Bank guarantee for tenders: types, on-demand BGs, format and charges

A bank guarantee for a tender lets you put up EMD or performance security without handing over cash. Your bank promises the buyer that it will pay if you default, and the buyer holds that promise instead of your money. This guide explains the types of bank guarantee that tenders ask for, how an on-demand guarantee works, how to get one from your bank, what affects the cost and which clauses to check.

What a bank guarantee in a tender means

Section 126 of the Indian Contract Act, 1872 defines a guarantee as a contract "to perform the promise, or discharge the liability, of a third person in case of his default". In a tender there are three parties:

• You, the bidder or contractor (the "applicant"). The law calls you the principal debtor.
• Your bank, the guarantor. It promises to pay if you don't keep your promise.
• The government buyer, the beneficiary. It can claim the money.

The bank charges you a commission for the guarantee. If the buyer claims, the bank pays and recovers the amount from you.

Rules 170 and 171 of the General Financial Rules (GFR) 2017 also accept an insurance surety bond, demand draft, fixed deposit receipt, banker's cheque or online payment, and the tender says which it takes. A corporate guarantee or indemnity bond is not accepted (Manual for Procurement of Goods 2024, para 6.1.6).

Types of bank guarantee in tenders

• EMD bank guarantee. Where bid security is above ₹5 lakh, the Goods Manual lets the buyer ask for a bank guarantee from a commercial bank in India. Micro and small enterprises and DPIIT-recognised startups are exempt from EMD in central tenders for goods and services; see EMD in tender.
• Performance bank guarantee (PBG). The winner gives it after the award; on GeM it is the ePBG. See performance security in tenders.
• Advance payment guarantee. GFR Rule 172 caps advances to private firms at 30% of the contract value, and the Goods Manual (para 6.5.1) asks for a guarantee of at least 110% of the advance. If the advance is recovered in instalments, you can give part guarantees, each released after its recovery.
• Retention money guarantee. In works, an unconditional guarantee can replace cash held from your bills; see retention money.
• Warranty guarantee. For capital equipment, your performance guarantee can be returned after commissioning against a warranty guarantee valid 60 days beyond the warranty (Goods Manual para 6.1.5).

Unconditional bank guarantee vs conditional

The Department of Expenditure's model guarantee format for performance security has the bank pay "upon your first written demand", "without cavil or argument", and without the buyer "needing to prove or to show grounds or reasons". The Reserve Bank of India's Non-Fund Based Credit Facilities Directions, 2025, in force from 1 April 2026, say a bank's guarantee should in general be irrevocable and unconditional, honoured "without demur", and that a bank must pay an invoked guarantee by its terms unless a court order restrains it (paras 10 and 16).

So an unconditional guarantee is close to cash in the buyer's hands. If a claim is wrong, your dispute is with the buyer, not the bank.

How an on-demand bank guarantee works, step by step

1. The tender sets the terms, including the format and whether an e-BG is accepted.
2. Your bank issues it against your credit limit or a deposit, on stamp paper or as an e-BG.
3. You submit it. For EMD, upload a self-attested scan with your bid and deliver the original if the tender asks. Performance security is due by the date in the letter of award, generally 14 to 28 days after it.
4. The buyer verifies it with the issuing branch before accepting it (Goods Manual para 6.1.6).
5. The buyer holds and tracks it, reviewing every month the guarantees that expire in the next three months. It should never hand a guarantee back to you for extension (para 6.1.7).
6. If you default, the buyer sends a written demand to the named branch before the claim date. The bank pays and recovers from you.
7. If you perform, the buyer returns the original or releases the e-BG. Have your bank cancel it so your limit is freed.

Validity period and claim period

The validity date is the last day the guarantee covers. The claim date is the last day the buyer can make a demand. The DoE model format has both: the guarantee "shall be valid until" one date, and the bank pays only if a written claim reaches the named branch "on or before" another.

Section 28 of the Indian Contract Act lets a bank's guarantee end the buyer's right to claim after a fixed period, but that period can't be less than one year from the event the guarantee names. The tender's format sets the claim period; don't let the bank shorten it.

How long it must be valid:

• EMD: 45 days beyond the final bid validity (Rule 170). If bid validity runs to 31 March 2027, the guarantee must last until at least 15 May 2027.
• Performance: 60 days beyond completion of all obligations, warranty included (Rule 171). If supply finishes on 30 June 2027 with a 12-month warranty, it must last until at least 29 August 2028.

If the buyer extends the bid validity or the contract, get the guarantee amended before it expires. See bid validity for counting the dates.

How to get a bank guarantee from your bank

1. Read the tender first. Note the type, amount, beneficiary's exact name, validity, claim date, place of claim and format. The Works Manual 2025 says a guarantee merely "advised" by a scheduled bank is not acceptable; it must be issued or confirmed by one.
2. Go to the bank that holds your loan or cash credit. Under the RBI's directions, a bank generally issues guarantees only for customers with a loan facility from it. Exceptions include firms with no loan from any bank, a no-objection certificate from your lending bank, and guarantees fully backed by deposits or other eligible collateral (para 7).
3. Agree on the limit and security. Each bank's credit policy sets the security it needs, such as margin money in a fixed deposit (para 6). A sanctioned guarantee limit saves time on every bid.
4. Apply. Banks usually ask for their application form, a copy of the tender or letter of award, the buyer's format and your KYC documents.
5. Check the draft against the buyer's format: beneficiary, tender or contract number, amount in words and figures, and dates.
6. Pay stamp duty. Paper guarantees go on stamp paper under your state's stamp law, so the amount varies. Karnataka's eProcurement notice, for example, puts the stamp duty on an e-BG below that on a paper BG; see Karnataka eProcurement.
7. Deliver it on time. For an e-BG, accepted under GFR Rules 170 and 171, give the bank the buyer's NeSL Unique Identity Number (UIN) and email ID; the bank creates it on NeSL and the buyer gets an email (Goods Manual para 6.1.4). GeM has an e-BG facility linked to NeSL.
8. Make sure confirmation reaches the buyer. For a paper BG, the issuing branch confirms in writing by registered post, speed post, courier or SFMS, the banks' messaging system (para 6.1.6). An e-BG needs only a check on NeSL.

Bank guarantee format: clauses to check

Use the tender's format, not your bank's standard one. Check that it has:

• The right beneficiary. The DoE model is addressed to "The President of India", through the buying office.
• The contract or tender number and what is being supplied or built.
• The amount in words and figures.
• Payment on first written demand, without proof of default and without the buyer claiming from you first.
• No release on contract changes made between you and the buyer.
• The validity date, claim date and the branch where claims are made.
• The signing officer's name, designation and code number, and the bank controlling office's address and phone number (Goods Manual para 6.1.6).

Bank guarantee charges and how to lower them

People search for "SBI bank guarantee charges" or "Canara Bank BG charges", but there is no common rate. The RBI's directions leave fees, commission, claim period and tenor to each bank's own policy (para 12). Your cost depends on:

• Commission for the guarantee's period, so longer validity costs more;
• Margin money locked in a deposit;
• Collateral and your standing with the bank;
• Stamp duty, set by your state;
• Processing, amendment and extension charges.

Get the bank's current charges in writing and build them into your price. When you shortlist live tenders on GovtTenderHub, note each one's EMD and performance security so you know which guarantees you'll need. To keep costs down:

1. Ask for exactly the validity and claim period the tender needs.
2. Get a sanctioned guarantee limit with your working capital loan.
3. Use part guarantees for advances, so each ends as the advance is recovered.
4. Claim exemptions you are entitled to, such as the MSE exemption from EMD.
5. Get released guarantees cancelled quickly so the limit is free.
6. Compare an insurance surety bond where the tender accepts one.

Risks for contractors

• Other dues. The DoE's model conditions let the buyer deduct for defaults in "any other contract" with the same buying organisation.
• Letting it lapse. If the performance guarantee isn't kept valid, the model conditions let the buyer terminate for default or recover the amount from your pending bills. After a contract amendment, you get 14 days to submit an amended guarantee.

Insurance surety bond instead of a bank guarantee

Since a DoE order of 2 February 2022, an insurance surety bond is accepted for bid security and performance security. The Goods Manual (para 6.1.3) calls it a premium-based insurance product that, unlike a bank guarantee, "does not require a deposit of a collateral amount". If you default and don't pay within 14 days, the insurer pays within 45 calendar days of receiving the documents. Works buyers may also let you swap an existing bank guarantee for a surety bond or an e-BG.

Common questions

What is a bank guarantee in a tender?

A written promise from your bank to pay the buyer up to a set amount if you withdraw your bid or fail to perform the contract. Tenders use it for EMD, performance security, advances and retention money.

How long should an EMD bank guarantee be valid?

At least 45 days beyond the final bid validity period (GFR Rule 170). If the buyer extends the bid validity, extend the guarantee too.

How much does a bank guarantee cost?

It depends on your bank's policy: commission for the period, stamp duty, and any margin money or collateral. Ask for the bank's charges in writing and add the cost to your bid.

Can a buyer encash a bank guarantee without proving default?

Yes, if the guarantee is unconditional, as government formats are. The bank must pay a valid demand made before the claim date unless a court order stops it.