International Bank Guarantee
The international bank guarantee operate in much the same way as documentary credits. Practically demand guarantees, standby letters of credit and commercial letters of credits are all treated as autonomous contracts whose operation should not be interfered on grounds immaterial to the guarantee or credit. However, these instruments have distinctive features in terms of operational efficiency, use, preference and regulatory environment. There are growing instances of offering international demand guarantee services by banks, and a few instances of standby LC in the country. Constant growth of business activities and complexity of business connections between distant clients results in a growing use of the instruments for securing receivables and unstable business.
Bank commonly issued both direct or indirect guarantees. Most of the direct bank guarantees issued are performance guarantees. And other major type of international bank guarantee is advance payment guarantee for trade purposes. Indirect guarantees are issued mainly to support government sectors. Bank guarantees issued to obtain foreign loans is a relatively recent development and a potential area for the future. In the wake of the recent financial crisis, the foreign banks, Foreign Financial institutions, multilateral institutions/development organizations (IFC, IDB, ADB, DEG, FOM and foreign banks), are moving toward emerging economies to invest their unemployed fund as the lending rate is very much higher as compare to the same in the developed countries.
On the other hand, the applicable interest rate of foreign currency loan offered by the foreign investors is also attractive to our medium and gigantic private sector enterprises due to upper trend of interest rate in the local market. In recent time, this trend has got a new paradigm due to direct patronization of the Bangladesh Bank as the foreign currency inflow in the form of loan, has overall positive impact of Balance of payment of the country. Previously, only a few big corporate availed of this facility, but now it has become common phenomena for medium size industry as well. There are cases, when the loan is driven from foreign bank, one of the conditions is to provide standby LC or bank guarantee from a bank.
In regard to the operational procedures, the following process flow figures reveal different steps in case of both direct and indirect bank guarantees.
Process of Direct Bank guarantees Received from abroad (Export)
1. Contract: Executing sales contract to export under documentary collection or open account; Submitting executed sales contract to Bank; Bank asks for guarantee from abroad [usually from the importer’s bank] before details performing export under contract.
2. Receiving Bank Guarantee abroad: Received appropriate bank guarantee or as required from by the Bank either directly or advised by another bank.
3. Advising or authentication of bank guarantee: Advice in case of guarantee received by exporter’s bank; ensuring authentication in case of guarantee advised by bank other than exporter’s bank.
4. Receiving Amendment: Advice in case of amendment received by exporter’s bank, ensuring authentication in a case amendment advised by bank other than exporter’s bank.
5. Lodging Claim: Lodging claim, in case of payment not received under documentary collection or open account.
6. Record Keeping and Reporting: Record Keeping and Preservation of data, record related to FBG.
Process of Indirect Bank guarantees Received from abroad:
1. Receiving Counter guarantee received: Directly through SWIFT; or Counter Guarantee indirectly from other local bank
2. Advising the Counter Guarantee: Advise the guarantee to the beneficiary [in case of counter Guarantee Received directly]
3. Issuance of Guarantee as per Applicant request.
Process Flow of Indirect Bank guarantees Received from abroad:
1.Receiving Counter guarantee received: Directly through SWIFT; or Counter Guarantee indirectly from other local bank
Step 2. Advising the Counter Guarantee: Advise the guarantee to the beneficiary [in case of counter Guarantee Received directly]
3. Issuance of Guarantee as per Applicant request.
