Chapter 33: Deferred Payment Guarantee (JAIIB – Paper 2)
1. What is the primary purpose of a Deferred Payment Guarantee (DPG)?
A. To provide immediate cash to the beneficiary without any condition
B. To act as a fixed deposit instrument for the applicant
C. To assure the beneficiary that payment will be made at a future agreed date
D. To waive the repayment obligations of the applicant
A Deferred Payment Guarantee ensures the beneficiary receives payment at a specified future date, providing security in trade or contract agreements.
2. Who primarily benefits from a Deferred Payment Guarantee?
A. The bank issuing the guarantee
B. The beneficiary of the contract or trade transaction
C. Competitors in the market
D. The government regulator
The beneficiary is assured that payment will be made on the agreed deferred date, reducing the risk of non-payment by the applicant.
3. Which of the following best explains why an applicant requests a Deferred Payment Guarantee?
A. To enable deferred payment to the beneficiary while securing contract obligations
B. To avoid any future liability
C. To instantly transfer cash to the beneficiary
D. To act as collateral for unrelated loans
Applicants use DPGs to assure the beneficiary that payment will be made at a later date while meeting contractual obligations without immediate cash outflow.
4. In trade finance, the Deferred Payment Guarantee mainly helps in:
A. Avoiding the need for a contract
B. Providing collateral for bank loans
C. Reducing interest on advances
D. Securing payment obligations for deferred transactions
DPGs are designed to secure payments that are to be made at a future date, ensuring that beneficiaries receive funds as per contract terms.
5. Which of the following is NOT a purpose of a Deferred Payment Guarantee?
A. Providing security to the beneficiary
B. Immediate cash withdrawal by the applicant
C. Facilitating deferred payment in trade contracts
D. Reducing payment default risk for the beneficiary
DPGs do not allow immediate withdrawal by the applicant; their purpose is to secure future payments and reduce default risk for beneficiaries.
6. Who issues a Deferred Payment Guarantee?
A. Bank or financial institution
B. Beneficiary
C. Government regulator
D. Applicant
Banks or financial institutions issue DPGs on behalf of the applicant to assure the beneficiary of payment at a future date.
7. What risk does a Deferred Payment Guarantee reduce for the beneficiary?
A. Market risk
B. Currency risk
C. Payment default risk
D. Operational risk
The main purpose of a DPG is to reduce the risk that the applicant may default on payment, assuring the beneficiary of future payment.
8. In a Deferred Payment Guarantee, the bank pays the beneficiary:
A. Only if the applicant requests immediate payment
B. On the agreed deferred date or if the applicant defaults
C. Without any reference to the contract
D. Only after the beneficiary provides collateral
Banks honor DPGs on the agreed deferred date or earlier if the applicant fails to pay, ensuring contractual obligations are met.
9. Which of the following is an advantage of a Deferred Payment Guarantee for the applicant?
A. Eliminates all financial risk
B. Guarantees immediate liquidity
C. Allows the bank to assume market risks
D. Enables deferred payment while maintaining trust with the beneficiary
Applicants can manage cash flow better by deferring payment while assuring the beneficiary that funds will be received.
10. A Deferred Payment Guarantee is often used in which type of transaction?
A. International trade or large supply contracts
B. Daily retail banking transactions
C. Small personal loans
D. ATM cash withdrawals
DPGs are typically used in large contracts or international trade where deferred payment arrangements are common.
11. In a Deferred Payment Guarantee, the “applicant” refers to:
A. The beneficiary receiving payment
B. The party requesting the guarantee from the bank
C. The bank issuing the guarantee
D. The regulatory authority overseeing the transaction
The applicant is the party who requests the bank to issue a DPG to assure deferred payment to the beneficiary.
12. Which party is legally responsible for paying the beneficiary if the applicant fails to make payment under a DPG?
A. Applicant only
B. Beneficiary
C. Bank issuing the guarantee
D. Government regulator
The bank that issues the DPG undertakes responsibility to pay the beneficiary in case the applicant defaults.
13. Which of the following is a common condition in a Deferred Payment Guarantee?
A. Payment must be immediate
B. The beneficiary must provide collateral
C. Applicant’s repayment is waived
D. Payment is made on a specified future date or on default by the applicant
The DPG ensures payment is made at the agreed deferred date or if the applicant defaults, securing the beneficiary’s interest.
14. Which of the following best describes the bank’s role in a DPG?
A. To provide payment assurance to the beneficiary on behalf of the applicant
B. To lend money directly to the beneficiary
C. To act as a guarantor without applicant’s consent
D. To waive the applicant’s contractual obligations
The bank issues the guarantee to assure the beneficiary that payment will be made at the deferred date, acting on behalf of the applicant.
15. Which of the following risks does the applicant face while requesting a DPG?
A. Market risk for the beneficiary
B. Bank charges and liability in case of default
C. Payment default by the beneficiary
D. Regulatory compliance by the bank
The applicant must pay bank fees for the DPG and may face repayment obligations if payment defaults occur.
16. How does a DPG help in international trade?
A. By eliminating all currency risks
B. By providing immediate working capital to the importer
C. By substituting letters of credit
D. By assuring exporters that payment will be received at an agreed future date
Exporters are assured of payment at the deferred date, reducing the risk of non-payment in international trade.
17. Which of the following charges is usually applicable on a DPG?
A. Income tax on beneficiary
B. Stamp duty on applicant’s contract
C. Bank commission or guarantee fee
D. No charges are applicable
Banks charge a commission or guarantee fee for issuing a DPG, which is usually a percentage of the guaranteed amount.
18. In case of applicant’s default, the bank will:
A. Refer the matter to RBI for payment
B. Pay the beneficiary up to the guaranteed amount
C. Cancel the contract immediately
D. Demand collateral from the beneficiary
The bank honors the DPG by paying the beneficiary if the applicant fails to meet the payment obligations.
19. Deferred Payment Guarantees are generally:
A. Open-ended without expiry
B. Issued only for government contracts
C. Repayable on demand by the applicant
D. Valid for a specified period and amount
DPGs specify the amount and period during which the bank’s payment guarantee is valid, ensuring clarity for all parties.
20. Which scenario reflects the use of a Deferred Payment Guarantee?
A. An exporter ships goods and receives assurance of payment after 90 days
B. A customer deposits cash in a savings account
C. A borrower repays a personal loan immediately
D. A bank issues a cheque to itself
DPGs are commonly used in trade where exporters or suppliers need assurance of payment at a future date after shipment.
21. Which of the following is a common method of payment under a Deferred Payment Guarantee?
A. Immediate cash transfer only
B. Payment through beneficiary’s collateral
C. Bank payment on the agreed deferred date or on applicant’s default
D. Direct debit from government account
Payment under a DPG is made by the bank on the deferred date or if the applicant fails to pay, ensuring contractual obligations are fulfilled.
22. In DPG, the bank usually makes payment to the beneficiary:
A. Only after legal proceedings
B. Against the beneficiary’s claim and submission of required documents
C. Without any request or documents
D. By waiting for applicant’s approval each time
The bank releases payment only after the beneficiary submits the required claim documents in accordance with the DPG terms.
23. Which payment method is generally used under a Deferred Payment Guarantee?
A. Telegraphic Transfer (TT) or bank-to-bank transfer
B. Cash delivery by courier
C. Payment by cheque from the applicant directly
D. Direct payment from the beneficiary’s bank
Banks usually transfer funds via TT or interbank transfer to the beneficiary, ensuring secure and traceable payment.
24. Which of the following documents is usually required for payment under a DPG?
A. Applicant’s personal income statement
B. Beneficiary’s bank passbook only
C. Government approval letter
D. Beneficiary’s claim documents as per DPG terms
Payment requires submission of documents specified in the DPG, such as invoices, shipping documents, or certificates confirming contractual compliance.
25. What is the advantage of using bank transfer as the method of payment in DPG?
A. Eliminates the need for a guarantee
B. Guarantees immediate payment to the applicant
C. Ensures secure, traceable, and timely payment to the beneficiary
D. Reduces applicant’s liability completely
Bank transfers under DPG ensure the payment is secure, can be tracked, and is executed as per the agreed deferred date.
26. Under a Deferred Payment Guarantee, payment can be triggered by:
A. Beneficiary’s discretion without documents
B. Submission of documents and occurrence of the deferred date or applicant’s default
C. Applicant’s verbal confirmation only
D. Automatic bank schedule without any claim
Payment is triggered only when required documents are submitted and the deferred date arrives, or if the applicant fails to pay.
27. Which of the following statements is true regarding DPG payment methods?
A. Payment is generally made through bank channels to ensure safety and traceability
B. Payment is made in cash to the applicant
C. Payment bypasses bank authorization
D. Payment is optional for the bank
Banks use secure channels for payment to protect both the applicant and beneficiary, and to maintain a traceable transaction record.
28. Which factor determines the mode of payment in a DPG?
A. Beneficiary’s location only
B. Applicant’s preference only
C. Bank’s internal policy only
D. Terms specified in the DPG and banking norms
The mode of payment is guided by the DPG terms, contract agreements, and regulatory/banking standards.
29. Why is documentation important for the method of payment in DPG?
A. To waive applicant’s obligations
B. To ensure that the bank releases payment securely and legally
C. To allow beneficiary to change payment date
D. To avoid bank charges
Proper documentation ensures the bank can release funds according to terms and provides legal protection in case of disputes.
30. In DPG, if the beneficiary’s bank account is overseas, the payment is usually made via:
A. Cash courier
B. Postal order
C. International wire transfer or SWIFT
D. Direct debit from applicant’s account without bank involvement
Overseas payments under DPG are usually made via secure banking channels like SWIFT or international wire transfer to ensure speed, safety, and traceability.
