In Banking Term How Can You Explain Guarantee?

Banks play an important role in the financial system. They serve as intermediary where the borrower and lender of money can easily satisfy their needs with the help of funds being transferred by the bank. So in other words the bank serves as a channel to transfer funds from savers to borrowers.

This is one of the primary works the bank does, however banks also provide certain facilities which are often termed as funded facilities and non-funded facilities.In the funded facilities the bank provides or advances a loan to the borrower in which it charges certain amount from the borrower for giving a service.

The term guarantee is a non-funded facility that is provided by the bank in which the bank undertakes the charge of the customer that incase the customer is unable to fulfill the terms of the third party, the bank would take the charge in making the payment i.e. incase of default by the customer the bank would make the payment to the third party and later would charge from the customer.

This helps the customer in getting something from the third party as the guarantee provided by the bank is considered as a strong security and on these basis a lot of transactions take place in the world.