annually.
  • Tax benefits: You can get tax deductions up to Rs.1.5 million by investing in fixed deposits that are tax-saving.
  • Senior citizens: Senior citizens receive a higher rate of interest than regular customers.
  • You can earn interest on your deposits, and your wealth will grow.
  • Flexible tenures.

Who should invest in Fixed Deposits?

Fixed deposits provide both income and protection? Fixed deposits are ideal for people who have a lump sum amount they don't need for a while. This product is suitable for people who are cautious about risk. The returns are not subjected to market risks, but they offer a fixed rate throughout.

Main Differences Between Bank Guarantee and Fixed Deposit in Points

There are main differences between bank guarantee and fixed deposit

  1. Bank Guarantee is a promise made by the bank to the buyer or seller for services on goods and credit. Fixed Deposits are a type of term deposit that which a fixed amount is deposited into the bank for a set period of time and is repayable at a later date along with any interest earned.
  2. A Bank Guarantee allows individuals to purchase goods and equipment, and take out loans. However, the goal of the Fixed Deposit is for investors to be able to invest in idle savings and earn interest.
  3. Bank Guarantee allows individuals to delay payment of goods or services based on the security provided by the bank guarantee. However, Fixed Deposits allow the depositor to make higher returns on his money.
  4. Investment in Bank Guarantees is possible without any type of collateral, but Fixed Deposits require a one-time investment.
  5. Bank Guarantee can only be offered by banks, and not by any other company or organization. However, a Fixed Deposit is available by both banks and non-banking financial institutions.

Conclusion

There are many differences between the Bank Guarantee and Fixed Deposit. Bank Guarantee is used to fulfil business commitments. The bank provides a guarantee to the seller for business settlements. In Fixed Deposit, one must deposit the money for a set amount of time. When the tenure ends, the applicant can withdraw money from his/her account.

Bank Guarantees do not require any type of investment, but Fixed Deposits require a one-time investment.

References

  1. https://mpra.ub.uni-muenchen.de/id/eprint/35557
  2. https://hrcak.srce.hr/67023

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