Banking Industry for Bank Guarantees from POME by Gautam KOppala

Author: GAUTAM KOPPALA
Banking Industry for Bank Guarantees:

Definition of a Bank:

The definition of a bank varies from country to country.

Under English law, a bank is defined as a person who carries on the business of banking, which is specified as:

• conducting current accounts for customers
• paying cheques drawn on a given person, and
• collecting cheques for their customers.

Examples of statutory definitions:

• "banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act; (Banking Act (Singapore), Section 2, Interpretation).

• "banking business" means the business of either or both of the following:

1. receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than [3 months] ... or with a period of call or notice of less than that period;
2. paying or collecting cheques drawn by or paid in by customers[2]

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit, direct debit and internet banking, the cheque has lost its primacy in most banking systems as a payment instrument. This has lead legal theorists to suggest that the cheque based definition should be broadened to include financial institutions that conduct current accounts for customers and enable customers to pay and be paid by third parties, even if they do not pay and collect cheques.

Wider commercial role

However the commercial role of banks in Projects is wider than banking, and includes:

• issue of banknotes (promissory notes issued by a banker and payable to bearer on demand)
• processing of payments by way of telegraphic transfer, EFTPOS, internet banking or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by way of overdraft, installment loan or otherwise
• providing documentary and standby letters of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• currency exchange
• sale, distribution or brokerage, with or without advice, of insurance, unit trusts and similar financial products as a 'financial supermarket'

Law of banking

Banking law is based on a contractual analysis of the relationship between the bank and the customer. The definition of bank is given above, and the definition of customer is any person for whom the bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

1. The bank account balance is the financial position between the bank and the customer, when the account is in credit, the bank owes the balance to the customer, when the account is overdrawn, the customer owes the balance to the bank.
2. The bank engages to pay the customer's cheques up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account without a mandate from the customer, e.g. a cheque drawn by the customer.
4. The bank engages to promptly collect the cheques deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account.
5. The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship.
6. The bank has a lien on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank.
7. The bank must not disclose the details of the transactions going through the customer's account unless the customer consents, there is a public duty to disclose, the bank's interests require it, or under compulsion of law.
8. The bank must not close a customer's account without reasonable notice to the customer, because cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force in the jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.

Types of investment banks

• Investment banks "underwrite" (guarantee the sale of) stock and bond issues for the Projects, trade for their own accounts, make markets, and advise corporations on capital markets activities such as mergers and acquisitions.
• Merchant banks were traditionally banks which engaged in trade financing. The modern definition, however, refers to banks which provide capital to firms in the form of shares rather than loans..

Both Combined:

• Universal banks, more commonly known as a fnancial services company, engage in several of these activities. For example, first bank (a very large bank) is involved in commercial and retail lending, and its subsidiaries in tax-havens offer offshore banking services to customers in other countries. Other large financial institutions are similarly diversified and engage in multiple activities. In Europe and Asia, big banks are very diversified groups that, among other services, also distribute insurance, hence the term bancassurance is the term used to describe the sale of insurance products in a bank. The word is a combination of "banque or bank" and "assurance" signifying that both banking and insurance are provided by the same corporate entity.

THE BANKING LIASON TO PROJECTS SECTOR

 

Account party:

The party which addresses the bank for the issue of a letter of credit , e.g. the account party can be an importer, a buyer, a construction contractor or a supplier bidding on a contract.

Interbank Offered Rate (IBOR):

Also known as the interbank rate, this is the interest rate applied on short term loans between banks and which serves as a reference rate for other types of loans, including buyer credit or supplier credit. The interest rate terms are calculated daily and determined according to the length of and currency of the loan. A number of financial centres offer an IBOR, including London (LIBOR), Paris (PIBOR), Singapore (SIBOR), Zurich (ZIBOR), etc. The US Federal Funds Rate is also an example of an interbank rate.

 

Guarantee credit:

A bank credit not involving the actual provision of funds by the bank, but rather the bank's assumption of liabilities or obligations on behalf of its customers, e.g. bill guarantee, acceptance or surety credit.

 

Interbank market:

A market where banks borrow and lend to each other, usually for very short-term periods.

 

Interbank transactions:

Foreign exchange or lending transactions between banks as opposed to transactions between banks and non-bank clients.

Interest arbitrage:

A type of artbitrage consisting of investment in interest-bearing instruments in different currencies, with the aim of earning a profit by taking advantage of existing or expected interest rate and exchange rate differentials.

Interest charge:

Interested charged i.e. negative interest.

Interest during construction (IDC), Pre-commissioning interest:

Interest on loans accruing during the performance of the supply contract, which are in general capitalized and added to the principal amount outstanding

 

Interest make-up agreement (IMU):

An arrangement involving an export credit agency or an EXIMBANK whereby these make possible the granting of a concessional fixed rate loan to support exporters.

Interest rate:

(1) The rate at which interest is due on any obligation, or is paid on interest bearing assets.

 

 

Interest Rate Coverage:

Coverage against adverse fluctuations in interest rates

 

Interest rate differential:

The spread between two different facilities or between spot and forward rates. (An indicator of future changes in the spot exchange rate).

Interest Rate Equalization: Subsidization :Make-up.

A service offered by Export Credit Agencies or EXIMBANKS providing commercial banks with the difference between the subsidized rate payable on the bank's ECA supported loan and the bank's market cost of funds, plus an agreed interest spread.

Intermediation:

An activity performed by banks and other financial institutions, aimed at matching the financial needs of certain companies with the financial surpluses of other companies. Banks can purchase direct claims from deficit units, while issuing secondary claims to depositors. Opposite: disintermediation.

 

Intermediate consignee:

The bank, forwarding agent or other intermediary, acting as agent in the foreign country on behalf of the exporter, purchaser or ultimate consignee, charged with the delivery of the exported merchandise to the ultimate consignee.

Investment bank: Merchant banks.

A financial intermediary specialised in offering a variety of services, such as acting as a broker in share and bond deals, underwriting new security issues, facilitating mergers and other corporate reorganizations, providing long-term loans and/or equity capital, etc., rather than in lending out its own funds. More specifically, the term refers to US banks like Merrill Lynch, Goldman Sachs and Salomon Brothers which underwrite and deal in securities and do not take deposits directly from the public.

Investment Fund:

A holding company usually managed by an investment banker which collects savings from investors to be used to acquire participation in agreed sectors and countries.

 

Investment paper:

Securities which are particularly suitable for long term investments.

Investment risk guarantee:

A guarantee scheme, usually government-operated, covering part of the risks connected with investments abroad.

Invisibles/Invisible trade:

Non-merchandise trade, including transport services (freight, shipping, etc.), most types of services (banking, insurance, tourism etc.) and investment.

Issuing bank:

A bank which opens a letter of credit, thereby assuming the obligation to pay the beneficiary or the correspondent bank if the documents presented are in accordance with the terms of the letters of credit.

Advising bank:

Also known as the notifying bank. This is the bank operating in the exporter's country which handles letter of credit on behalf of the foreign bank, by notifying the exporter that the credit has been opened in his favour and informing him of the terms and conditions of the letter of credit. It does not necessarily have responsibility for payment.

Term loan:

A business loan with a final maturity of more than one year, payable according to a specified schedule.

Tied aid credit:

This refers to the practice of providing a grant and/or a concessional loan, either alone or combined with an export credit, which is linked to an export sale from the donor country.

Tied loan:

A loan made by a government agency whereby the foreign borrower is required to spend the related financial resources in the lender's country.

 

Authorized bank:

A bank allowed by a country's public authorities to process the decentralized payment transfers.

Aval:

A form of guarantee, generally given by a commercial bank, on a negotiable instrument. An aval is usually an unconditional guarantee of payment and is not affected by the terms of the underlying transaction. Avals are recognized only in certain countries (mainly European), though usually not in countries with an Anglo-Saxon legal base.

Bank(er's) Acceptance; Bank bill:

A draft or bill of exchange whose acceptor is a bank.

 

Bank commission:

A bank charge for special services (credit commission) or for risk coverage, added to the interest on loans extended to its clients.

 

Bank discount rate:

The rate at which a bank discounts notes. A rate quoted on a discount basis understates bond equivalent yield. This difference must be calculated when comparing the return on yields on a discount basis and equivalent coupon securities.

Bank draft:

An international transfer of funds through an instrument very similar to a cheque.

 

Bank for International Settlements (BIS):

An international bank based in Basel, Switzerland, serving as a forum for monetary co-operation between several European central banks, the Bank of Japan and the U.S. Federal Reserve System.

 

Bank guarantee:

A guarantee, issued by the bank of the foreign purchaser, to pay the seller/exporter up to an agreed percentage of the value of the goods shipped in case of default by the purchaser.

Bank-issued medium-term note:

A medium-term certificate of indebtedness, issued by a bank on demand, with maturities ranging between 2 to 8 years.

 

Bank release:

A negotiable time draft drawn on and accepted by a bank, which adds its credit and standing to that of the importer.

Banker's Bank:

A bank established by consent by independent and unaffiliated banks as a clearing house for financial transactions.

Banker's draft:

This is an order from a buyer/importer to his bank to make a payment to the bank of the seller/exporter.

Balance

the difference between credits and debits in an account.

bank charges

money paid to a bank for the bank's services etc

branch

local office or bureau of a bank

checkbookUS

book containing detachable checks; chequebookUK

checkUS

written order to a bank to pay the stated sum from one's account; chequeUK

credit

money in a bank a/c; sum added to a bank a/c; money lent by a bank

credit card

(plastic) card from a bank authorising the purchasing of goods on credit

current account

bank a/c from which money may be drawn at any time; checking accountUS

debit

a sum deducted from a bank account, as for a cheque

deposit account

bank a/c on which interest is paid; savings accountUS

fill inUK

to add written information to a document to make it complete; to fill outUS

interest

money paid for the use of money lent - interest rate n.

loan

money lent by a bank etc and that must be repaid with interest.

overdraft

deficit in a bank account caused by withdrawing more money than is paid in

pay in

to deposit or put money in to a bank account

payee

person to whom money is paid

paying-in slip

small document recording money that you pay in to a bank account

standing order

an instruction to a bank to make regular payments

statement

a record of transactions in a bank account

withdraw

to take money out of a bank account - withdrawal n.

Gautam  Koppala,

POME Author

 

Article Source: http://www.articlesbase.com/entrepreneurship-articles/banking-industry-for-bank-guarantees-from-pome-by-gautam-koppala-3033847.html

About the Author

GAUTAM KOPPALA, With over   a decade, track record of successful leadership, excellent results through strategic skills in driving revenue and profit growth. Demonstrated ability to identify and trouble shoot critical issues impacting productivity, cost, distribution, marketing, Strategic positioning, sales and financial operations, with innate ability to build and maintain strong client relationships in operations. Expert in distilling and managing processes, enhancing internal structures, and promoting multi-skilled team competencies via nurturing mentorship and inspirational leadership. Engagements have spanned operational, strategic, technological and change management roles. Academically, I am a cum laude graduate with a Bachelor of Technology degree in Electrical and Electronics Engineering (B-Tech E.E.E.) and a post graduate in Masters in Human Resources Management (M.H.R.M.) and Masters of Foreign Trade (M.F.T.). As you will see my Post Graduation's were been studied part-time, as well as working full-time as an Engineer. I feel that this demonstrates my ability to maintain dedication, motivation and enthusiasm for a project management over a long period of time. In addition, balancing full-time work with study has perfected my time-management and organizational skills. I believe that my college degrees and gamut certifications in combination with my extensive broad-based work experience along with my drive, resourcefulness and determination, would make me an excellent candidate for a senior management position with any company. Highlights of my background include Operations related Commercial, Supply chain, Sales with a magnificent experience in Project management, technically oriented towards Automation and Security Systems in Industrial and Building sectors. Presently, writing a book on Projects and Operations Management (comprise of 12 volumes, 6K pages), and awaited for the reputed publications. These books can be checked in Google books and other search engines too.