Aval (Aval Credit or Guarantee Credit) is a term that refers to a guarantor loan and is provided by the bank. Bank provides a guarantee that in the event of insolvency of the debtor, he pays the obligation. The bank does not provide funds directly, does not assume liability but only guarantees for its payment. It is similar to a bank guarantee.
Aval is provided in two versions:
- Bill aval (guarantee) - is used on bills, the bank guarantees the bill clause (“per aval”) for any of the bill debtors and then is equally liable as this person. Aval bill is used by forfaiting
- Aval credit in the form of a guarantee - the bank as guarantor undertakes to pay the obligation in the event of debtor’s insolvency
In return for the loan, the bank receives the aval commission as a percentage of the amount at which the bank guarantees.
What is aval credit used for in practice?
Aval credit is used to ensure proper and timely repayment. Commitment, which is guaranteed by a solid bank, is more confident than the liability accepted only by borrower whose creditworthiness is often hard to detect. This type of loan is widely used in the field of foreign trade.