What is Deferred Payment Guarantee?
The Deferred Payment Guarantee (DPG) is an undertaking by the bank to guarantee due payment of the deferred installments by the buyer on due date. In the event of default in payment, the bank will make payment of all or such of the drafts as may have remained unpaid on their respective due dates. DPG could be issued both to the Buyer and the Seller.
Normally, the customer requires this type of guarantee when purchasing machinery or goods on credit. DPG is issued for specific amount and period and is generally a one time limit.
The Seller raises the bills in parts and all the bills are Guaranteed/Co-accepted by the Buyer’s bank. Once the Bills details are noted and confirmed (Co-accepted or confirmed by way or letter), DPGs are not modified. Usually bills are drawn in such a way that each bill matures for payment after a gap of certain period (say 6 month) after the previous one matures.
The Seller could discount these bills with his bank, paying the discount charges and will realize the proceeds of the sale. The Seller’s bank in turn re discounts the bill with IDBI/Other Institutions under bill Re discounting Scheme. Around the due date of the bill the sellers’ bank will pay to IDBI/Other institutions and take delivery of the bill and present it for payment to the buyer’s bank.
While Guarantee is issued, margin is obtained and commission is recovered in full. Depending on situation, the DPG commission is collected in installments.
For the payment of the bills, an intimation is sent to the customer few days before due date. The bills are to be paid on or before due date, even if the bills are not presented. If the bill payment is made after due date, then the interest for the overdue period is also to be paid. No bill can be partially satisfied.
If the customer of the bank fails to pay the bill, then a loan account in the name of the buyer is created and the amount remitted to the Seller or Seller’s bank.
If the seller does not opt for discount he forwards the bill on or before due date to the buyer’s bank for payment.
Contra entries for the entire bill amount are generated at the time the guarantee is given. When a part bill is paid, the contra entries are reversed by that amount.
Rediscount may be handled by designated branch of the Bank. The moment the payment is received from the buyer’s bank, the amount is remitted to the designated branch. Process continues till all the bills are paid.
Margin is obtained by way of Security/ Collateral. The Seller’s bank only charges the seller for handling the DPG and no Commission is taken.