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There are many people who do not understand well about bank guarantee as well as the process of guaranteeing payment via bank. Find out with Cfis.edu.vn about bank guarantee and guarantee procedures through the article below.
What is a bank guarantee?
According to Circular No. 07/2015/TT-NHNN, a bank guarantee can be understood as a commitment of a third party (the guarantor) to the obligee (the guarantee party) in the performance of obligations. finance on behalf of the guaranteed party .
Examples are as follows : Company ABC accepts the Xmas project. However, in order to ensure that ABC company does not give up halfway, financial institution F will issue a bid guarantee certificate to ABC company that will execute the project on schedule, if ABC company does not complete it, all costs financial institution F will stand to pay all costs to the party organizing the bid for Xmas project.
Features of bank guarantee:
- This is a dual transaction, trade specific.
- Bank guarantee is a type of unconditional guarantee (also known as independent guarantee).
- Organizations and organizations that stand out as guarantors are also a bank business.
- This transaction has consequences between two contracts, including guarantee service contract and guarantee contract/guarantee commitment. It is closely related to each other but independent of the legal rights and obligations of the subjects.
- Bank guarantee is a transaction established and performed based on documents, from the commitment to guarantee (letter of guarantee) to the performance of obligations by the guaranteed person or organization that must be established in writing.
What is a bank guarantee letter?
A letter of bank guarantee is a written commitment between the two parties, the guarantor and the guaranteed party , made to ensure that the guarantor will have to perform the debt payment obligation on behalf of the guaranteed party, when this guarantor fails to perform or improperly performs the obligations committed to the guarantor which is a third party (the customer).
Types of bank guarantees
According to the release method
- Direct guarantee
- Indirect guarantee
- Guarantee is confirmed
According to the form of use
Includes two types of conditional guarantee, unconditional guarantee
According to each purpose of use
- Contract performance guarantee
- Payment guarantee
- Loan repayment guarantee (Loan guarantee)
- Bid guarantee
- Advance payment guarantee guarantee
- Warranty guarantee or product quality guarantee under the contract
- Guarantee exemption from deduction of invoice value
There are also other types of guarantees such as:
- Standby Letter of Credit (L/C)
- Tax guarantee
- Guarantee of bills of exchange
- Underwriting securities
Bank guarantee procedures
Step 1Sign the contract
The two parties will sign the contract according to the criteria such as payment, construction, bidding, the other side will require a bank guarantee to ensure the other party completes the project on schedule as stated in the contract. sign,
According to Circular No. 07/2015/TT-NHNN Article 13, the project recipient (client) will make a dossier and send a guarantee request to a bank or financial institution, including:
- Guarantee request letter
- Customer Documentation
- Documentation of guaranteed obligations
- Documents on security measures (if any)
- Documentation of other stakeholders (if any)
After that, the organization receiving the guarantee will review and approve the contents of the dossier according to criteria such as: the legitimacy and feasibility of the guarantee project; client’s legal capacity, form of guarantee; assess the financial viability of the client. If all criteria are met, the organizer will sign a co-grant of guarantee and letter of guarantee with the customer
Step 4Notice of guarantee letter
The guarantee organization will notify the guarantee letter to the client’s counterparty that the organization will guarantee the customer, the letter will clearly stipulate the basic contents of the granting contract. guarantee.
Step 5Fulfillment of guarantee obligations
The guarantor organization will perform the guarantee obligation to the guarantor according to article 21 of Circular No. 07/2015/TT-NHNN (customer) if it arises.
Step 6Request to fulfill financial obligations
The guarantee organization will require the guaranteed party (the customer) to fulfill its financial obligations to the bank such as paying principal, interest, and fees.
How is the bank guarantee fee calculated?
Although financial institutions such as banks will guarantee the party receiving the guarantee. However, the guarantor also has to pay the guarantor’s expenses , which will be a compensation for the costs and activities that the financial institution has prepaid as well as the risks that may be incurred. in charge of.
On the financial institution’s side, the guarantee fee is included in the service fee and contributes directly to the bank’s profit.
In short, this part of the cost is like a “protection” fee and there is no “free plate of cake falling from the sky” for the business, the unit, the part of the guarantee cost of this financial institution stands out ” guarantee” for businesses, units and individuals that need to be guaranteed is calculated according to the following formula:
Guarantee fee = Guarantee amount * Fee rate * Guarantee period
Guarantee amount : The amount that the guarantor stands to pay on behalf of the party needing to guarantee, when the guarantor cannot afford to pay as in the bidding contract or transaction.
Fee rate (%) : The guarantee rate for each type of guarantee of each different financial institution or bank will apply.
Guarantee period : It is the period of guarantee commitment between two parties.
Bank guarantee example:
– Guarantee amount: 100,000.00 VND
– Fee rate: 1%/year
– Warranty period: 3 years
=> So the guarantee fee will be: 100,000.00 * 1% * 3 years = 3,000,000 VND
Above is an explanation of the bank guarantee as well as the guarantee payment procedures and costs, hope to share more about this form of finance.
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