Table of Contents
A bank guarantee is an undertaking by an issuing bank to pay the beneficiary if the applicant fails to perform duties and obligations under a contract. In Nepal, bank guarantees and performance bonds are essential instruments in public procurement, construction contracts, import transactions, and commercial dealings. These financial instruments are primarily regulated by the Bank and Financial Institutions Act 2073 (2017) under Nepal Rastra Bank oversight and the Public Procurement Act 2063 administered by the Public Procurement Monitoring Office (PPMO). This guide covers the legal framework, types of guarantees, issuance procedures, bid security requirements, performance bond obligations, and claiming processes under Nepali law.
Legal Framework
Bank guarantees and performance bonds in Nepal are governed by multiple legislative instruments:
| Legislation | Year | Key Provisions |
|---|---|---|
| Bank and Financial Institutions Act (BAFIA) | 2073 (2017) | Banking transactions, guarantee issuance authority, regulatory framework |
| Public Procurement Act | 2063 (2007) | Bid security and performance bond requirements in public contracts |
| Public Procurement Regulations | 2064 (2007) | Detailed procedures for security instruments |
| Nepal Rastra Bank Act | 2058 (2002) | Central bank oversight and directives |
| Labour Act | 2074 (2017) | Bank guarantee requirements in labor disputes (Section 155) |
| Contract Act | 2056 (2000) | General contractual obligations and enforcement |
What is a Bank Guarantee?
A bank guarantee is a legally binding commitment by a bank (guarantor) to pay a specified sum to a beneficiary if the applicant (principal debtor) fails to fulfill contractual obligations. The bank acts as a surety, promising to honor the guarantee upon valid claim by the beneficiary within the specified validity period.
Key Characteristics
- Unconditional: Payable on first demand without proof of default
- Irrevocable: Cannot be cancelled without beneficiary consent
- Time-bound: Valid only until specified expiry date
- Independent: Separate from underlying contract
- Documented: Must be in writing with specific terms
Parties Involved
| Party | Role | Rights/Obligations |
|---|---|---|
| Applicant (Principal) | Party requesting guarantee | Pays bank charges, provides collateral, performs contract |
| Issuing Bank (Guarantor) | Bank issuing guarantee | Evaluates risk, issues guarantee, honors valid claims |
| Beneficiary | Party protected by guarantee | Receives payment on valid claim, verifies authenticity |
| Counter-Guarantor | Foreign bank (in international transactions) | Provides backing guarantee to local issuing bank |
Types of Bank Guarantees
1. Bid Bond Guarantee (Bid Security)
A bid bond secures the beneficiary (party inviting tender) against:
- Withdrawal or modification of bid before expiry date
- Refusal to sign contract after award
- Failure to provide required performance bond after selection
Standard Requirements: Amount typically 2-3% of estimated contract value; validity period extends 30 days beyond bid validity period.
2. Performance Bond (Performance Guarantee)
A performance bond safeguards the beneficiary's interests by guaranteeing that the contractor will:
- Complete work within specified timeframe
- Maintain required quality standards
- Fulfill all contractual obligations
- Cover defect liability period
Standard Requirements: Amount typically 5% of contract price; validity extends through contract completion and defect liability period.
3. Advance Payment Guarantee
When contracts require advance payments to the contractor, the beneficiary may require an advance payment guarantee ensuring repayment if the contractor fails to comply with contract terms. The guarantee amount typically equals the advance payment percentage.
4. Counter Guarantee
Counter guarantees facilitate international transactions where foreign bidders participate in Nepal projects. A foreign bank issues a counter guarantee to a Nepali commercial bank, which then issues a local guarantee to the beneficiary. This arrangement is essential when the beneficiary requires a guarantee from a locally licensed bank.
5. Payment Guarantee (Supplier's Credit Guarantee)
Payment guarantees are commonly used in import transactions, dealership agreements, and credit purchases from suppliers. If the applicant receiving goods on credit fails to pay the required amount, the beneficiary can claim payment from the issuing bank.
6. Customs Guarantee
Customs guarantees are issued in favor of customs offices as security for payment of customs duties by importers. These cover both actual debt (customs debt that has arisen) and potential debt (debt from special customs procedures such as temporary importation or transit).
7. Court Guarantee
Bank guarantees issued in favor of courts as security during litigation proceedings, including appeals against government assessments and dispute resolution.
Bid Security Requirements in Nepal
Under Nepal's public procurement laws, bid security is mandatory for most public tenders unless expressly exempted in bidding documents.
Statutory Requirements
| Requirement | Specification |
|---|---|
| Amount | 2% to 3% of estimated contract value (as specified in bidding documents) |
| Form | Bank guarantee from recognized commercial bank; cash deposit (rarely preferred) |
| Validity | At least 30 days beyond bid validity period |
| Nature | Unconditional and payable on first demand |
| Issuing Bank | Licensed commercial bank in Nepal (Class A) |
Forfeiture Conditions
Bid security may be forfeited if the bidder:
- Withdraws bid during validity period
- Refuses to sign contract after award
- Fails to submit required performance bond
- Modifies bid terms without authorization
Critical: Non-submission of valid bid security results in automatic bid rejection. Even minor deviations (incorrect validity dates, conditional language, unauthorized bank) are treated as material non-compliance.
Performance Bond Requirements in Nepal
After contract award, successful bidders must submit performance bonds before contract signing.
Mandatory Conditions
| Requirement | Specification |
|---|---|
| Amount | 5% of contract price (may range higher depending on project) |
| Form | Unconditional bank guarantee |
| Submission Deadline | Before signing the contract |
| Validity | Until completion of contractual obligations and expiry of defect liability period |
Note: Public entities cannot execute contracts without receipt of a valid performance bond.
Forfeiture Conditions
Performance bond may be invoked if the contractor:
- Fails to commence work within stipulated time
- Abandons the project
- Misses critical performance milestones
- Fails to meet contractual quality standards
- Breaches material contract terms
Legal Authority for Guarantee Issuance
Under Section 49(1)(g) of the Bank and Financial Institutions Act 2073, Class A banks are authorized to:
"issue guarantees on behalf of its customers and getting executed necessary bonds with such customers in consideration thereof, obtaining security, and acquire their movable or immovable assets as collateral or on mortgage, or the assets of third persons as collateral and to carry on other related transaction"
Similar provisions extend to Class B development banks under Section 49(2)(b) and Class C finance companies under Section 49(3)(j).
Documents Required for Guarantee Issuance
Standard Documentation
- Guarantee Application Form
- Promissory Note
- Company/Firm Registration Certificate
- PAN/VAT Registration Certificate
- Tax Clearance Certificate
- Board Resolution (for companies)
- Copy of Contract/Tender Documents
- Financial Statements
Additional Requirements for Special Cases
| Guarantee Type | Additional Documents |
|---|---|
| Third Party Guarantee | Board minute bearing responsibility; Self-declaration of no overdue loans |
| Joint Venture Guarantee | JV Agreement; Board minutes from all JV partners |
| Counter Guarantee | Counter guarantee from foreign correspondent bank; Power of attorney |
Bank Guarantee Charges
Banks charge commission on guarantees typically calculated on a quarterly basis:
| Guarantee Type | Commission (Per Quarter) | Minimum Charge |
|---|---|---|
| Bid Bond | 0.25% | NPR 1,000 |
| Performance Bond | 0.375% | NPR 1,500 |
| Advance Payment Guarantee | 0.375% | NPR 1,500 |
| Payment/Credit Supply Guarantee | 0.375% | NPR 2,000 |
| Court Guarantee | 1.00% | NPR 10,000 (minimum 1 year advance) |
| Bonded Warehouse/Customs Guarantee | 0.375% | NPR 2,000 |
| FDR-Secured Guarantee | 0.25% (bid) / 0.375% (performance) | NPR 1,000 |
| Third Party Guarantee | Additional NPR 2,000 per quarter | Plus applicable base charges |
Counter Guarantee Charges
| Currency | Commission (Per Quarter) | Minimum |
|---|---|---|
| NPR | 0.50% | NPR 5,000 |
| INR | 0.50% | INR 5,000 + Service Charge |
| Other FCY | 0.50% | USD 100 + Service Charge |
Note: Commission is charged quarterly even if tenure doesn't complete the quarter (e.g., 4-month guarantee = 2 quarters). Renewal commission equals new guarantee issuance.
Claiming Bank Guarantees
Claim Procedure
- Beneficiary submits written claim to issuing bank
- Claim must be made within working hours before expiry date
- Claim letter must state applicant's failure to perform contractual obligations
- Bank verifies claim authenticity and compliance
- Payment made through Manager's cheque or account credit
Claim Settlement Timeline
Valid claims are typically settled within 7 working days, subject to regulatory compliance and bank policies.
Verification of Authenticity
Beneficiaries can verify bank guarantee authenticity through the issuing bank's website or by direct inquiry to the bank's trade finance department.
Bank Guarantee in Labor Disputes
Section 155 of the Labour Act 2074 authorizes the Labour Court to require bank guarantees or deposits:
"If there is a possibility that one party will be entitled to receive any amount from the other party when the case running under this Act is adjudged and there is a likelihood of non-payment of such amount by such a party, the Labour Court may, for the execution of the decision, require such a party to deposit the amount equivalent to that amount or furnish a bank guarantee covering that amount."
This provision ensures judgment enforcement in employment disputes where monetary recovery is anticipated.
Foreign Bank Guarantees
Foreign bank guarantees are not directly acceptable in Nepal public procurement. Foreign bidders must:
- Obtain counter-guarantee from their foreign bank
- Have a licensed Nepali commercial bank issue local guarantee
- Nepali bank relies on counter-guarantee for security
This requirement ensures beneficiaries can enforce guarantees through local legal mechanisms without cross-border complications.
Release of Bank Guarantees
Bid Security Release
- Unsuccessful bidders: After contract award to winning bidder
- Successful bidder: After submission of performance bond
- Upon expiry of validity period (if not extended)
Performance Bond Release
- After completion of all contractual obligations
- After expiry of defect liability period
- Upon certification by procuring entity
Important: Release is mandatory upon satisfactory completion. Beneficiaries cannot withhold release without valid grounds.
Common Issues and Best Practices
Common Mistakes by Bidders
- Submitting conditional bank guarantees
- Using incorrect validity dates
- Issuing guarantees from non-approved banks
- Mismatching bid amount and guarantee amount
- Failing to extend validity when bid validity is extended
Best Practices
- Review bidding documents carefully for exact requirements
- Match guarantee text exactly with tender specifications
- Track expiry dates and request extensions promptly
- Maintain documentary proof of submission
- Verify issuing bank eligibility
- Ensure unconditional and first-demand language
Regulatory Oversight
Nepal Rastra Bank
NRB regulates bank guarantee issuance through directives covering risk management, capital adequacy, and off-balance sheet transactions. Banks must maintain appropriate provisions for guarantee commitments.
Public Procurement Monitoring Office (PPMO)
PPMO issues guidelines on bid security and performance bond requirements for public procurement, ensuring standardization across government entities.
Need Legal Assistance?
Our legal team provides comprehensive advisory services for bank guarantee documentation, bid security compliance, performance bond structuring, and dispute resolution. Contact us for professional consultation on your guarantee requirements.
Frequently Asked Questions
A bank guarantee is a legally binding undertaking by an issuing bank to pay a specified sum to the beneficiary if the applicant fails to perform duties and obligations under a contract. Under the Bank and Financial Institutions Act 2073, Class A banks, Class B development banks, and Class C finance companies are authorized to issue guarantees on behalf of customers. The guarantee is unconditional, irrevocable, and payable on first demand within the specified validity period.
Common types of bank guarantees in Nepal:
- Bid Bond: Secures bid validity and contract signing commitment
- Performance Bond: Guarantees completion of contractual obligations
- Advance Payment Guarantee: Secures advance payments made to contractors
- Counter Guarantee: Enables foreign parties to participate through local bank
- Payment/Supplier's Credit Guarantee: Secures credit purchases and import transactions
- Customs Guarantee: Covers customs duty obligations
- Court Guarantee: Provides security in litigation proceedings
| Aspect | Bid Security | Performance Bond |
|---|---|---|
| Purpose | Ensures bid commitment | Ensures contract performance |
| Timing | Submitted with bid | Submitted before contract signing |
| Amount | 2-3% of estimated value | 5% of contract price |
| Validity | Bid validity + 30 days | Contract period + defect liability |
| Forfeiture | Bid withdrawal, refusal to sign | Non-performance, abandonment |
Documents required for bank guarantee issuance:
- Guarantee Application Form and Promissory Note
- Company/Firm Registration Certificate
- PAN/VAT Registration Certificate
- Tax Clearance Certificate
- Board Resolution (for companies)
- Copy of Contract/Tender Documents
- Financial Statements
For third party guarantees: Board minute accepting responsibility and self-declaration of no overdue loans with other banks.
| Guarantee Type | Commission (Per Quarter) | Minimum |
|---|---|---|
| Bid Bond | 0.25% | NPR 1,000 |
| Performance Bond | 0.375% | NPR 1,500 |
| Advance Payment | 0.375% | NPR 1,500 |
| Payment Guarantee | 0.375% | NPR 2,000 |
| Court Guarantee | 1.00% | NPR 10,000 |
| Third Party | Additional NPR 2,000/quarter | Plus base charges |
Commission is charged quarterly even if the tenure doesn't complete a full quarter.
Yes. Bank guarantees in Nepal are typically unconditional and payable on first demand, allowing invocation without prior judicial approval. The beneficiary must submit a written claim to the issuing bank within working hours before the expiry date, stating that the applicant has failed to perform contractual obligations. Banks honor valid claims within approximately 7 working days.
If bid security validity expires without extension when required, the bid becomes non-responsive and the procuring entity may:
- Reject the bid as non-compliant
- Forfeit the security if extensions are not submitted on time
- Disqualify the bidder from the procurement process
Bidders must monitor validity periods and request extensions promptly when bid validity is extended.
Foreign bank guarantees are not directly acceptable in Nepal public procurement. Foreign bidders must:
- Obtain counter-guarantee from their foreign bank
- Have a licensed Nepali commercial bank issue local guarantee
- The Nepali bank relies on the counter-guarantee for security
Counter guarantee charges: 0.50% per quarter (minimum NPR 5,000 or USD 100 depending on currency).
Performance bonds are released after:
- Completion of all contractual obligations
- Expiry of the defect liability period
- Certification by the procuring entity
The beneficiary must release the bond upon satisfactory completion and cannot withhold release without valid grounds established under the contract.
Section 155 of the Labour Act 2074 empowers the Labour Court to require bank guarantees or deposits in employment disputes: "If there is a possibility that one party will be entitled to receive any amount from the other party when the case running under this Act is adjudged and there is a likelihood of non-payment of such amount by such a party, the Labour Court may require such a party to deposit the amount equivalent to that amount or furnish a bank guarantee covering that amount."
Bid security may be forfeited if the bidder:
- Withdraws bid during the validity period
- Refuses to sign the contract after award
- Fails to submit required performance bond
- Modifies bid terms without authorization
- Provides false information in the bid
The procuring entity must provide opportunity for explanation before forfeiture except in cases of automatic forfeiture for withdrawal.
Yes, banks can issue guarantees in third party names subject to additional requirements:
- Board minute from the applicant accepting all responsibilities for claims
- Self-declaration from third party of no loans/overdues with other banks
- Additional charges of NPR 2,000 per quarter on top of standard commission
- Enhanced due diligence by the issuing bank
Beneficiaries can verify bank guarantee authenticity through:
- Direct verification from the issuing bank's trade finance department
- Bank's official website verification portal
- Written confirmation request to the bank
- Cross-checking guarantee text against standard bank formats
- Verifying bank signatories and seal
Verification is recommended before relying on any guarantee for contract execution.
| Guarantee Type | Standard Validity Period |
|---|---|
| Bid Security | Bid validity + 30 days |
| Performance Bond | Contract completion + defect liability period |
| Advance Payment | Until advance is recovered/utilized |
| Customs Guarantee | Until customs clearance completion |
| Court Guarantee | Until case disposal or court direction |
Validity can be extended upon request, typically charged as new guarantee issuance.
If a bank fails to honor a valid guarantee claim, beneficiaries may:
- File complaint with Nepal Rastra Bank for regulatory action
- Initiate civil suit for breach of contract in Commercial Court
- Seek damages including consequential losses
- Report to professional bodies for disciplinary action
- Request NRB to impose fines under Section 99-100 of BAFIA 2073
Banks are legally obligated to honor unconditional guarantees on first demand, and failure constitutes breach of banking obligations subject to regulatory action.
