Deferred Payment Guarantee
DPG: bank guarantees instalment payments for capital goods. Seller supplies now, buyer pays in instalments over years. Bank guarantees each instalment to seller. Long-term non-fund based facility. Assessed like term loan (DSCR). Becomes fund-based if invoked.
Banky Issues a DPG! 🏗️
When a company buys expensive machinery but cannot pay upfront, it uses a Deferred Payment Guarantee. The bank guarantees the instalment payments to the supplier. It is essentially a term loan in guarantee form!
Why Read This Chapter?
DPG = term loan in guarantee form — bank guarantees instalment payments for capital goods
Exam Marks
1-2 questions — DPG is for capital goods (not working capital), assessed like term loan (DSCR), non-fund based (becomes fund-based on invocation), instalment-based payment. Moderate weightage.
Career Growth
DPG is a specialized product for large capital expenditure financing — important for corporate banking
Real Life
Understanding DPG helps if your company needs expensive machinery but cannot pay the full amount upfront
How Will It Benefit You?
Real career advantages
What Is This Chapter About?
30-second summary
Key Definitions — Banky Asks, Mentor Explains
Every term explained like you’re 10
Banky’s Understanding: DPG: Bank guarantee for instalment payments on capital goods. Supplier delivers goods upfront. Buyer pays in instalments over 3-10 years. Bank guarantees each instalment. Non-fund based facility — becomes fund-based if invoked (buyer defaults). Assessment like term loan — project cost, DSCR (min 1.5-2.0), technical/commercial viability. Guarantee amount reduces as instalments are paid. For: plant, machinery, equipment, vehicles, imported capital goods. NOT for working capital.
Banky’s Understanding: Payment method: (1) Instalment schedule: Quarterly/half-yearly/yearly over 3-10 years. (2) Each instalment has principal + interest components. (3) Usance bills: May be drawn for each instalment (accepted by buyer, guaranteed by bank). (4) As instalments are paid, guarantee amount reduces proportionally. (5) If buyer defaults, bank pays supplier → becomes funded exposure → bank recovers from buyer using security. (6) Counter-guarantee + security from buyer mandatory.
Banky’s Understanding: Assessment (like term loan): (1) Project cost estimation (land, building, machinery, prelim, WC margin). (2) Means of finance (promoter equity + DPG amount). (3) Technical feasibility. (4) Commercial viability (market, competition). (5) DSCR (min 1.5-2.0). (6) Management competence. (7) Security: primary (asset purchased) + collateral. Key features: Non-fund based (no immediate outflow). Long-term (3-10 years). Reduces with repayment. Counter-guarantee required. Becomes fund-based on default. Commission charged by bank (like BG commission).
Chapter Explained in Simple Stories
So easy even Banky’s nephew understands
🏗️ Block 1: DPG — What & Why
DPG: Bank guarantees instalment payments for capital goods. Supplier delivers now → buyer pays over years.
Purpose: Plant, machinery, equipment, vehicles, imported capital goods. NOT for working capital.
Non-fund based — becomes fund-based if invoked (buyer defaults).
Guarantee amount reduces as instalments are paid.
📊 Block 2: Assessment & Payment Method
Assessment: Like term loan — project cost, means of finance, DSCR (min 1.5-2.0), viability, security.
Payment: Instalment schedule (quarterly/half-yearly). Usance bills per instalment. Principal + interest.
Default: Bank pays supplier → funded exposure → recover from buyer with security.
Counter-guarantee + security mandatory. Commission charged (like BG).
Exam Angle — Every Testable Point
All facts, numbers, definitions JAIIB tests
✅ Must-Know Facts — Highest Probability
- DPG is for CAPITAL GOODS — not working capital
- DPG is non-fund based — becomes fund-based on invocation/default
- Assessment like term loan: project cost, DSCR, viability, security
- Guarantee reduces as instalments are paid by the buyer
- Instalment schedule: quarterly/half-yearly over 3-10 years
- Usance bills may be drawn for each instalment — accepted by buyer, guaranteed by bank
- If buyer defaults, bank pays supplier → funded exposure → recovers from buyer
- Counter-guarantee and security from buyer required
- DSCR minimum typically 1.5-2.0 (like term loan)
- Financial/performance guarantees = working capital | DPG = capital goods (long-term)
📝 Previous Year Questions
Memory Tricks That STICK
Lock every fact permanently
🧠 Trick 1 — DPG = Capital Goods
🧠 Trick 2 — Non-Fund → Fund
🧠 Trick 3 — Reduces Over Time
Visual Summary — Chapter Map
Entire chapter in one diagram
Flash Revision — Last-Minute Cards
Read these 10 minutes before exam
⚡ Chapter 33 Complete — Deferred Payment Guarantee
- DPG: bank guarantees instalment payments for capital goods — not working capital
- Nature: non-fund based → fund-based on invocation | Reduces as instalments paid
- Assessment: like term loan — project cost, DSCR (1.5-2.0), viability, security
- Payment: instalment schedule, usance bills | Default → bank pays → recovers from buyer
Banky says: “DPG=capital goods instalments, non-fund→fund on default, assessed like term loan, DSCR!” 🎉🏗️
You now understand DPG — the bridge between term loans and bank guarantees. It helps companies acquire expensive capital assets without upfront payment! 💪