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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

A company's bank guarantee is invoked by a beneficiary and the bank pays it, though the company has not reimbursed the bank. For the bank, the correct consequence is that:

When a guarantee is invoked and the bank pays, the contingent liability crystallises into a funded exposure to the borrower. The bank keeps its right of recovery, and if the company does not reimburse it, the account can be treated as stressed under prudential norms.

  1. AThe non-fund based exposure crystallises into a funded exposure on the borrower, which the bank monitors and may classify as stressed if unpaidCorrect
  2. BThe guarantee lapses and the bank has no claim on the company
  3. CThe bank must treat the amount as a gift to the beneficiary
  4. DThe exposure moves off the books because guarantees are never recorded

Explanation

When a guarantee is invoked and paid, the contingent liability becomes an actual outflow, a funded claim on the borrower. If the borrower does not reimburse, the account can turn stressed. The bank retains its right of recovery against the borrower.

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