Đề tài Guarantee Operations at Agribank – Current Situation and Recommendations

ACKNOWLEDGEMENTS Actually the thesis is the process of my collecting information, choosing data, analyzing figures and especially asking for valuable helps of many people. I could not have finished my thesis without the great support and guidance of my supervisor, Ms. Nguyen Hoang Giang. Therefore, I would like to give my warmest thanks to her. I would like to express my deep gratitude to Mr. Ngo Xuan Quang, the credit staff of the credit department at Agribank, who spent much time explaining, suggesting, and providing me with valuable information. I also would like to give my big thanks to other staffs of Agribank credit department such as Ms. Linh, Ms Hue and Mr Long who are enthusiastic to help me complete the thesis. Last but not least, I wish to pay tribute to my friends and relatives, who gave me encouragement to overcome many obstacles during writing process. Despite my own effort and others the thesis unavoidably contains errors and limitation because of time limit and my inexperience. I am really willing to receive constructive comments and contributions from the readers. Tran Thi Hoai Thu INTRODUCTION ****@@@**** Rationale Becoming the full member of WTO marks a mile-stone for Vietnam in its transitional period of economy, which creates a great deal of unprecedented opportunities and major challenges for the domestic economy. To overcome the difficulties, a smooth and quick capital turnover especially bank credit capital is necessary. By covering some of the risks that the market is not able to bear or adequately evaluate, the bank guarantee can attract new sources of finance, reduce financing costs, and extend maturities. Guarantee operations, therefore, is one of the three basic modes of credit operations (together with loans and equity investments.) for a developed economy. Bank guarantee operations appeared firstly in US in the early of the 1960s under the form of Standby Letter of Credit. Until the early of the 1970s it really became common in every developed country. Nowadays, guarantee plays a more and more vital role in the international economic transactions and in the bank activities all over the world with the participation of 6-9% total a bank’s revenue. Guarantee, however, is quite new to Vietnam commercial banks. It has just been implemented for the last few years. It means that, in Vietnam, guarantee operations have just been at the primary stage of development. There are a lot of weakness and shortcomings leading to considerable losses for the banks because of its new, complicated and risky characteristics. As a result, ceaseless enhancement in bank guarantee operations is an urgent requirement for Vietnam commercial bank. It cannot be denied that, in the integration economy, the development of guarantee operations in specific, and credit operations in general are indispensable and objective requirement in order to push banking as well as Economic activities stronger forward. So how to improve and promote bank guarantee operations, how to guarantee banks’ safety and avoid risks are the concern not only of authorities, policy-makers but also of any students like me. Moreover, after reading this issue in a banking finance book, I am really interested in and I desire to learn more about it. Probating at Agribank Operation Centre gives me a good chance to study about guarantee activities, which offers me a new and comprehensive insight into bank operations. In the short period of probation at Agribank, one of the top commercial bank in Vietnam, with the enthusiastic help of Ms Hoang Giang and the staffs in the credit department, I have completed this report: Guarantee Operations at Agribank – Current Situation and Recommendations Aims of the study 2.1 Objectives of the study Sharing ideas of guarantee operations and analyzing the theoretical base and the practical factors related to the bank guarantee operations. Broadening the knowledge of the bank guarantee activities particularly in Agribank and clearing up any misunderstandings of this. Suggesting some measures to improve the bank guarantee operations’ development Improving the skills of research, for example, learning how to collect information sufficiently, assess information correctly, analyze figures completely and so on. 2.2 Research questions: What is the definitions of bank guarantee operations? What is the functions of guarantee operations in the bank services? How many types of bank guarantee? What are the determinants of bank guarantee development? What is the overview of guarantee operations at Agribank? What is about the regulations of guarantee activities at Agribank? What is the current situation of guarantee activities at Agribank? What are the achievements and weakness of guarantee operations at Agribank? How to improve the guarantee operations at Agribank? What are proposals to the Government, State Bank and others organizations for developed guarantee operations? Methodology Based on knowledge at university, books and self-accumulation, several methods of studying the thesis are used as follow: Figures collection: from websites of the banks, books, trade journals, bank magazines and internet. Inductive, deductive and statistical method. Figure comparison. Data evaluation, judgment and conclusion. Scope of the study Bank guarantee operations are quite new and complicated in Vietnam so materials of this subject are not much abundant and available. As a result, the study just concentrates on guarantee operations of Agribank and Vietnam commercial banks recently (figures almost of three years 2005-2007). The thesis focuses on the analysis, evaluation of the basic guarantee operations factors mainly at Agribank and suggestions to develop this activity there. Structure of the study Besides the Contents, Introduction, Conclusion and References, the thesis consists of 3 chapters. Chapter 1 gives the overview of guarantee operations at commercial banks including the general definitions and the definition of Vietnam State Bank, the functions and types of bank guarantee operations and the determinant of guarantee operations’ development. Chapter 2 is the main part of the thesis. It is about the current situation of guarantee activities at Agribank. This chapter refers to the overview and general regulations including guarantee types, manners, conditions, fees, files of application, activity environment and procedures of issuing guarantee at Agribank. After analyzing the qualitative and quantitative indicators of guarantee activities at Agribank and the central part of chapter 2 reveals the achievements, weakness and causes of the weakness of these activities at Agribank. Chapter 3 gives the solutions to improve guarantee operations at Agribank. The recommendations includes marketing, human solutions, flexible guarantee mechanism, IT applications and other solutions. In addition, this chapter also refers to some proposals to the government, the state bank, Agribank and the enterprises for the guarantee development. Chapter 1 OVERVIEW OF GUARANTEE OPERATIONS AT COMMERCIAL BANKS 1.1. DEFINITION OF BANK GUARANTEE The more developed the economy is, the larger scale and higher value of the international commercial transactions are. To avoid and reduce potential loss, the banks have used various measures such as more legal procedures on dispute settlement promulgation, using mortgage property, and delegating the third party which is reliable, specialized, well-qualified and well-financial ability to guarantee to make up for the loss party. Guarantee appears as an objective, indispensable factor to prevent risks in financial and nonfinancial transactions. In term of definition, bank guarantee can be looked at from different angles. 1.1.1. General definitions In theory, bank guarantee is a form of signature credit. It is a lucrative activity without providing capital of a bank. In other words, it uses prestige of the bank to guarantee somebody's obligation. With regard to international commerce, bank guarantee is considered to be a foreign trade sponsor form which aims to protect guarantee beneficiary party from loss because of the breach of related partners’ duty. Besides, there are several definitions of bank guarantee on some popular websites. A commitment made by a bank to a foreign buyer that the bank will pay an exporter for goods shipped if the buyer defaults. A bank guarantee is the bank's promise to repay the debt of another person if that person does not pay the debt. An undertaking by a bank to be answerable for payment of a sum of money in the event of non performance by the party on whose behalf the guarantee is issued. A guarantee from a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. 1.1.2. The definition of Vietnam State Bank According to bank guarantee operations status (enclosed with the decision number 283/2000/QD-NHNN on 25th August, 2000 of the Governor of Vietnam State Bank.), “Bank guarantee is committed to paper by credit organization (the guarantor) and the beneficiary. The commitment is about the financial duty performance on be half of the customer (the principal) when the customer does not perform his duty or has done wrongly according to the commitment. The customer has to admit and return this loan to the credit organization with the amount of money equal to which has been paid.” In guarantee operations, there are at least 3 participating parties. They are: The Guarantor: the party issues guarantee may be the bank, credit organization or financial organization which are generally called bank. guarantee bank must be prestigious, financial-worthy and accepted by the beneficiary. The Principal: the party requires customers to open letter of guarantee. According to guarantee status (enclosed with the decision number 283/2000/QD-NHNN 14), the principal includes: state-owned enterprises, other legal types of enterprise (according to Vietnamese law): co-operative, nonstate-owned enterprises, foreign enterprises joining in join-venture cooperation, credit organization, private-owned business… The Beneficiary: all organizations or individuals who have legal capacity and civil capacity. The beneficiary enjoys benefit from guarantee contract. 1.2. THE FUNCTIONS OF BANK GUARANTEE: 1.2.1. Guarantee is a security instrument: It is the most fundamental function of guarantee. Guarantee target is providing the beneficiary with a guarantee to refund his loss in case of the breach of contract caused by the principal. According to statistics in US, only 1% of the total issued guarantee is required to pay by the beneficiary. It reveals that guarantee is a security instruments rather a payment one. Furthermore, guarantee is used in some contracts such as work execution contract, product warranty contract and building tender contract. They are not sales or payment agreements but only a guarantee for a smooth and safe transaction. In international trade, the first requirement so that a contract will be signed is the guarantee of banks in different nations. Guarantee is only used for security of the beneficiary when the principal violates the contract. 1.2.2. Guarantee is a financing instrument: Some major import-export projects and long-term construction contracts need financing to perform. The construction company or the exporter may bargain with the investor or the importer about the amount of money in the form of advanced sum which is guaranteed by a bank. Thus, payment guarantee of the bank can be described as a financing instrument so that the construction company and exporter receive the advanced money from the importer or the building manager. 1.2.3. Guarantee is a supervising and speeding up contract performance instrument: The guarantee payment bases on the breach of contract of the principal. In other words, the beneficiary has the authority to ask for payment when the principal breaks the contract in the period of guarantee validity. The principal is always under the guarantee refund’s pressure (the rate of guarantee loan is much higher than normal rate) if he violates the contract or performs it lately. Guarantee, consequently, has a function of supervising and speeding up the principal to perform the contract completely. Nevertheless, the beneficiary still wants the principal to perform the contract rather than receives the financial refund from the guarantor. Requiring the guarantor to pay is only the last resort. 1.3. GUARATEE TYPES 1.3.1. In terms of issue method a. Direct guarantee It is the kind of guarantee that the bank promises to pay directly to the beneficiary if the principal defaults. Diagram of direct guarantee: (2) Guarantor   Principal   Beneficiary   (1) (3) (1) The principal and the beneficiary sign an origin contract which assigns that the A party (the principal) has to open a guarantee. (2) The principal offers the bank to issue a banking guarantee. (3) The guarantor follows through its commitment to settle the debt for the principal in the event of the breach of the contract. b. Indirect guarantee That is issued by a correspondent bank (usually the guarantee beneficiary's bank) upon the counter-guarantee of the guarantee applicant's bank. This type of guarantee is more convenient for the beneficiary in transaction and getting money back in the event of the A party’s breach of the contract. Diagram of indirect guarantee: (3) The correspondent bank   The main guarantee bank   (6) (7) (2) (4) (5) The principal   The beneficiary   (1) The principal and the beneficiary sign an original contract which includes guarantee clauses and duration. The principal proposes the correspondent guarantee bank asking another bank (usually the guarantee beneficiary's bank) to issue a bank guarantee. The second bank acts as a guarantee for the beneficiary. The beneficiary requires the main guarantee bank to carry out financial duty in the event of the contract breach. The main guarantee bank pays the beneficiary. The main guarantee bank asks the correspondent bank the money back. The correspondent bank asks the principal to return the guarantee amount. It depends on the specific conditions to choose the better one: direct or indirect guarantee. Remember that the conditions and letter form suitable to the beneficiary’s bank and the guarantee type can be used flexibly in direct guarantee. c. Confirmative guarantee It is a banking guarantee which issued to the confirmed party by the credit organization (the confirming party). In case the principal fails to implement committed duty with the confirmed party, the guarantee confirming party has to carry out the guarantee confirmed party’s duty. d. Co-guarantee In this case, several banks act as guarantees for a customer through a clue bank. Co-guarantee is carried out when the guarantee value exceeds the current guarantee budget or required rate of a bank. An individual bank is unable to act as a guarantee so it offers the others to do together. The co-guarantee banks often choose the most prestigious and experienced one to play as the clue bank which presides over guarantee issue. Diagram of co-guarantee: Bank I   The principal   (2) Bank II   (1) The beneficiary   .........….…………........ (3) BankN   The principal and the beneficiary sign an original contract including bank guarantee clauses. The principal asks the banks to acts as his guarantee. The guarantee banks pay to the beneficiary when their customer fails to perform the contract. 1.3.2. In term of guarantee purposes a. Payment/Trade debt guarantee Payment/Trade debt guarantee is often used to cover the non-payment of a debt arising under a transaction or over a period of time. This type of guarantee provides financial security to the beneficiary should the applicant fail to make payment for the goods or services supplied. Such guarantees will invariably run up to the final scheduled date of payment, plus a grace period to allow the beneficiary to make demand in the event of non-payment. b. Tender guarantee/Bid bond Bid bond is usually issued for an amount equal to between 1 and 2 percent of the contract value and often called for in support of contract tenders, particularly in international trade situations. It gives the employer compensation for additional costs if the party submitting the tender does not take up the contract and it must be awarded to another party. Bid bond normally submitted with the other documents called for in the invitation to tender and remain valid during the period of tender, plus a grace period to allow the beneficiary to make demand. c. Performance bond Performance bond is the most common form of guarantee and used in variety of situations. Normally issued for an amount equal to between 5 and 10 percent of the contact value, this guarantee assures payment to the employer in the event that the contractor fails to fulfill contract obligations. This is required at the time of commencement of the contract and will extend over the duration of the contract, plus a grace period to allow the beneficiary to make demand in the event of non-performance of the obligations covered by the guarantee. d. Facility guarantee Facility guarantee is usually not trade related. Its purpose is to provide security to another bank to advance money to an individual or company. It is often used when a company does not have any credit record and wishes to expand offshore. This guarantee enables an applicant to secure banking facilities for a subsidiary/associate company, or personal account, in other countries. 1.3.3. In term of payment conditions a. Conditioned guarantee (Guarantee against documents) Conditioned guarantee requires the third party’s documents confirming the breach of the principal when the beneficiary asks for payment or other documents proving that the principal clearly fails to follow through commitments, for example, winning the contract without executing the work (in bid bond), failing to perform the contract (in performance bond) or to pay the debt to the beneficiary (in payment guarantee). The beneficiary, however, only needs to make the required guarantee documents not the detailed documents of demonstration or description of the principal’s breach. The third party’s documents and other documents can be an assessing certificate of a dependent assessing company. One of the greatest disadvantages of this guarantee is the beneficiary’s lengthened payment period. The beneficiary can not receive the guarantee amount in case there is any upheaval. L/C is a typical guarantee against documents in which the beneficiary must present essential documents required in the L/C for payment. It is more advantageous for the principal to use conditioned guarantee because it prevents him from the fraud of the beneficiary. On the contrary, conditioned guarantee brings no benefit for the beneficiary. If the regulations are not obvious enough it easily causes in dispute in payment procedures, thus, deals a fatal blow on beneficiary’s finance and prestige. As a result, conditioned guarantee is hardly used in bank guarantee operation. b. Unconditioned guarantee: Unconditioned is the type of guarantee in which the guarantee issue bank has to carry out its guarantee duty as soon as the beneficiary asks for without delay provided that the principal’s breach is shown. This is also known to be the unconditional payment order without documents. There is, therefore, no way for the bank to shirk its financial duty for its customer. Unconditioned guarantee is used popularly as its conve