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ACKNOWLEDGEMENTS
Actually the thesis is the process of my collecting information, choosing data,
analyzing figures and especially asking for valuable helps of many people. I
could not have finished my thesis without the great support and guidance of my
supervisor, Ms. Nguyen Hoang Giang. Therefore, I would like to give my
warmest thanks to her.
I would like to express my deep gratitude to Mr. Ngo Xuan Quang, the credit
staff of the credit department at Agribank, who spent much time explaining,
suggesting, and providing me with valuable information. I also would like to
give 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 the thesis.
Last but not least, I wish to pay tribute to my friends and relatives, who gave me
encouragement to overcome many obstacles during writing process.
Despite my own effort and others the thesis unavoidably contains errors and
limitation because of time limit and my inexperience. I am really willing to
receive constructive comments and contributions from the readers.
Tran Thi Hoai Thu
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INTRODUCTION
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1. Rationale
Becoming the full member of WTO marks a mile-stone for Vietnam in its
transitional period of economy, which creates a great deal of unprecedented
opportunities and major challenges for the domestic economy. To overcome the
difficulties, a smooth and quick capital turnover especially bank credit capital is
necessary. By covering some of the risks that the market is not able to bear or
adequately evaluate, the bank guarantee can attract new sources of finance,
reduce financing costs, and extend maturities. Guarantee operations, therefore, is

about guarantee activities, which offers me a new and comprehensive insight
into bank operations. In the short period of probation at Agribank, one of the
top commercial bank in Vietnam, with the enthusiastic help of Ms Hoang
Giang and the staffs in the credit department, I have completed this report:
Guarantee Operations at Agribank – Current Situation and
Recommendations
2. Aims of the study
2.1 Objectives of the study
• Sharing ideas of guarantee operations and analyzing the
theoretical base and the practical factors related to the bank
guarantee operations.
• Broadening the knowledge of the bank guarantee activities
particularly in Agribank and clearing up any misunderstandings
of this.
• Suggesting some measures to improve the bank guarantee
operations’ development
• Improving the skills of research, for example, learning how to
collect information sufficiently, assess information correctly,
analyze figures 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?
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(8) What are the achievements and weakness of guarantee operations at

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Agribank. After analyzing the qualitative and quantitative indicators of guarantee
activities at Agribank and the central part of chapter 2 reveals the achievements,
weakness and causes of the weakness of these activities at Agribank.
C hapter 3 gives the solutions to improve guarantee operations at Agribank.
The recommendations includes marketing, human solutions, flexible guarantee
mechanism, IT applications and other solutions. In addition, this chapter also
refers to some proposals to the government, the state bank, Agribank and the
enterprises for the guarantee development.
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Chapter 1
OVERVIEW OF GUARANTEE OPERATIONS AT
COMMERCIAL BANKS
1.1. DEFINITION OF BANK GUARANTEE
The more developed the economy is, the larger scale and higher value of the
international commercial transactions are. To avoid and reduce potential loss, the
banks have used various measures such as more legal procedures on dispute
settlement promulgation, using mortgage property, and delegating the third party
which is reliable, specialized, well-qualified and well-financial ability to
guarantee to make up for the loss party. Guarantee appears as an objective,
indispensable factor to prevent risks in financial and nonfinancial transactions.
In term of definition, bank guarantee can be looked at from different angles.
1.1.1. General definitions
In theory, bank guarantee is a form of signature credit. It is a lucrative
activity without providing capital of a bank. In other words, it uses prestige of
the bank to guarantee somebody's obligation.
With regard to international commerce, bank guarantee is considered to be a
foreign trade sponsor form which aims to protect guarantee beneficiary party

performance on be half of the customer (the principal) when the customer does
not perform his duty or has done wrongly according to the commitment. The
customer has to admit and return this loan to the credit organization with the
amount 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, credit
organization or financial organization which are generally called bank. guarantee
bank must be prestigious, financial-worthy and accepted by the beneficiary.
The Principal: the party requires customers to open letter of guarantee.
According to guarantee status (enclosed with the decision number 283/2000/QD-
NHNN 14), the principal includes: state-owned enterprises, other legal types of
enterprise (according to Vietnamese law): co-operative, nonstate-owned
enterprises, foreign enterprises joining in join-venture cooperation, credit
organization, private-owned business…
The Beneficiary: all organizations or individuals who have legal capacity
and civil capacity. The beneficiary enjoys benefit from guarantee contract.
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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 is
providing the beneficiary with a guarantee to refund his loss in case of the breach
of contract caused by the principal.
According to statistics in US, only 1% of the total issued guarantee is
required to pay by the beneficiary
1
. It reveals that guarantee is a security

1.3. GUARATEE TYPES
1.3.1. In terms of issue method
a. Direct guarantee
It is the kind of guarantee that the bank promises to pay directly to the
beneficiary if the principal defaults.
Diagram of direct guarantee:

(2)
Guarantor

(1)
(3)

(1) The principal and the beneficiary sign an origin contract which assigns
that the A party (the principal) has to open a guarantee.
(2) The principal offers the bank to issue a banking guarantee.
(3) The guarantor follows through its commitment to settle the debt for the
principal in the event of the breach of the contract.
Principal
Beneficiary
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b. Indirect guarantee
That is issued by a correspondent bank (usually the guarantee beneficiary's
bank) upon the counter-guarantee of the guarantee applicant's bank. This type of
guarantee is more convenient for the beneficiary in transaction and getting
money back in the event of the A party’s breach of the contract.
Diagram of indirect guarantee:
(3)
The correspondent bank

committed duty with the confirmed party, the guarantee confirming party has to
carry out the guarantee confirmed party’s duty.
d. Co-guarantee
In this case, several banks act as guarantees for a customer through a clue
bank. Co-guarantee is carried out when the guarantee value exceeds the current
guarantee budget or required rate of a bank. An individual bank is unable to act
as a guarantee so it offers the others to do together. The co-guarantee banks often
choose the most prestigious and experienced one to play as the clue bank which
presides over guarantee issue.
Diagram of co-guarantee:
Bank I
(2)

(1)
.........….…………........
(3)
The principal
Bank II
The beneficiary
Bank
N
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(1) The principal and the beneficiary sign an original contract
including bank guarantee clauses.
(2) The principal asks the banks to acts as his guarantee.
(3) The guarantee banks pay to the beneficiary when their customer
fails to perform the contract.
1.3.2. In term of guarantee purposes
a. Payment/Trade debt guarantee

for a subsidiary/associate company, or personal account, in other countries.
1.3.3. In term of payment conditions
a. Conditioned guarantee (Guarantee against documents)
Conditioned guarantee requires the third party’s documents confirming the
breach of the principal when the beneficiary asks for payment or other
documents proving that the principal clearly fails to follow through
commitments, for example, winning the contract without executing the work (in
bid bond), failing to perform the contract (in performance bond) or to pay the
debt to the beneficiary (in payment guarantee).
The beneficiary, however, only needs to make the required guarantee
documents not the detailed documents of demonstration or description of the
principal’s breach. The third party’s documents and other documents can be an
assessing certificate of a dependent assessing company. One of the greatest
disadvantages of this guarantee is the beneficiary’s lengthened payment period.
The beneficiary can not receive the guarantee amount in case there is any
upheaval. L/C is a typical guarantee against documents in which the beneficiary
must present essential documents required in the L/C for payment.
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It is more advantageous for the principal to use conditioned guarantee
because it prevents him from the fraud of the beneficiary. On the contrary,
conditioned guarantee brings no benefit for the beneficiary. If the regulations are
not obvious enough it easily causes in dispute in payment procedures, thus, deals
a fatal blow on beneficiary’s finance and prestige. As a result, conditioned
guarantee is hardly used in bank guarantee operation.
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Tien, N. V. (2006). International Payment. International Payment and Foreign Sponsor (pp
15,36-58. Hanoi: Foreign Trade University Press.
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b. Unconditioned guarantee:

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As a result, if the bank does not pay high-level attention to marketing
development its numerous competitors will attract its potential customers
immediately and it will be kicked out of the field. Furthermore, bank guarantee 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 through marketing. They can
find out essential information with the help of marketing such as interest,
guarantee fee, and mortgage assets. The far-reaching and popular development
of the bank guarantee, so, depends much on bank marketing. Banks should not
hesitate to attach special importance to marketing.
Besides the two referred factors, there are many inner factors of a bank
which 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 and production
scale. The higher these elements are, the better customers’ financial ability is.
Beside financial ability, the bank is still interested in production ability and
capital turnover rate. If the financial ability is great, capital turnover rate is quick
the return rate of customers will be high and customer business can be expanded.
Thank to this, credit repayment capacity for the bank should be high.
The customers’ prestige is also a decisive factor of guarantee operations
extension. A customer considered creditworthy, still try to cover the debt despite
facing with risks in business. The bank, as a result, can not only eliminate risks
but also maintain the good relationship with its customers.

bank can expand its scale including guarantee operation. In contrast, in crisis
time the bank’s customers are under severe threat of loss. The customers will
have difficulties in carrying out the contracts. In this case, it is the banks that
bear all the risks of financial duty on behalf of its customers. Guarantee
operation, hence, is held back from development.
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Politics is the matter of all investors’ interest. They always want to invest on
the country with stable politics. Thanks to foreign investment, domestic
enterprises will do business more effectively. This, therefore, creates good
conditions for guarantee activities development. Any tiny change in political
policy may have crucial impact on all activities of the bank let alone guarantee
operations, which causes in loss, prestige erosion in the whole banking system.
b. Legal system
Like economic environment, legal environment plays an significant part in
business activities of commercial banks. It may be driving force or restraining
force for enterprise development. Legal environment, in this thesis, just refers to
the law system and legal documents related to banking activities in general and
guarantee operations in particular. These activities are pushed stronger forward
as long as the law system is progressive, coherent, and complete. Nowadays, law
always goes hand in hand with the market mechanism under the government’s
control. Almost activities of the economy become chaotic and uncontrollable
without a complete law system. Law creates a legal corridor so as to promote
convenient and effective production. Guarantee operations are not the exception,
only when customers implement strictly and clearly can the bank bear fruits from
its business activities.
Incomplete law system will pose challenge to the banks in signing and
performing guarantee contracts. In fact, banking law in Vietnam now still
remains incomprehensive and weak. This leads to low quality of management
activity of guarantee operations.

maintains the top position with the total capital of VND267,000 billion, total
balance of VND239,000 billion and bad debt rate of 1.9%. Agribank has
achieved remarkable success to contribute to the national industrialization-
modernization stage and was offered the title: “Hero of Labor in the New Age”
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In the process of international integration, with the signatory VN-US trade
pact, AFTA participation and WTO membership, all the foreign banks have
rights to carry out full duties as other Vietnam banks in following years. It
enhances opportunities as well as challenges for Vietnam commercial banks
including Agribank. Hence, they need crucial reforms to sharpen the
competitiveness so as to consolidate its position.
2.1.2. The orientation of guarantee operations at Agribank
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Operation Centre is oriented to be prestigious in Vietnam and over the world
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.
Thus, it should promote the quality of its services; extend operation fields by
performing some new services as following:
• Continue improving Guarantee quality by simplifying
procedures, applying IT and giving a priority to bank security.
• Diversify guarantee forms and develop new services.
• Implement customer policy, push marketing strategy forward
to hold traditional customer and attract more new.
• Modernize guarantee activity quickly; computerize bank
technique for an accurate and prompt service.
• Train and manage the bank staff, attach importance on
fostering guarantee knowledge for them.

 Having creditworthiness in credit, guaranty and payment
relations with Agribank.
 The customer shall have legal security for the guaranty in line
with requirements of Agribank.
 Having feasible and effective investment projects, manufacture/
business plan.
 For guaranty for drafts: the customer shall meet requirements of
laws on commercial papers.
 In case of foreign loan, the customer shall follow regulations of
the law on management and repayment of foreign loan.
 Customers as foreign economic organizations shall be allowed
to invest, to do business or to bid in Vietnam in accordance with
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.
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In
addition, some other reasonable fees related to guarantee Issuance shall be paid
under 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:
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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).

need to be approved by the relevant authorities, Documents allowing borrowing
and making payment (Limitation and Conditions) for foreign loan of the SBV in
accordance with existing laws on Management of foreign loans and repayment,
Contract for loans borrowing (Original copy in accordance with universally-
recognized customs and procedures; Decree on Economic Contract).
* 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 vary
depend 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 guarantee
operations at Agribank:
- Decision of the governor of the state bank number 283/2000/QD-
NHNN14 on August 25
th
2000 and the promulgation of bank
guarantee operation status. This status assigns the implementation

money in its guarantee fund. The total guarantee level is calculated basing on the
guarantee fund projection and the capital’s safety rate in guarantee (but not
exceed 20 times of guarantee fund projection.) The guarantee fund is entered in
the 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 guarantee
deposit, and mortgage. However, the guarantee deposit plus mortgage assets
must be more valuable than guarantee money.
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2.2.7. Orders and procedures of issuing guarantee at Agribank
According to the latest decision number 398/QD-HDQT-TD on May 2
nd
2007, the guarantee issue process must have the participation of three grades:
credit staffs, head of credit department and the manager of Agribank’s branches.
a. Credit staffs
- Instruct the regulations of guarantee operation at agribank to the
customers.
- Collect information of customers as well as the duty of guarantee.
- Assess the guarantee conditions.
- Make an assessment report showing specific ideas about accept or
refuse to issue guarantee. Be responsible for this assessment then
send this report to the credit department (or business planning
department.)
- After receiving the manager or director-general’s decisions:
+ draw up a document to inform the customer of the bank’s decision
(accept guarantee or not), then present to the manager for signing and
send to the customer at last.

manager (or business manager) and decide whether to issue
guarantee or not.
- Sign the guarantee letter, guarantee contract, contract of guarantee
security if agree.
- In case the Agribank branch manager can not decide because it
exceeds his authority, he should draw up a statement and transfer
all related documents (the signed and sealed copy ones.)
- Direct the staffs to implement approved guarantee.
- Follow through instructions and requirements of Agribank
manager-general about the signed guarantee.
- Supervise and speed up the customers’ implements together with
the 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 and promoting
the Agribank’s strength, it can implement a new service of modern bank so as to