Introduction:
- Create an irrevocable obligation on part of bank in case of default of the principal debtor.
- Appropriate procedure to be followed for approval, to minimize the risk associated with this transaction.
Types of Guarantee
- Tender/Bid: Intention to sign contract.
- Performance: Fulfill a contractual commitment.
- Advance Payment: Advance money received for performance.
- Retention Money: Money retained for performance.
- Custom: In lieu of import duty on goods.
Bank Guarantee Issuance Process Guarantee issuance at the request of Direct Customer
Receive request for Guarantee issuance:
Scrutiny of Guarantee request:
- Request letter should be signed by the customer.
- Verify Customer’s signature.
- Check request date.
- Check currency and amount.
- Check Tenor / expiry date.
- Check type of Guarantee requested i.e. Performance Bond, Bid Bond or Advance Payment Guarantee.
- Check that the text is signed by the customer.
- Check for any unusual conditions which could create unforeseen circumstances.
- Extent of bank’s obligation.
- Financial liability under the guarantee.
- Checks the Guarantee limits if excess in limit rifer the matter to Credit Division.
Get the text approved by Legal Advise:
Send the text to legal adviser for vetting.
Enter details into Register & allot LG Number:
- Enter details into LG Register and allot number.
- Fill all required columns in LG Register.
- Pass the following accounting entries:
Customer Liability - Guarantee Dr.
Bankers Liability - Guarantee Cr.
Customer Account Dr.
Margin Account Cr.
Pass Vouchers:
Calculate commission as per the schedule of charges / exceptional approval and pass vouchers.
Customer Account Dr.
Commission on in Come A/C-Guarantee Cr.
Commission will be charged at the time of the issuance of the guarantee.
Deliver Guarantee to the customer:
Make photocopy of signed guarantee.
Deliver to customer and ensure guarantee delivered to authorize person. (Identification of receiver needs to be done by viewing authority letter, ID card etc).
Get acknowledgement of customer on photocopy.
File documents:
Check all documents and file accordingly. Ensure following are with us.
- Counter Guarantee.
- Credit Approval.
- Copy of Guarantee text acknowledged / delivered to customer.
- Customer request letter / application.
- Format of the text approved by the customer.
- Copy of voucher
- Any exceptional approval
- Copy of the guarantee
Genuineness Confirmation:
In case if the beneficiary sends the Guarantee / Amendment for confirmation, a letter signed by two authorized signatories, confirming issuance of the guarantee / amendment, be prepared and sent at the address mentioned in the beneficiary’s letter.
1 Policy
Bok may issue guarantees (bonds) on behalf of its customers in favor of government entities or private beneficiaries. The guarantees issued in favor of government beneficiaries are considered lower risk compared to guarantees issued in favor of private beneficiaries.
Primarily, guarantees would be issued in accordance with State Bank guidelines. For the purpose of issuance of guarantee, Bok will ensure that the following features are included in the text of the guarantee.
- The guarantee must be issued as per approved text and formats by in house legal counsel or vetted by a counsel nominated by Ho.
- The guarantee must be for a clear, well-defined purpose and for a specific amount and period and shall contain claim lodgment date.
- In accordance with state bank directives, open ended guarantees may be issued for the following purposes against adequate collateral or other arrangements acceptable to the bank.
- Government departments
- Corporations and/or autonomous bodies owned and/or controlled by the government, and
- Guarantees required by the court.
- The text of the guarantee will have a reference to the underlying contract agreement stipulating the bid or performance bond or Advance payment Guarantee etc as the rationale for issuing the guarantee.
- Payment under the guarantee will be on beneficiary’s request or upon presentation of an agreed document (viz statement of claim) or set of documents along with guarantee in original.
- The guarantee shall state the maximum amount of the bank’s commitment in clear terms both in figures and in words.
- Guarantee’s shall not be of revolving nature or shall not contain automatic revolving/renewal clause except Lag’s issued by international Group (e.g. in United Arab Emirates) with proper credit committee approval.
- The guarantee issued by Bok must have a specific expiry date, and all claims must be lodged within the expiry date.
GUIDELINES
- Necessary credit approval as per Bok standard practice and procedures must be obtained prior to issuance of any bond or guarantee.
- The client on whose behalf the guarantee is being issued must agree to and sign the text of the guarantee concurrently with the signing of a counter guarantee. Such counter guarantees shall embody a request for the guarantee as well as an irrevocable commitments from the client to reimburse Bok on demand,
- Stipulated margins will be realized up front and applicable commission will also be realized, preferably upfront.
- A valid Disbursement Authorization certificate issued by the CAD must be in place prior to the issuance of any bond/guarantee.
- The credit Administration Division will monitor expired guarantee with a view to obtain guarantees back after expiry and decontrol the liability as per BOK’s policy
Execution of Guarantees/Bond
While executing a guarantee the following aspects will be considered:
I. the terms and conditions of the guarantee must be closely examined to determine the :
· Type of guarantee,
· Unusual conditions which could create unforeseen circumstances,
· Extent of Bank’s obligation, and
· Financial liability under the guarantee
II After the guarantee has been issued, a copy of the same will be attached to the counter guarantee executed by the customer along with a draft of the customer and filed by Br.
In the normal course of business, Bok may issue the following guarantees and bonds:
- Bid Bond
- Advance Payment Guarantee
- Performance Guarantee
- Payment Guarantee
- shipping Guarantee
Policy
The issuance of shipping guarantees to cover missing documents under our own documentary letters of credit and documentary collections will be subject to the requirements set forth in this section.
Issuance of shipping guarantee will require a sub-limit under L/C.
Customer Documentation
In all cases involving shipping guarantees, the customer will sign our standard shipping guarantee application that includes an irrevocable undertaking that the client will accept the relative documents when received, regardless of discrepancies.
Security
Shipping guarantees related to sight/usance documents under L/Cs and collections will be issued against 110% cash collateral. Cash collateral should be kept in local currency unless requested by client; it will be refunded as soon as the shipping guarantee is received back by the bank. Any relaxation in this condition will require approval from the competent authority.
110% cash margin for Shipping Guarantees is not required where FIM facility as a sub-limit is available for the client. However, it is to be ensured that 110% cash margin is waived only up to the amount of FIM facility. For such arrangements it is ensured that the goods are cleared by the C&F agent under his control till stored in the go down Book.
Missing Invoices
In case of documentary collections when the invoices are not available with the Bank, the value of merchandise for issuance of shipping guarantees will be established on the basis of supporting documents relating to price along with an undertaking to indemnify the bank in case of any fluctuation in price resulting in a shortfall in value .
Open Ended
The requirement for a fixed expiry date will be considered waived in all cases since carriers and Customs Department do not accept shipping guarantees with a stated expiration date.
Decontrol
Shipping guarantees can be decontrolled after settlement in the following scenarios:
- Return of original shipping guarantee instrument.
- On settlement of documents related to Airway Bills.
- When original B/L is with us, and provided two follow-ups have been sent to the importer with an interval of 2 weeks each.
- The original Bill of Lading should be kept in the file to serve as evidence in the event the shipping agent inquire or call on the shipping guarantee. Credit Committee approval for the amount of the transaction should be taken.
Claim Processing under Guarantee-Guarantee issued on behalf of Direct Customer
Receive encashment claim from Beneficiary:
1. Claim received by mail / fax.
2. Time stamp at Guarantee department.
Scrutiny of Claim:
1. Pull out Guarantee file.
2. Verify claiming authority (claiming authority must be Beneficiary).
3. Check date.
4. Check claim addressed to Bok.
5. Check claim amount.
6. Verify that the claim is lodged within the validity of the guarantee.
7. check that the entire guarantee issued by us (original along with all the amendments are returned with the claim).
8. the entire claim should be promptly reviewed to ensure that the required formalities / condition have been full filled before a claim is acknowledged.
9. Check claim text fulfils guarantee terms and conditions.
10. Recover claim – handling charges (if any).
Inform to Applicant / RM:
The Applicant be immediately informed of the receipt of the claim and request to arrange withdrawal of the claim, otherwise arrange necessary funds for the payment of the guarantee within 2 working days. If customer requests extension, issue an amendment in accordance with the original guarantee.
Cancellation of Guarantees – (returned by beneficiary)
Receive back Original Guarantee:
Receive back original guarantee along with all amendments and all pages forming integral part of the original guarantee, issued to the beneficiary.
Put Cancellation stamp & reverse liability:
- Affix Cancellation on every page of the Original Guarantee.
- Check whether all the charges have been retrieved from the principal’s banker in case of back to back guarantee.
- Reverse contingent liability.
Pass the following accounting entries for reversal of the guarantee liability: \
Bankers Liability Dr.
Customer’s liability Cr.
Margin A/C – Gtee Dr.
Customer account Cr.
- Mark E/R (Entry Reversed) in the Guarantee Register along with the date and signature in front of the related entry.
Expired Guarantees – (not returned by beneficiary)
Upon expiry of the period of the guarantee, by way of abundant caution certain endeavors are usually made to obtain the original guarantee back in order to safe guard the banks interest and to release/vacate the liability of the principal accordingly in cases were no demand or a claim is made under the guarantee within its period of validity irrespective of its beneficiary.
Following procedure is to be adopted to handle expired guarantees:
- No claim has been received by the Bank from the beneficiary.
- The guarantee contains a specific expiry date and is not effectively open ended.
- Notify the client in writing (through registered post / courier) that the guarantee has expired therefore the original guarantee duly cancelled from the beneficiary be surrendered to the band within a period of 15 days so that their liability may be released accordingly.
- Simultaneously the beneficiary of the guarantee should also be intimated in writing (through registered post / courier) that the guarantee is expired, therefore Bok is no longer under any obligation to honour any claim and that the original guarantee be returned to Bok within 15 days.
- In case no response is received from the client and or the beneficiary within the stipulated time, a reminder may be sent to both after 15 days of the first letter sent giving notice of another 7 days time.
In case where a response is received from the beneficiary (not Govt. Federal/ provincial Govt Organization):
- in case response is received from the beneficiary stating that the original guarantee is lost / misplaced and that there is no claim outstanding against the guarantee and also noting that in case if found would be returned to the bank then;
- Genuineness confirmation would be acquired of the above said letter independently.
- Customer would be asked to execute an indemnity favoring Bok for any losses in future due to any dispute relating to the subject LG.
- Refer cancellation of guarantee section.
- Al the documents / letters to be filled in the guarantee file.
| Product Name: | Guarantees | Date of Issue: | |
| Ver: | 0 | Process No: | TRADE/TR_GUAR |
Decontrolling of Guarantees – (not returned by beneficiary)
Prudent banking practice requires reversal of contra liability relating to a letter of Guarantee as soon as feasible after its stated expiry date. However as per practice the branches do not reverse the liability unless original instrument is received back for cancellation. This results pilling up of contingent liability un necessarily as the beneficiaries fail to return the original instrument after its expiry date even after sending reminders to both the client and the beneficiary after the expiry of the guarantee.
Guarantees (other than Government/Federal/Provincial) which stands outstanding in our books for more than 3 years after their original expiry date may be decontrolled upon specific request of the client which would require Ho approval on a case to case basis. However it may be noted no action will be taken if expiry period of LG is less than 3 years from the date of expiry in case of non- return of original guarantee along with all the amendments issued forming integral part of the guarantee.
Following procedure is to be adopted to handle decontrolling of the guarantees:
The guarantee should:
- Contains a specific expiry date must not be effectively open ended.
- No claim has been received during its validity period, in other words the period applicable before the expiry date.
- Ensure that immediately after the expiry of the guarantee letters to the client as well as the beneficiary have been sent for returning of the guarantee intimating them that Bok will not be liable of any claim entertainment as the expiry of the guarantee has lapsed.
- Clients send a request to release their liability under the specific guarantee number, which should be verified.
- Client executes an indemnity favoring Bok for any losses in future due to any dispute relating to the subject LG.
- Approval acquired from credit division.
- Refer cancellation of guarantees.
- All the documents / letters to be filled in the guarantee file.
