Guarantee Operations at Agribank – Current Situation and Recommendations.doc

Guarantee Operations at Agribank – Current Situation and Recommendations

Actually the thesis is the process of my collecting information, choosing data,analyzing figures and especially asking for valuable helps of many people Icould not have finished my thesis without the great support and guidance of mysupervisor, Ms Nguyen Hoang Giang Therefore, I would like to give mywarmest thanks to her.

I would like to express my deep gratitude to Mr Ngo Xuan Quang, the creditstaff of the credit department at Agribank, who spent much time explaining,suggesting, and providing me with valuable information I also would like togive 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 thethesis

Last but not least, I wish to pay tribute to my friends and relatives, who gaveme encouragement to overcome many obstacles during writing process.

Despite my own effort and others the thesis unavoidably contains errors andlimitation because of time limit and my inexperience I am really willing toreceive constructive comments and contributions from the readers.

Tran Thi Hoai Thu

1 Rationale

Becoming the full member of WTO marks a mile-stone for Vietnam in itstransitional period of economy, which creates a great deal of unprecedentedopportunities and major challenges for the domestic economy To overcomethe difficulties, a smooth and quick capital turnover especially bank creditcapital is necessary By covering some of the risks that the market is not able tobear or adequately evaluate, the bank guarantee can attract new sources offinance, reduce financing costs, and extend maturities Guarantee operations,therefore, is one of the three basic modes of credit operations (together withloans and equity investments.) for a developed economy.

Bank guarantee operations appeared firstly in US in the early of the 1960sunder the form of Standby Letter of Credit Until the early of the 1970s it reallybecame common in every developed country Nowadays, guarantee plays amore and more vital role in the international economic transactions and in thebank activities all over the world with the participation of 6-9% total a bank’s

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 Thereare a lot of weakness and shortcomings leading to considerable losses for thebanks because of its new, complicated and risky characteristics As a result,ceaseless enhancement in bank guarantee operations is an urgent requirementfor Vietnam commercial bank.

It cannot be denied that, in the integration economy, the development ofguarantee operations in specific, and credit operations in general areindispensable and objective requirement in order to push banking as well asEconomic activities stronger forward So how to improve and promote bankguarantee operations, how to guarantee banks’ safety and avoid risks are the

1 Aniston, S (2004) The history of the bank guarantee operations Retrieved June 8, 2004 from the World Wide Web: www.powerhomebiz.com

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 reallyinterested in and I desire to learn more about it.

Probating at Agribank Operation Centre gives me a good chance to studyabout guarantee activities, which offers me a new and comprehensive insightinto bank operations In the short period of probation at Agribank, one of thetop commercial bank in Vietnam, with the enthusiastic help of Ms HoangGiang and the staffs in the credit department, I have completed this report:

Guarantee Operations at Agribank – Current Situation andRecommendations

2 Aims of the study

2.1 Objectives of the study

theoretical base and the practical factors related to the bank guaranteeoperations.

 Broadening the knowledge of the bank guarantee activitiesparticularly in Agribank and clearing up any misunderstandings of this.

operations’ development

collect information sufficiently, assess information correctly, analyzefigures completely and so on.

2.2 Research questions:

(1) What is the definitions of bank guarantee operations?

(2) What is the functions of guarantee operations in the bank services?(3) How many types of bank guarantee?

(4) What are the determinants of bank guarantee development?(5) What is the overview of guarantee operations at Agribank?

(6) What is about the regulations of guarantee activities at Agribank?(7) What is the current situation of guarantee activities at Agribank?

(8) What are the achievements and weakness of guarantee operations atAgribank?

(9) How to improve the guarantee operations at Agribank?

organizations for developed guarantee operations?

4 Scope of the study

Bank guarantee operations are quite new and complicated in Vietnam somaterials of this subject are not much abundant and available As a result, thestudy just concentrates on guarantee operations of Agribank and Vietnamcommercial banks recently (figures almost of three years 2005-2007) Thethesis focuses on the analysis, evaluation of the basic guarantee operationsfactors mainly at Agribank and suggestions to develop this activity there.

5 Structure of the study

Besides the Contents, Introduction, Conclusion and References, the thesisconsists of 3 chapters

Chapter 1 gives the overview of guarantee operations at commercial banksincluding the general definitions and the definition of Vietnam State Bank, thefunctions and types of bank guarantee operations and the determinant ofguarantee operations’ development

Chapter 2 is the main part of the thesis It is about the current situation ofguarantee activities at Agribank This chapter refers to the overview andgeneral regulations including guarantee types, manners, conditions, fees, filesof application, activity environment and procedures of issuing guarantee at

Agribank After analyzing the qualitative and quantitative indicators ofguarantee activities at Agribank and the central part of chapter 2 reveals theachievements, weakness and causes of the weakness of these activities atAgribank

Chapter 3 gives the solutions to improve guarantee operations at Agribank.The recommendations includes marketing, human solutions, flexible guaranteemechanism, IT applications and other solutions In addition, this chapter alsorefers to some proposals to the government, the state bank, Agribank and theenterprises for the guarantee development.

Chapter 1

OVERVIEW OF GUARANTEE OPERATIONS ATCOMMERCIAL BANKS

1.1 DEFINITION OF BANK GUARANTEE

The more developed the economy is, the larger scale and higher value ofthe international commercial transactions are To avoid and reduce potentialloss, the banks have used various measures such as more legal procedures ondispute settlement promulgation, using mortgage property, and delegating thethird party which is reliable, specialized, well-qualified and well-financialability to guarantee to make up for the loss party Guarantee appears as anobjective, indispensable factor to prevent risks in financial and nonfinancialtransactions.

In term of definition, bank guarantee can be looked at from differentangles.

1.1.1 General definitions

In theory, bank guarantee is a form of signature credit It is a lucrativeactivity without providing capital of a bank In other words, it uses prestige ofthe bank to guarantee somebody's obligation.

With regard to international commerce, bank guarantee is considered to bea foreign trade sponsor form which aims to protect guarantee beneficiary partyfrom loss because of the breach of related partners’ duty.

Besides, there are several definitions of bank guarantee on some popularwebsites.

A commitment made by a bank to a foreign buyer that the bank will pay anexporter for goods shipped if the buyer defaults.1

A bank guarantee is the bank's promise to repay the debt of another personif that person does not pay the debt.2

2 www.investor-info.ca/glossary.asp

An undertaking by a bank to be answerable for payment of a sum of moneyin the event of non performance by the party on whose behalf the guarantee isissued.1

A guarantee from a lending institution ensures that the liabilities of a debtorwill be met In other words, if the debtor fails to settle a debt, the bank will coverit.2

1.1.2 The definition of Vietnam State Bank

According to bank guarantee operations status (enclosed with the decision

Vietnam State Bank.),

“Bank guarantee is committed to paper by credit organization (theguarantor) and the beneficiary The commitment is about the financial dutyperformance on be half of the customer (the principal) when the customer doesnot perform his duty or has done wrongly according to the commitment Thecustomer has to admit and return this loan to the credit organization with theamount 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, creditorganization or financial organization which are generally called bank.guarantee bank must be prestigious, financial-worthy and accepted by thebeneficiary.

The Principal: the party requires customers to open letter of guarantee.According to guarantee status (enclosed with the decision number283/2000/QD-NHNN 14), the principal includes: state-owned enterprises, otherlegal types of enterprise (according to Vietnamese law): co-operative, nonstate-owned enterprises, foreign enterprises joining in join-venture cooperation,credit organization, private-owned business…

2http://www.answers.com/topic/bank-guarantee?cat=biz-fin

The Beneficiary: all organizations or individuals who have legal capacityand 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 isproviding the beneficiary with a guarantee to refund his loss in case of thebreach of contract caused by the principal.

According to statistics in US, only 1% of the total issued guarantee isrequired to pay by the beneficiary1 It reveals that guarantee is a securityinstruments rather a payment one Furthermore, guarantee is used in somecontracts such as work execution contract, product warranty contract andbuilding tender contract They are not sales or payment agreements but only aguarantee for a smooth and safe transaction.

In international trade, the first requirement so that a contract will be signedis the guarantee of banks in different nations Guarantee is only used forsecurity 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 needfinancing to perform The construction company or the exporter may bargain withthe investor or the importer about the amount of money in the form of advancedsum which is guaranteed by a bank Thus, payment guarantee of the bank can bedescribed as a financing instrument so that the construction company and exporterreceive the advanced money from the importer or the building manager.

1.2.3 Guarantee is a supervising and speeding up contract performanceinstrument:

The guarantee payment bases on the breach of contract of the principal Inother words, the beneficiary has the authority to ask for payment when theprincipal breaks the contract in the period of guarantee validity The principalis always under the guarantee refund’s pressure (the rate of guarantee loan ismuch higher than normal rate) if he violates the contract or performs it lately.

1World Bank-Policy Based Guarantees (R99-53), approved April 20, 2004

Guarantee, consequently, has a function of supervising and speeding up theprincipal to perform the contract completely.

Nevertheless, the beneficiary still wants the principal to perform thecontract rather than receives the financial refund from the guarantor Requiringthe guarantor to pay is only the last resort.

(3) The guarantor follows through its commitment to settle the debt for theprincipal in the event of the breach of the contract.

b Indirect guarantee

of guarantee is more convenient for the beneficiary in transaction and gettingmoney back in the event of the A party’s breach of the contract.

Diagram of indirect guarantee: (3)The correspondent bank

(6)

(7) (2) (4) (5)

(1)

which includes guarantee clauses and duration.

bank guarantee.

out financial duty in the event of the contract breach.

money back.

The main guarantee bank

The principal

The beneficiary

(7) The correspondent bank asks the principal to return theguarantee amount.

It depends on the specific conditions to choose the better one: direct orindirect guarantee Remember that the conditions and letter form suitable to thebeneficiary’s bank and the guarantee type can be used flexibly in directguarantee.

c Confirmative guarantee

It is a banking guarantee which issued to the confirmed party by the creditorganization (the confirming party) In case the principal fails to implementcommitted duty with the confirmed party, the guarantee confirming party has tocarry out the guarantee confirmed party’s duty.

d Co-guarantee

In this case, several banks act as guarantees for a customer through a cluebank Co-guarantee is carried out when the guarantee value exceeds the currentguarantee budget or required rate of a bank An individual bank is unable to actas a guarantee so it offers the others to do together The co-guarantee banksoften choose the most prestigious and experienced one to play as the clue bankwhich presides over guarantee issue.

Diagram of co-guarantee:Bank I

(2)

(1) ….…………

(3)

The principalBank II

The beneficiary

(1) The principal and the beneficiary sign an original contractincluding bank guarantee clauses.

(3) The guarantee banks pay to the beneficiary when theircustomer 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 adebt arising under a transaction or over a period of time This type of guaranteeprovides financial security to the beneficiary should the applicant fail to makepayment for the goods or services supplied Such guarantees will invariably runup to the final scheduled date of payment, plus a grace period to allow thebeneficiary 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 percentof the contract value and often called for in support of contract tenders,particularly in international trade situations It gives the employercompensation for additional costs if the party submitting the tender does nottake up the contract and it must be awarded to another party Bid bondnormally submitted with the other documents called for in the invitation totender and remain valid during the period of tender, plus a grace period toallow the beneficiary to make demand.

c Performance bond

Performance bond is the most common form of guarantee and used invariety of situations Normally issued for an amount equal to between 5 and 10percent of the contact value, this guarantee assures payment to the employer inthe event that the contractor fails to fulfill contract obligations This is requiredat 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 inthe 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 providesecurity to another bank to advance money to an individual or company It isoften used when a company does not have any credit record and wishes toexpand offshore This guarantee enables an applicant to secure bankingfacilities for a subsidiary/associate company, or personal account, in othercountries.

1.3.3 In term of payment conditions

a Conditioned guarantee (Guarantee against documents)

Conditioned guarantee requires the third party’s documents confirming thebreach of the principal when the beneficiary asks for payment or otherdocuments proving that the principal clearly fails to follow throughcommitments, for example, winning the contract without executing the work(in bid bond), failing to perform the contract (in performance bond) or to paythe debt to the beneficiary (in payment guarantee).

The beneficiary, however, only needs to make the required guaranteedocuments not the detailed documents of demonstration or description of theprincipal’s breach The third party’s documents and other documents can be anassessing certificate of a dependent assessing company One of the greatestdisadvantages of this guarantee is the beneficiary’s lengthened payment period.The beneficiary can not receive the guarantee amount in case there is anyupheaval L/C is a typical guarantee against documents in which the

It is more advantageous for the principal to use conditioned guaranteebecause it prevents him from the fraud of the beneficiary On the contrary,conditioned guarantee brings no benefit for the beneficiary If the regulationsare not obvious enough it easily causes in dispute in payment procedures, thus,

1 Tien, N V (2006) International Payment International Payment and Foreign Sponsor (pp 15,36-58 Hanoi: Foreign Trade University Press.

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 bankhas to carry out its guarantee duty as soon as the beneficiary asks for withoutdelay provided that the principal’s breach is shown This is also known to bethe unconditional payment order without documents There is, therefore, noway for the bank to shirk its financial duty for its customer.

Unconditioned guarantee is used popularly as its convenience andadvantage for the beneficiary Nevertheless, dishonest beneficiary may leads tofinancial fraud just because compensation is compulsory for the bank when theprincipal violates the contract.

1.4 DETERMINANTS OF GUARANTEE OPERATIONS’ DEVELOPMENT

1.4.1 Bank

a Bank staffs’ skill

Bank staffs are the people who are directly related to the bank guaranteeoperations After transactions, the customers can discover the bank’s workingstyle, whether it is convenient, quick or not It is out of question that the innercharacteristic of the customers is disloyalty If they find the bank’s workingstyle bureaucratic, wordy, slow…they will switch to other banks with betterservices, higher quality, and friendlier staffs The bank’s prestige,consequently, is eroded.

If the staffs are bad at assessment phase of finance situation, business orproduction situation, customers’ prestige, they are unable to evaluate thecustomers’ potential and realize possible risks as well This, therefore, causesin immeasurably severe consequences The assessment staffs need to have far-reaching knowledge because the projects belong to different fields They mightcome up with difficulties in project feasibility assessment should they be awareof these.

b Bank marketing

Standing in a fierce competitive environment, their image is gettinggloomy if they do not assert their selves prestige and position A bankingproduct, in nature, is easily copied A recent invented product may be copiedjust in the twinkling of an eye The latter products are even more complete andpreeminent As a result, if the bank does not pay high-level attention tomarketing development its numerous competitors will attract its potentialcustomers immediately and it will be kicked out of the field Furthermore, bankguarantee is a new service so the customers are not familiar with this product.They may hardy know about its importance, regulations as well as procedures.Thus, the customers’ knowledge can be sufficiently fulfilled throughmarketing They can find out essential information with the help of marketingsuch as interest, guarantee fee, and mortgage assets The far-reaching andpopular development of the bank guarantee, so, depends much on bankmarketing Banks should not hesitate to attach special importance to marketing.Besides the two referred factors, there are many inner factors of a bankwhich influent on guarantee operations development such as:

- Company running capacity of the manager board- Organizational scale and financial situation of the bank- Financial structure

- Banking technology and information system

1.4.2 Customers

a Customers’ financial capacity

Customers’ financial capacity is embodied in their own fund andproduction scale The higher these elements are, the better customers’ financialability is Beside financial ability, the bank is still interested in productionability and capital turnover rate If the financial ability is great, capital turnoverrate is quick the return rate of customers will be high and customer businesscan be expanded Thank to this, credit repayment capacity for the bank shouldbe high.

The customers’ prestige is also a decisive factor of guarantee operationsextension A customer considered creditworthy, still try to cover the debtdespite facing with risks in business The bank, as a result, can not onlyeliminate risks but also maintain the good relationship with its customers.

b Project’s feasibility

The customer must prove that his project (has signed with the third party)is feasible in order to be guaranteed A feasible project should include thesefactors: market demand satisfaction, urgent and necessary performance, theeconomic development orientation suitability and especially lucrativeness In acut-throat competition, many enterprises go bankrupt because they fail tocalculate exact essential capital and forecast the future market fluctuation Thisleads to loss-making situation and consequently, has an adverse impact on thebank activity including guarantee operations.

c Mortgage assets

Bank guaranty operations hold a great deal of substantial risks Mortgageassets are the necessary requirement for banking credit activity as well asguarantee operation Mortgage assets protect the bank against terrible risks andare the driving force to encourage customers to avoid non-fulfillment of thecontract.

Up to different customers, the bank has a particular regulation of mortgageassets so that it fits their business features and the general law.

1.4.3 Environments

a Economic and political environment

It is undeniable that no type of business is out of the surroundingenvironment’s control Economic environment has major implication forcommercial banks’ activities including credit operation In this operations, thebank may encounter significant threat unless they foresee fluctuation ofeconomy.

Influencing directly on customers’ financial strength, economicenvironment causes in success or failure of customers’ business In boomconditions, the customers get profits from their business so they implement the

contract completely This increases profits for the bank while eliminates risks.Thus, the bank can expand its scale including guarantee operation In contrast,in crisis time the bank’s customers are under severe threat of loss Thecustomers will have difficulties in carrying out the contracts In this case, it isthe banks that bear all the risks of financial duty on behalf of its customers.Guarantee operation, hence, is held back from development.

Politics is the matter of all investors’ interest They always want to investon the country with stable politics Thanks to foreign investment, domesticenterprises will do business more effectively This, therefore, creates goodconditions for guarantee activities development Any tiny change in politicalpolicy may have crucial impact on all activities of the bank let alone guaranteeoperations, which causes in loss, prestige erosion in the whole banking system.

b Legal system

Like economic environment, legal environment plays an significant part inbusiness activities of commercial banks It may be driving force or restrainingforce for enterprise development Legal environment, in this thesis, just refersto the law system and legal documents related to banking activities in generaland guarantee operations in particular These activities are pushed strongerforward as long as the law system is progressive, coherent, and complete.Nowadays, law always goes hand in hand with the market mechanism underthe government’s control Almost activities of the economy become chaoticand uncontrollable without a complete law system Law creates a legal corridorso as to promote convenient and effective production Guarantee operations arenot the exception, only when customers implement strictly and clearly can thebank bear fruits from its business activities.

Incomplete law system will pose challenge to the banks in signing andperforming guarantee contracts In fact, banking law in Vietnam now stillremains incomprehensive and weak This leads to low quality of managementactivity of guarantee operations

The regular changes in the government policy also have influence onguarantee activities effect The changes of any industry’s law can be attributed

to negative repayment ability of enterprises; this is not to mention the changesinside the banking law For instance, the sudden changes in export-importpolicy disorder the business activity of enterprises, which prevents theenterprises from selling their product or push them on the edge of bankruptcy.As a consequence, the enterprise is unable to follow through commitment inthe contract and it is the bank that carries out the financial duty on behalf of itscustomers.

Chapter 2

CURRENT SITUATION OF GUARANTEE OPERATIONSAT AGRIBANK

2.1 OVERVIEW OF GUARANTEE ACTIVITIES AT AGRIBANK

2.1.1 General introduction about Agribank

Agribank has a full name: Vietnam Bank for Agriculture and Rural

Development (VBARD) whose predecessor was the Vietnam Agriculture

number 53/HDTB of the President of Minister Community, now is PrimeMinister, in the period of transforming the bank system from grade 1 into grade2 It operates as a state-owned general company model according to the notenumber 90/TTG on 7th March, 1994 of Prime Minister and the regulation

Agribank is the largest commercial bank of Vietnam in term of capital,property, activity network, staffs and customers As of March 2007, it stillmaintains the top position with the total capital of VND267,000 billion, totalbalance of VND239,000 billion and bad debt rate of 1.9% Agribank hasachieved remarkable success to contribute to the national industrialization-modernization stage and was offered the title: “Hero of Labor in the NewAge”2

2http://www.mofa.gov.vn/en/nr040807104143/nr040807105039/ns071002085235

In the process of international integration, with the signatory VN-US tradepact, AFTA participation and WTO membership, all the foreign banks haverights to carry out full duties as other Vietnam banks in following years Itenhances opportunities as well as challenges for Vietnam commercial banksincluding Agribank Hence, they need crucial reforms to sharpen thecompetitiveness so as to consolidate its position.

2.1.2 The orientation of guarantee operations at Agribank

Thus, it should promote the quality of its services; extend operation fields byperforming some new services as following:

procedures, applying IT and giving a priority to bank security.

forward to hold traditional customer and attract more new.

technique for an accurate and prompt service.

 Train and manage the bank staff, attach importance onfostering guarantee knowledge for them.

Base on overall target, the specific targets for guarantee in 2007 are:

2.2 GENERAL REGULATIONS OF GUARATEE OPERATIONS AT AGRIBANK

2.2.1 Types of guarantee

- Guarantee for domestic loan - Guarantee for foreign loan

1Hai, L.V (2007) Golden stars in Vietnam Labor, 3-4.

 Guarantee for product quality

2.2.2 Manners of guaranty

basis of counter-guaranty of other credit institutions.

2.2.3 Terms and Conditions

 The customer shall have legally civil competence, civilbehaviour and civil obligation in accordance with laws;

 Having creditworthiness in credit, guaranty and paymentrelations with Agribank

line with requirements of Agribank

manufacture/business plan

of laws on commercial papers

of the law on management and repayment of foreign loan

allowed to invest, to do business or to bid in Vietnam in accordancewith Vietnamese laws

2.2.4 Fees of guarantee

The fees shall be agreed by both parties, the maximum shall not exceed 2%per year over guaranteed amount, and the minimum is VND 300.000.1 Inaddition, some other reasonable fees related to guarantee Issuance shall be paidunder the written agreement between the two parties.

2.2.5 Files of application for guarantee

Files of Application for guaranty of the customer may include:

a For legal entity, incorporate, private enterprise:

* Legal documents

Notarized photocopies of documents proving the legal status:- Legal decision on the establishment of the institution.- Enterprise Charter (Except for private sector enterprise).

- Decision of Appointment of General Director (Director); ChiefAccountant or Director of Accounting Department or Accountant of theorganization; Or Decision of Recognition of Board of Management, Director ofthe Co-operatives.

- Business registration certificate

- Operation license (If the law requires)

- Investment License (For foreign invested enterprises only)

- Record on capital contribution contract; List of founding members ofenterprise, (company limited, joint-venture, incorporate…)

- Accounting procedures as stipulated in AGRIBANK Guideline:submitting sample documents of the enterprise’s stamp and account holder orauthorized person(s) signature(s); Letter introducing the transacting staff’sname, ID number, signature…, Registration form of opening deposit account(if not yet)

Apart from those above mentioned, other documents concerning Requestfor guarantee issuance are required (if any and vary depend on kinds ofguarantee):

1http://agribank.com.vn/Agribank/eServices/ServiceDetails.aspx?CatId=9&Service=true

- Guarantee for bidding: Invitation for bid; Complete Set of biddingDocuments.

- Guarantee product quality: agreement on product quality.

- Guarantee for performance bond: Contract made between tender callerand the bidding winner.

- Guarantee for domestic loan: Contract for loans borrowing (Originalcopy).

- Guarantee for foreign loan: Projects with investment time over 12 monthsneed to be approved by the relevant authorities, Documents allowingborrowing and making payment (Limitation and Conditions) for foreign loan ofthe SBV in accordance with existing laws on Management of foreign loans andrepayment, Contract for loans borrowing (Original copy in accordance withuniversally-recognized customs and procedures; Decree on EconomicContract).

* Other related documents:

- Request for Guarantee Issuance (In form).

- Security documents or deposit for guarantee issuance.

b For individual business, collectives

* Legal documents:

- Personal Identification of individual or residency file (notarized copy).- Business Certificate.

- Cooperation Contract (For co-operatives only).

- Authorized Representative in transactions with AGRIBANK.

* Related documents:

- Request for Guarantee Issuance (In form).

- Effective & feasible investment projects, manufacture/business plan;(Guarantee for loans borrowing).

- Security documents or deposit for guarantee issuance.

Documents concerning Request for guarantee issuance (if any and varydepend on kinds of guarantee)

2.2.6 Activity environment of guarantee operations at Agribank

a Legal foundation

The legal documents regulate and instruct the implementation of guaranteeoperations at Agribank:

- Decision of the governor of the state bank number

operation status This status assigns the implementation of guaranteeoperation between the credit organization and its customers.

- Decision of the governor of the state bank number NHNN on April 11st 2001 on changes and supplement of some clausesin the bank guarantee operation status enclosed with decision number283/2000/QD-NHNN14.

386/2001/QD Decision of the governor of the state bank number

of some clauses in the bank guarantee operation status enclosed withdecision number 283/2000/QD-NHNN14.

- Decision of the directors board number 09/QD-HDQT-05 onJanuary 18th 2001 on “promulgation of instruction in guaranteeoperation in the Agribank system.”

- Decision of the directors board number 398/QD-HDQT-TD onMay 02nd 2007 on changes and supplement of some clauses in thedecision number 09/QD-HDQT-05.

- Regulations of organization and activities of Agribank enclosed

b Guarantee fund, guarantee level and mortgage assets

Based on the usable capital in business, Agribank anticipates the amount ofmoney in its guarantee fund The total guarantee level is calculated basing onthe guarantee fund projection and the capital’s safety rate in guarantee (but notexceed 20 times of guarantee fund projection.) The guarantee fund is entered inthe separated account with the minimum rate at 5% of the total guarantee

revenue It is used to pay the beneficiary in the event of non performance by

the party on whose behalf the guarantee is issued.

Given the customers’ production situation, financial capacity, prestige…the Agribank managers can choose the method for security such as guaranteedeposit, and mortgage However, the guarantee deposit plus mortgage assetsmust be more valuable than guarantee money.

2.2.7 Orders and procedures of issuing guarantee at Agribank

2007, the guarantee issue process must have the participation of three grades:credit staffs, head of credit department and the manager of Agribank’sbranches.

- After receiving the manager or director-general’s decisions: + draw up a document to inform the customer of the bank’sdecision (accept guarantee or not), then present to the manager forsigning and send to the customer at last.

+ draw up guarantee letter (or indirect guarantee later in caseAgribank plays as a correspondent bank), or guarantee contract and acontract of guarantee security, then present for signing.

+ give one guarantee engagement to the guarantor and the other tothe customer according to agreement in the contract Give a guaranteefile (including above referred documents) to the secretary after theguarantee engagement has been signed.

- Keep the guarantee file according to Agribank’s current

- Supervise and speed up the duty implementation of the customeraccording to the related guarantee contract Propose appropriatemeasures to deal with problems if happened Follow through the creditmanager and manager-general’ measures.

b Head of credit department (or business department)

- Check all the guarantee proposal file and assessment report of thecredit staffs; write the idea clearly on the assessment report (for oragainst guarantee issue) Assess directly if necessary.

- Examine the content of draft guarantee letter, guarantee contract,guarantee issue contract and the contract of guarantee security, whetherthey fit current guarantee regulations of Agribank or not.

- Present to the manager-general for signing (if acceptable) or askthe credit staffs for changes and supplements to complete thedocuments.

- Supervise and speed up the duty implementation of the customertogether with credit staffs, propose measures if needed.

- Be responsible for every tasks and content implemented.

c Manager-general of Agribank’s branch

- Examine the draft guarantee file made by credit staffs and creditmanager (or business manager) and decide whether to issue guarantee ornot.

- Sign the guarantee letter, guarantee contract, contract ofguarantee security if agree.

- In case the Agribank branch manager can not decide because itexceeds his authority, he should draw up a statement and transfer allrelated documents (the signed and sealed copy ones.)

- Direct the staffs to implement approved guarantee.

- Follow through instructions and requirements of Agribankmanager-general about the signed guarantee.

- Supervise and speed up the customers’ implements together withthe credit manager and staffs.

- Be responsible for all decisions.

2.3 CURRENT SITUATION OF GUARANTEE OPERATIONS AT AGRIBANK

Operation Centre is a unit directly under Agribank Inheriting andpromoting the Agribank’s strength, it can implement a new service of modernbank so as to satisfy the economy’s demand and the bank service’s productdiversification demand Guarantee operations not only bring profit but alsoincreases prestige and boosts other business activities Agribank.

Agribank has lately promulgated “Bank Guarantee regulations in Agribank

2007.) This promulgation actually paves the way for performing guaranteeduty, simplifying the guarantee procedure, contributing to the bank’s income.

Despite these noticeable achievements, guarantee operations have notbecome a flexible instrument Operation Centre has not fully capitalized onitself potentiality or satisfied the guarantee demand of customers To give anoverall picture of current situation of guarantee operation at Agribank, figuresof three latest years 2005, 2006, 2007 and some evaluation will be shown.Current situation of concerned matter is reflected through both qualitativeindicators and quantitative indicators.

2.3.1 Qualitative indicators

Qualitative indicators refer to Agribank ability to satisfy customers’demand and attract customers Because bank customers come from diversified

industries, their demands of guarantee are different in type, rate and so on Thebank should pay special attention to satisfy all customers Capacity ofsatisfying and attracting customers is manifested in reasonable fee, lowoperation cost, safety rate, convenient procedures, various guarantee type Infact, Agribank has partially recognized this Customers doing transaction atAgribank are instructed enthusiastically by friendly staffs Procedures ofguarantee offer, so, are implemented quickly and smoothly Furthermore,competitive cost is another selling point.

Besides, qualitative indicators also consist of the bank’s prestige If a bankis successful in building up reputation to customers it lays the ground for notonly maintaining loyal customers but also attracting more new ones Thank toincreasing prestige, the number of customers doing transaction with Agribankincluding guarantee grows considerably Therefore, guarantee debit balance,revenue and profit from the operations rise significantly Quantitativeindicators will prove this growth.

2.3.2 Quantitative indicators

a Guarantee debit balance in the years

Guarantee debit balance reflects the number of guarantee arising throughyears It is of key important to evaluate the guarantee development Ifguarantee debit balance is high through years it means guarantee has increasedin quantity However, it does not mean that the bigger this figure is the betterguarantee situation of the bank is If the guarantee debit balance in a year isextremely high but almost of these guarantee are risky the bank is highly likelyto pay the debt for customers In this case, guarantee operations at the bank cannot be considered developed Only when the guarantee debit balance increasesregularly with valuable and safe guarantee does guarantee activity grow.

Guarantee is new operations in Vietnam commercial banks not apart fromAgribank It, thus, accounts for just a tiny fraction of the bank transaction.Nevertheless, this operation grows more and more through years Thefollowing table shows its development to some extent.

Table 1

Unit: million VND

Targets

(Source: Guarantee activities report of Credit Department, Operation Centre)

The table shows that the Guarantee balance grows rapidly and thefollowing year’s increases more considerably than the year before This is thegood signal for the bank indeed In 2005, guarantee balance is just a smallproportion of VND 27,170 million The 2006’s rises sharply and surprisinglybecause Agribank entered into a major guarantee contract with Vinashin worthUSD 2,998,957.5 This number more than doubles the year before with thepositive number of VND 40,782 million It is one of the typical examples of theattraction of guarantee activity at Agribank.

The increase of guarantee debit balance is shown more clearly in thefollowing chart:

Chart 1: Guarantee Debit Balance through Years

VND trillion

In 2007, the balance continues being positive with the increase in guaranteebalance of VND 26,521 million A very great guarantee contract has beensigned, which results in growth number of guarantee balance in this year It isthe guarantee contract between Agribank and Vietnam Machinery InstallationCorporation The guarantee balance amounts to VND 48,097,381 million It isan unprecedented giant of guarantee at Agribank Objective reasons of this riseinclude the comprehensive government import-export policy and WTO fullmember position of Vietnam It can not be denied that joining WTO has pavedthe way for Vietnam economy development especially investment activity andbanking system There are a lot of foreign investors in Vietnam and guaranteeactivity of the bank, thank to this, is expanded Moreover, the sound leadershipof the bank manager board still contributes to this growth.

b Guarantee turnover:

When the bank follows through the guarantee commitment, a customer hasto pay guarantee cost at a given rate out of the total guarantee surplus And thebank must not pay any other service cost.

Guarantee turnover reflects profitability of guarantee operations From thisfigure guarantee revenue out of the total revenue of all bank services is inferredand this is the reason why guarantee turnover reveals the position of guaranteeoperations in the bank system.

Here is the turnover of guarantee activities in 3 year: 2005, 2006 and 2007.

Table 2

Unit: Million VND Year

Targets

(Source: Guarantee Activities report of the Credit Department)

From this table we can see the turnover of guarantee operations atAgribank increases/decreases irregularly in the 3 years The contribution of theguarantee operation turnover to the total bank turnover only occupies a smallshare In 2005, the guarantee turnover of Agribank is quite high (VND 644million) and makes up 4, 11% of all services turnover However, in 2006 theguarantee turnover decreases steadily (VND 273 million) while total servicesturnover of Agribank increases at VND 20,532 million, greater than 2007’sVND 4859 million This leads to rapid decline (2, 29%) in guarantee turnoverrate out of the total

It seems to be contradictory with the Table 1 because the guarantee balancein 2006 even more than doubles the number in 2005 In fact, the reason is notso complicated The guarantee balance in 2006 is bigger than in 2005 becauseAgribank signed more valuable guarantee contracts, but their due date are in2008 and the bank has not collect these fees Consequently, the guaranteerevenue in 2006 is negligible against the total one The situation is getting more

optimistic in 2007 The guarantee turnover nearly doubles the year before; thisis not to mention a huge guarantee contract with Vietnam MachineryInstallation Corporation (VND 48 trillion) with the due date till 2009 Togetherwith guarantee turnover, the bank total services turnover rises significantly(>VND 10 trillion the year before.) The guarantee turnover rate, thus, onlygrows 0, 62% against 2006 and is still 1, 67% lower than 2005

In summary, guarantee turnover at Agribank through 3 latest years onlyoccupies a tiny share compared with the other services’ because guaranteeoperations are less well-known than other traditional services like credit andpayment The market demand for this service still remains limited Itsimportance has not been attached so the fluctuation of guarantee improvementis indispensable The guarantee turnover fluctuation through years is shedbrighter light into in the chart below.

Chart 2: Guarantee turnover against total