In the competitive world of manufacturing, especially when dealing with government bodies, public sector undertakings (PSUs), engineering, procurement, and construction (EPC) contractors, and large original equipment manufacturers (OEMs), bank guarantees (BGs) are an essential tool. They provide assurance to clients that contractual obligations will be met, covering aspects like performance, advance payments, or earnest money deposits (EMDs). However, beneath the surface of these seemingly straightforward financial instruments lies a hidden cost: bank guarantee charges and commissions. These fees, often overlooked because they are non-fund-based (meaning no actual funds are disbursed by the bank), can quietly chip away at a manufacturer’s profitability year after year.
Unlike interest on loans, which is scrutinized and negotiated aggressively, BG commissions are typically deducted upfront and treated as a fixed expense. This lack of attention stems from their nature—banks charge a percentage of the guarantee amount as commission for assuming the risk, but without transparent breakdowns, manufacturers end up paying more than necessary. For instance, a mid-sized manufacturer issuing BGs worth ₹50 crore annually at a 1.5% commission rate could be shelling out ₹75 lakh in fees alone. If not negotiated, this erodes margins in an industry already squeezed by raw material costs, labor expenses, and supply chain disruptions.
The good news? By asking the right questions, manufacturers can turn the tables. These inquiries force banks to justify their pricing, reveal hidden costs, and open doors to negotiations that reduce expenses without compromising coverage. This isn’t about haggling blindly; it’s about understanding the nuances of BG pricing, such as effective annual rates, billing frequencies, and risk-based adjustments. In this comprehensive guide, we’ll explore 10 critical questions every manufacturer must ask their banks. Drawing from industry insights, we’ll delve into why these questions matter, how to frame them effectively, and the potential savings they unlock. Whether you’re a small-scale producer or a large enterprise, mastering these can lead to substantial cost reductions—potentially saving lakhs or even crores over time. Note that the examples provided throughout this article are hypothetical scenarios designed to illustrate key points, as we do not have specific real-world sources or links to attach; they are based on common industry practices to help visualize the concepts without referencing actual cases.
Effective Annual Commission Rate
Many manufacturers assume the BG commission rate quoted by banks is standard and non-negotiable. In reality, the “headline rate” often hides the effective annual cost, which may be higher due to upfront charging, minimum slabs, or non-pro-rata billing. Banks may quote a rate like 1% per annum, but if the commission is charged upfront for the entire year—even for a six-month guarantee—the effective rate doubles.
Manufacturers should ask banks to clearly state the effective annualized cost and compare it with market benchmarks for similar companies in the same industry and turnover range. Large manufacturers or those with PSU clients typically qualify for lower rates due to lower default risk. By forcing transparency on effective pricing, manufacturers move the conversation from “standard rates” to “fair risk-based pricing,” which opens the door for negotiation.
Commission Charged Monthly, Quarterly, or Annually—and Is It Pro-Rata
The frequency of commission charging has a direct impact on cost. Many banks charge BG commission annually in advance, even if the guarantee is valid for a shorter duration. This practice inflates costs unnecessarily, especially for project-based manufacturing contracts where BG tenure may be uncertain.
Manufacturers should negotiate monthly or quarterly pro-rata charging, particularly for short-term guarantees or contracts nearing completion. Asking this question also helps identify banks that are flexible versus those relying on legacy pricing models. Over time, moving to pro-rata charging can save lakhs annually for manufacturers issuing multiple guarantees.
Charge on the Full BG Amount Even After Partial Contract Completion
In many manufacturing contracts, risk reduces significantly once certain milestones are achieved—such as supply completion, inspection approval, or commissioning. Despite this, banks often continue charging commission on the original BG value, ignoring reduced exposure.
Manufacturers should push for step-down or progressive reduction clauses, where BG values reduce as work progresses. This aligns bank pricing with actual risk and releases unused limits. This question signals financial maturity and often leads banks to offer customized structures rather than rigid pricing.
Additional Charges Apart from BG Commission
BG commission is rarely the only cost. Banks may levy processing fees, stamp duty, documentation charges, amendment fees, and sometimes SWIFT or handling charges—even for domestic guarantees. These charges, when aggregated, materially increase the cost of BGs.
Manufacturers must insist on a complete cost breakdown upfront. This transparency allows better contract pricing and prevents post-issuance disputes. Often, banks are willing to waive or cap ancillary charges for repeat clients once questioned directly.
Minimum Commission Per BG
Manufacturers issuing multiple small-value BGs—such as EMDs—often suffer due to minimum commission slabs. Even a ₹5-lakh BG may attract charges equivalent to a much larger guarantee.
By questioning minimum commission policies, manufacturers can negotiate waivers or bundled pricing for multiple guarantees. Banks are often willing to relax minimums for clients with consistent BG volumes.
Impact of Credit Profile
Banks price BGs based on perceived risk, yet many manufacturers with strong financials still pay generic rates. Asking how turnover, net worth, repayment history, and client profile influence pricing forces banks to justify their rates.
This question helps manufacturers identify specific actions—like improving financial ratios or consolidating limits—that can reduce commissions over time.
Extension and Amendment Charges with Reduced Risk
BG extensions often attract full fresh commission, even though the contract risk may have reduced. Manufacturers should challenge this logic and seek discounted extension rates.
This is especially important for long-term manufacturing projects where extensions are procedural rather than risk-based.
Bundled Pricing with Other Banking Facilities
Banks value overall relationship profitability. Manufacturers should negotiate BG commission as part of a bundle including working capital, LCs, or term loans. Bundled pricing often results in meaningful cost reductions.
Providing High Margin or Collateral
If a manufacturer is providing cash margin or collateral, the bank’s risk is significantly reduced. Yet many banks fail to reflect this in pricing. This question exposes pricing inefficiencies and strengthens negotiation leverage.
Preferential Pricing for Higher BG Volumes
Manufacturers placing higher BG volumes bring predictable revenue to banks. Asking for volume-based discounts encourages banks to compete for incremental business. Even small reductions compound into large savings over time.
Conclusion: Empower Your Negotiations and Boost Profitability
Bank guarantee charges don’t have to be a passive expense. By posing these 10 questions, manufacturers can demystify pricing, rectify overcharges, and negotiate terms that align with business realities. Start with your relationship manager, document responses, and shop around if needed. Over time, these savings compound, enhancing competitiveness in tenders and improving bottom lines.
Remember, knowledge is leverage—arm yourself with these insights to transform BGs from a cost center to a strategic asset. If you’re a manufacturer in Delhi or beyond, review your current BGs today; the potential rewards are immense.