Bank guarantees support the smooth operation of enterprises and help increase the prestige of the company. So what is a bank guarantee? What are the common forms of bank guarantees? Please refer to the content compiled by SeABank below!
What is a bank guarantee?
Bank guarantee is a form of credit provision. The credit institution makes a commitment to the beneficiary that they will perform financial obligations on behalf of the customer if the customer fails to perform or does not fully perform the committed obligations. The customer must then accept the debt and pay the outstanding debt to the credit institution according to the commitment.
Bank guarantee is a way of providing credit.
Note: To understand more about bank guarantees, you can learn about other types of guarantees such as what is an advance payment guarantee, what is a loan guarantee,...
What are the characteristics of a virtual bank guarantee?
Bank guarantee is a special service, so there are some unique features that you need to pay attention to, details are as follows:
- Is a special type of commercial transaction.
- Only banks and other credit institutions are allowed to carry out bank guarantees.
- In guarantee activities, credit institutions are not simply guarantors but also play the role of a banking enterprise.
- To carry out bank guarantee activities, there are usually two types of contracts: guarantee/guarantee commitment contracts and guarantee service contracts. In essence, these two types of contracts are closely related and influence each other. However, in reality, they are still independent in terms of the subjects, rights, and legal obligations of those subjects.
- Bank guarantee is not just a one-way or three-way transaction, it is also a double transaction.
- Bank guarantees are established and implemented based on documents. The nature of bank guarantee documents is clearly shown when credit institutions issue a commitment to implement the guarantee (letter of guarantee). The beneficiary of the guarantee will exercise the right to request, the credit institution will perform the guarantee obligation. At the same time, these will be established in writing.
Banks are entities authorized to carry out bank guarantee activities.
Who are the subjects of bank guarantees?
According to Clauses 5, 6, 7, 8, 9, 10 of Article 3 of Circular 07/2015/TT-NHNN, the subjects of bank guarantees include:
- The guarantor is a bank or credit institution.
- The guaranteed parties are organizations (including domestic and foreign credit institutions, foreign bank branches), individuals guaranteed by the guarantor and the counter-guarantor.
- The beneficiary of the guarantee is an organization (including domestic and foreign credit institutions, foreign bank branches), or an individual who has the rights to benefit from the guarantee issued by the guarantor and the guarantee confirmation party.
- Counter-guarantors are credit institutions and foreign credit institutions that provide guarantees for the guaranteed party.
- The guarantee confirming party is domestic and foreign credit institutions, foreign bank branches that confirm the guarantee for the guarantor.
Bank guarantee classification criteria
For bank guarantee services, there will be 4 types as follows:
Release method
- Guarantee confirmed.
- Direct guarantee.
- Indirect guarantee.
- Co-guarantee.
Bank guarantees are divided into four types.
How to use
Based on the form of use, bank guarantees are divided into 2 types:
- Conditional guarantee.
- Unconditional guarantee.
Intended use
- Bank guarantees based on purpose of use are considered a popular type of guarantee with the following 5 forms:
- Payment guarantee.
- Contract performance guarantee.
- Loan guarantee.
- Bid security.
- Guarantee to ensure payment of advance payment.
- Warranty or guarantee guarantees the quality of the product according to the contract.
- Guarantee of no deduction from total invoice value.
Other types of guarantees
At the same time, bank guarantee services also have several other types of guarantees as follows:
- Standby letter of credit (L/C).
- Customs guarantee.
- Bill of exchange guarantee.
- Guarantee when issuing securities.
Bank guarantee process
Step 1: Customers must sign contracts such as:
- Payment contract.
- Construction contract.
- Bidding contract,...
Then the partner requires a bank guarantee.
Step 2: Customers prepare documents and send a guarantee request to the bank including the following documents:
- Application for guarantee.
- Purpose profile.
- Legal documents.
- Collateral profile.
- Business financial records.
6 steps to carry out the bank guarantee process
Step 3: The bank will conduct an appraisal and two things will happen:
Agree: The bank and the customer sign a guarantee contract as well as a letter of guarantee.
Reject: Inform the customer of the reason.
Step 4: The bank will notify the letter of guarantee to the counterparty (the beneficiary of the guarantee).
Step 5: The bank performs its guarantee obligation if any problem occurs.
Step 6: The bank requires the customer to fulfill financial obligations to the bank such as paying principal, interest, and fees.
Conclusion
Bank guarantees are an important financial key for businesses. In the following article, SeABank will discuss the regulations on contract performance guarantees. Follow SeABank now to update more useful financial information!
