What Is Bank Instrument Monetization And How Does It Works

 Bank instrument monetization is a  guarantee operation by which the guarantor (bank) undertakes to answer for the fulfilment of an obligation of the guarantor (usually a client) before a third party (beneficiary), in case the guarantor does not do so. Frequently the guaranteed obligations consist of the payment of a certain amount of money, although guarantees can be issued to guarantee other obligations (successful completion of work, supply of material, participation in contests and tenders).

For the bank, a guarantee implies a risk, like a loan. The difference with this is that the guarantee does not imply an immediate disbursement of money by the bank in favour of the beneficiary of the guarantee. But it can suppose it in the future if said beneficiary executes it, that is, demands compliance. At that time, the bank, which has complied with the beneficiary of the guarantee, will require the client to repay the said amount.

Therefore, the bank in these operations undertakes to fulfil, if the client (guaranteed) does not do so, the obligation that it would have contracted towards the beneficiary. The payment of the obligation that is guaranteed may or may not be of a financial nature.

For the client (guaranteed), having a bank guarantee lease document allows him to comply with the requirements of the beneficiary, derived from a commercial relationship (contract for the sale of goods, execution or bidding for works, etc.).

Why look for bank instrument monetization?

For the bank instrument monetization by the bank, it is necessary for the client (guarantee) to formalize before a notary a Bank Guarantee Coverage Policy, or a Coverage Policy for the Limit of Bank Guarantees if several guarantees are to be formalized. It regulates the relations between the bank and the guaranteed party derived from the bank guarantee provided (payment of commissions, interest and stipulated expenses, reimbursement of the amounts that the Bank has paid as a result of the guarantee, etc.).

Types of bank guarantee lease:

Financial - All those guarantees in which the bank agrees to pay a certain amount in the event that the guarantee does not do so.

Technical – This is the bank guarantee lease in which the bank responds in case of breach of commitments other than a payment obligation, which has its guarantee. Generally, these obligations are before public bodies or before administrations, but they can also be before other third parties, and the bank is responsible for the breach of the commitments that the guaranteed party had before said third parties, contracted for reasons such as participation in contests or tenders, execution of works or supplies, proper functioning of sold machinery, in cases of administrative appeals, etc.

In return for the risk assumed, the bank receives certain commissions, depending on the term, type and risk of the guarantee. Bank instrument monetization can be defined as indefinite. The duration is one of the most important aspects of the guarantee since it delimits the temporary validity of the guarantee granted by the bank.