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Deferred Payment Guarantee [DPG] JAIIB CAIIB

Legal & Regulatory aspects of Banking

JAIIB Exam Study Material: Deferred Payment Guarantee [DPG] JAIIB CAIIB

Deferred Payment Guarantee is a guarantee for a payment usually on installments which has been deferred or postponed. Banks issue DPG in the cases of purchase of capital goods/machinery where the seller offers credit to the buyer and buyer’s bank guarantees the due payments to the seller. Here the seller draws drafts of different maturities on the buyer which are accepted by the buyer and co-accepted by the Buyer’s bank. Thereby the buyer’s bank guarantees due payment of those drafts drawn by the seller which represents the total consideration of the contract of sale/supply. The seller avail the refinance from his bank against co-accepted bills. DPG involves substitution of the term loan. Unlike all other Guarantees here the payment will have to be made by the bank on the accepted due dates and thereafter the installment is recovered from the borrower on whose behalf guarantee is issued. Hence procedure applicable for assessment of term loan must be followed for DPG limit viz. projection under operating statement, Funds flow statement, DSCR, BEP etc. The proposal is also examined having regard to the profitability / cash flows of the project to ensure that sufficient surpluses are generated by the borrowing unit to meet the commitments as a bank has to meet the liability on the accepted due dates at regular intervals.As per Reserve Bank of India guidelines, Banks, which intend to issue deferred payment guarantees on behalf of their borrowers for acquisition of capital assets should ensure that the total credit facilities including the proposed deferred payment guarantees do not exceed the prescribed exposure ceilings.

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