BANK GUARANTEES HARASS FIRMS
There is hardly a more unpleasant surprise for a businessman than to learn that the bank has changed the rules for work with his firm. The more so if that change does not make operation easier and even creates hindrances that could result in loss of clients and markets. Such an unpleasant surprise befell some of the big construction contractors and suppliers of computers and software. In front of a reporter of the BANKER weekly businessmen complained that as of the beginning of 2004 the banks which service them had changed the terms under which they give them guarantees for participation in public procurement tenders. By the end of 2003 there was no problem for businessmen to get such a document, which used to be quickly issued when demanded, and the firm secured the guarantee by money from its deposits. They estimate that procedure as quick and convenient, as no large volume of documentation was necessary. However, the scheme has been amended and the entrepreneurs learn that the bank which services them insists when giving them guarantees to sign with them a contract for a credit, entering into effect when the guarantee is activated. According to the businessmen, this leads to more complicated and expensive procedure when getting guarantees. Moreover, a large number of documents have to be filled in, additional fees and taxes are charged, and a longer period of time is needed for the approval of guarantees. All these things render the companies' operation more difficult. These additional requirements caused indignation on the part of firms' heads. Prior making whatever analysis of the new problem connected with the bank guarantees, it should be noted that the business and the banks are usuallyon the opposite sides of the barricadeBanks try to get better proceeds from servicing their clients' money, while firms and citizens try to get the bank's services at lower prices. Getting and respectively extending guarantees is one of the most frequent operations on the Bulgarian financial market. Firms need them for various purposes, e.g. foreign-trade deals, participation in privatisation, in tenders and competitions for public procurement in the spheres of construction, supply of raw materials, machines, equipment, technologies, etc.According to BNB data, in end-March 2004 the aggregate amount of off-balance bank liabilities, where given guarantees are written as well, exceeded BGN2.8BN. The most active credit institutions in these operations were: BULBANK, whose off-balance liabilities totalled BGN559.7MN in end-March; HBV Bank Biochim, which extended guarantees worth BGN326.4MN; Raiffeisenbank (Bulgaria), with off-balance liabilities of BGN241.5MN; First Investment Bank (FIB), which gave guarantees for BGN182.3MN, and United Bulgarian Bank (UBB), whose off-balance assets totalled BGN148.7MN. What is a bank guarantee?This is a kind of a credit commitment undertaken by a bank to a certain firm or institution, promising that it will pay instead of the client if the agreed commodity is not delivered or the negotiated service is not rendered. In case things come to cashing the guarantee, the bank should get its money back from the client for whom it has undertaken the respective commitment. The options are two: it can either draw the due amount from its deposits, or sign a credit contract, repayable by the client. For those who are interested in the technology of accounting itself we'll specify that in this case the off-balance liabilities of the bank automatically become assets. Of course, the described scheme is quite simplified and concerns the most elementary cases of extending bank guarantees. But there are complex foreign-trade deals in which several firms and banks participate, and when back bonds are exchanged. This is quite an intricate operation. When accepting orders for construction of vessels, for instance, the clients of shipyards demand guarantees for good and timely fulfilment, and the ship-builders on their part insist for guarantees that they will be paid in time. In these cases the banks servicing the parties in the deal exchange the so-called back bonds, and their preparation is not a simple job. Such deals are real financial aerobatics and the companies which effect them have highly-qualified financial managers.The rules for extending guaranteesare usually the same for most of the big banks. If the client has a deposit with the respective financial institution and demands a guarantee whose amount exceeds the money on its account, it is issued, but the money on the deposit is blocked as a security. In most banks the client only signs a contract for immediate cashing, so that the credit institution could right away get its money from the client's deposit if it is forced to pay the guarantee.As of the spring of 2004, however, HBV Bank Biochim has introduced a requirement for firms demanding bank guarantees to sign a contract for pledging the deposit in favour of the bank. The decision was made on the insistence of risk managers of Bank Austria, which purchased 99% of the Bulgarian credit institution's shares in October 2002. The logics of the recently introduced changes is as follows: tax authorities may find a deficit in the accounts of the company that gets the guarantee, and if they get a writ of execution against it they could block its bank deposits by a court ruling and draw the money from them. In such a case the bank will be left without a security and no money will be left for it in if it has to pay the guarantee. No such a danger exists when a contract for pledging the deposit in favour of the bank is signed, because the pledged assets (the money on the deposit) are at the disposal of the issuer of the guarantee for the period when it is valid. The new requirement, however, forces businessmen to sign additional documents, such as a contract for pledge, and they do not like it at all. The guarantee could be also extended without pledging the money on the deposit as a security. In that casethe client signs a credit contractwith the bank that has issued the guarantee. As we have already said, it enters into effect when the financial institution pays the guarantee and the firm has to return the money the bank has spent. The credit contract can be secured by commodities, or mortgages, or by putting the entire enterprise in pledge. In that case, however, the guarantee has to be approved by a credit committee. This is quite a complex procedure and requires much more time. In order to avoid such inconveniences, most of the big banks have introduced special terms for their big corporate clients. When closing a contract for servicing a corporate client we set him a limit for financing, which the bank is ready to extend. This limit is approved by a credit council and depends on the client's solvency, appraised by our risk managers. Individual amounts are set for credits, bank guarantees, letters of credit, etc. The client may use any of these services at any time, but to the amount set by the bank, Stiliyan Vutev, CEO of UBB explained. In his words, the quarterly fees charged by the bank for extending guarantees are within 0.2%-2% and depend on the size of the guarantee and the security for it, as well as on the client's solvency. If Craft Jacobs Suchard demands from BULBANK a guarantee for import of cocoa we'll extend it without whatever formalities, because the company has undeniable reputation and extremely good financial indicators. But if a firm we do not know applies to us, demanding a guarantee for import of sneakers, we'll certainly demand from it maximally high security, as there is a great risk that it might not be able to pay for the imported goods, the taxes or customs duties. These are the laws of business, Levon Hampartsoumyan, Chairman of BULBANK's Management Board explained.It is true that banks should be seeking maximum protection of the money they manage, as it is not theirs but of citizens and companies which have entrusted it to them. This protection, however, should not be at the expense of aggravating the terms for prompt businessmen, independent if they are big corporate clients or small sole traders. Otherwise, criticism that banks are blood-suckers will never stop. The problem regarding the clumsy procedures for extending credits might be settled by the establishment of an unified register of companies which have already used that bank service. It will be clear from it who has been prompt to bank and who hasn't. Then, trustworthy businessmen will be getting the necessary guarantees without much formalities.