Aval - Explained
What is an Aval?
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Table of ContentsWhat is an Aval?How Does an Aval Work?Aval and Credit Ratings
What is an Aval?
Aval refers to a written guarantee by a third party attached to a debt obligation which assures that a bill of exchange will be paid at maturity. The third party that issues an aval is not the drawer, payee, acceptor, endorser or holder of a debt obligation, but guarantees that payment will be made even if the issuing party defaults. A bank or financial institution usually provides an aval on a debt obligation. An aval is often made on debt obligations such as a bill of exchange, a bank draft, promissory note or a bond.
Back to:BANKING, LENDING, & CREDIT INDUSTRY
How Does an Aval Work?
When an aval is provided by a lending institution or a bank, it guarantees that they will pay a debt obligation should a customer no be able to pay themselves. In certain cases, an aval is called a bank guarantee since it is a promise by a bank to make a payment if a customer or the issuer of the financial instrument defaults. Avals are commonly used in Europe and are not provided for all types of purchase agreements, they are most common with the bond purchase agreement, matched sale-purchase agreement and cross-purchase agreements. It is possible for an Aval to be forged, it is therefore expedient that parties conduct due diligence when accepting debt instruments that have avals attached to them.
Aval and Credit Ratings
There is a limit to the type of instruments banks and lending institutions may use to provide Aval. Aside from checking the instruments, banks also consider the credit rating of customers before avals are provided. Usually, banks provide avals to issuers or customers who have good credit ratings. Issuers can strengthen their credit ratings by ensuring that they make loan repayments as at when due and avoid defaulting on loan payments. There are several credit rating agencies that assign credit ratings to individuals, companies and even municipalities based on their credit assessment.