Module: | MODULE A: INTERNATIONAL BANKING
Q143: Consider the following statements regarding the invocation of bank guarantees for failed advance import remittances:
1. When an importer makes an advance remittance exceeding 5 million United States Dollars backed by a bank guarantee, the guarantee must be aggressively invoked if the overseas supplier completely fails to deliver the promised goods within the stipulated time.
2. Upon successful invocation of the guarantee, the foreign bank that issued the guarantee is legally bound to refund the advance payment amount directly to the Authorized Dealer bank in India.
3. To protect international diplomatic relations, Authorized Dealer banks are strictly prohibited from invoking bank guarantees against sovereign owned foreign suppliers, even in cases of complete non delivery.
Which of the above statements is or are correct?
2. Upon successful invocation of the guarantee, the foreign bank that issued the guarantee is legally bound to refund the advance payment amount directly to the Authorized Dealer bank in India.
3. To protect international diplomatic relations, Authorized Dealer banks are strictly prohibited from invoking bank guarantees against sovereign owned foreign suppliers, even in cases of complete non delivery.
Which of the above statements is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Statements 1 and 2 are correct. Statement 3 is incorrect.It ensures that if the overseas supplier takes the cash but fails to ship the goods, the domestic importer can instantly recover their funds.
Structural Breakdown: For large advances exceeding 5 million United States Dollars, this guarantee is mandatory.
If the 6 month shipment deadline expires without delivery, the domestic bank initiates the invocation process.
The foreign bank that wrote the guarantee must instantly wire the funds back to the domestic account, reversing the capital outflow.
Historical Context: Mandating guarantees for large advances was instituted to fiercely protect the national foreign exchange reserves from sophisticated international trade frauds and fly by night offshore suppliers.
Causal Reasoning: Statement 3 is strictly incorrect.
The financial regulations governing foreign exchange recovery do not provide arbitrary exemptions based on diplomatic status or sovereign ownership.
If a sovereign owned foreign supplier fails to deliver commercial goods against an advance payment, the bank guarantee must be invoked identically to any private commercial transaction to recover the national foreign exchange.