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PRODUCTS FOR WORKING
CAPITAL FINANCE
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Cash
Cash
Finished Goods
Work in process
Value added
ExpensesIncurred
Rawmaterialspurchased
Bills
Payable
FinishedGoods sold
Billsreceivable
The Cycle
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Working Capital Cycle
Raw Material
Work in Process
Finished Goods
Receivables
Cash Payables
Bank funding is availableat every stage (exceptof course cash!)
20781Total Current assets
3252Cash & Bank Balance
679Other Current Assets
7414Receivables
9436Inventories
9397Other current liabilities
5387Sundry Creditors/ BillsPayables/ Acceptances
5344Bank borrowings forworking capital
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Trade transaction analysed
Seller Buyer
Enquiry/negotiation/Order
Goods/Service Delivery
Payment immediate/delayed
Will buyer refuseto take delivery?
Will buyer pay on
time/at all?
Will buyerscountry run intoproblems?
Will seller deliverat all?
Will seller deliver
on time ?
Will quality be asagreed?
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Financing Purchases
Letters of Credits Facilitate transaction
and/or finance transaction Discounting of suppliers Bills
Financing Inventory
Cash Credit / Overdraft
Short Term Loans
Commercial Papers
Pre shipment Credit
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Cash Credit/ Working CapitalDemand Loan
Most Prevalent in the country
Unique to Indian Conditions
Various methods of assessment Primarily against hypothecation of
Inventory and receivables
Working Capital Demand Loan
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Financing Sales
Sales Bills / Supply Bills Discounting
Overdraft against Collection Bills
Invoice Financing
Factoring Similar Products for export sales
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Stock level for ExportsPacking Credit
Export receivable LevelForeign Bills
Level of purchasesthrough LC, Leadperiod, Usance period
LC for Rawmaterials
Receivables LevelCC against bookdebts, sales bills
Stock LevelCC against Stocks,Purchase bills etc
Structure of Limits
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Term Loan To Augment Networking Capital
Low net working capital
Good asset coverage
Good DSCR
Medium Term Loans Security Second Charge on Fixed
Assets
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Adhoc Short Term Loans
Unforeseen requirements
Temporary Cash flow requirements
Importance of Takeout
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Commercial Papers
Eligibility
Terms
Mode of Issue
Eligible Investors
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Bills Discounting
Negotiable Instruments
Clean and Documentary Bills
Supply Bills
Invoice Financing Why Banks prefers Bills
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Mumbai, 30th June, 2011 Amount Rs. 100,00,000Amount Rs. 100,00,000Amount Rs. 100,00,000Amount Rs. 100,00,000
At60 days after sight60 days after sight60 days after sight60 days after sight pay against this sole bill of exchange
To the order ofTo the order ofTo the order ofTo the order ofourselves the sum of Rupees onecrore only
For value receivedFor value receivedFor value receivedFor value received
To: For and on behalf of
M/s Atharva Steel Limited
Steel Authority of IndiaPalacia, Indore, MP
Finance Director/Manager
Bill of Exchange
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Factoring
Extensions of Invoice discounting
Assignment of receivables
With / Without / Partial Recourse
Balance sheet management
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Facilitating production for exports atmandated interest rates and tenors.
Pre ShipmentPost Shipment
Export Finance
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Pre shipment : Packing Credit
Against firms orders / Letter of Credit
In Rupees or Dollars
Interest concessions?
Up to 180 days/270 days To be converted into Post Shipment
finance
ECGC cover
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Post Shipment Finance
Bill Discounting under L/c orOtherwise
C/C against collection Bills
Facility in Rupee / Foreign Currency Concessional Interest Rate
ECGC cover
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Suppliers Credit / Buyers Credit
Arranged for importers by exporters
bank abroad Or arranged by Importers Banks
abroad with their foreign
Correspondent Bank Against Letter of credit of Importers
Bank
Low Finance Cost Can be done synthetically
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Factoring & Forfaiting ofExport Receivables
Short Term Receivables: Factoring
Medium Term Receivables: Forfaiting
Bank abroad takes credit risk on theImporters by Co-accepting ExportBills
Bank in India take performance riskon exporters
Discounts Co- accepted Bills
Similar process of forfaiting
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Cash flow/ Receivable Buyout
Discounting of certain or near certaincash flows
Similar to securitisation of future
receivables, involves Performance &Credit risk
Credit risk transfer to buyers if
without recourse
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Balance sheet Impact
Liabilities RsAfter
buy-out Assets RsAfter
buy-out
Networth 100 100 Fixed Assets 290 290
Term borrowings 200 200
Current Liabilities Current Assets
Creditors for supplies 30 30 Inventory 50 50Peovisions 20 20 Receivables 40 10Bank Borrowings 50 20 Cash 10 10
Other Current Assets 10 10Total CL 100 70 Total CA 110 80
Total liabilities 400 370 Total Assets 400 370
Tol/TNW 3 2.7
Current Ratio 1.10 1.14
Balance Sheet of ABC Ltd.
Improved by 10%
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Credit Enhancement Mechanism
Cash Collateralisation
Over Collateralisation
Cherry Picking
Buyback of delinquent portion Credit Support of a Bank
Use of Escrow accounts
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Securitisation
The process of conversion of illiquidloans into tradable, Bankruptcy-remote securities
An issue of securities backed byspecific assets
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Structured Finance
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Why Structured Finance?
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Progressive StructureDevelopment
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Key Success Factors
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Change of Picture.
Up to early 90s corporates pursued aggressive capacity expansion& diversification
Everything produced was sold irrespective of quality/costs. Speculative gains were driving use of working capital. This stopped after liberalisation made cost competitiveness critical
and so the demand for Term loans and working capital declined. Five years from 2002 saw up-turn in trade cycle but from second
half of year 2008 recession took a grip. Through fiscal meansGovt. has ensured soft landing but groth has suffered. Real estate and export led bubble has burst Regulator is forced to prefer recession stimulus over inflation A conflict is clearly seen in regulators twin role as monetary
authority and Govt. debt manager
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Current trends.
Efficiency in use of working capital is increasingsignificantly with use of technology and better practices.
Banks are moving money faster.
Banks IT systems are talking to customers ERP systems.
Outsourcing is used increasingly to gain costcompetitiveness - Banks are managing receivables
/payables of clients. With rise in inflation, inventory and receivable levels are
going up and so also the need for bank finance.
Suppliers supply goods not credit.
Banks prefer to provide cash-flow based structured ratherthan vanila finance against current assets.
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Current trends.
Risk unbundling and risk pricing is the KEY
channel financing is the buzz word afterRetail Financing..
For a large manufacturing company, banks
finance suppliers on one hand and dealerson the other.
Various kind of comforts offered to thebankers in place of security through
transaction based structuring.Transaction history is an important guide.
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Lettersof
Credit
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Billo
fLading
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Open
sanL
/C
Req
uestforL/c
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Letter of credit is an arrangement whereby a bank (Issuing Bank) acting at the request and in
accordance with the instructions of
a customer(applicant) is to make payment to or to theorder of
a third party (beneficiary) or is to pay, accept ornegotiate bills of exchange drawn by the beneficiary orauthorises such payments to be made or such drafts tobe paid, accepted or negotiated by another bank
against stipulated documents, provided that the termsand conditions of the LC are complied with.
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PARTIES TO A LETTER OF CREDIT
A. Applicant - Applicant is normally the buyer of
the goods who has to make payment to theseller - beneficiary.
B.Issuing Bank - Issuing bank is one whichissues the credit i.e. it is the bank which
undertakes to make the payment to selleragainst documents.
C. Beneficiary - He is normally the seller of thegoods who has to receive payment from the
Applicant. He gets payment on presentation ofstipulated documents complying with the termsand conditions of the LC.
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dededede----RiskRiskRiskRiskdededede----RiskRiskRiskRiskD.Advising Bank- Advising bank advises the credit to the
beneficiary, thereby assuring the genuineness of thecredit. It is normally located in beneficiary's territory.
E. Confirming Bank- Confirming bank adds its guaranteeto the credit opened by another bank,
thereby,undertaking the responsibility of payment /negotiation / acceptance under the credit, in addition tothat of the issuing bank.
F. Nominated Bank- The bank which is nominated and
authorised by the Issuing bank to pay, to incur a deferredpayment undertaking, to accept draft (s) or to negotiate.In a freely negotiable credit any bank is a nominatedbank.
F. Reimbursing Bank- It is the bank, authorised tohonour the reimbursement claim in settlement ofnegotiation acceptance / payment lodged with it by thepaying , negotiating or accepting bank.
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TYPES OF LETTER OF CREDIT
A. Revocable / Irrevocable Letter of Credit
LC which can/can not be amended orcanceled by the issuing bank at any timeprior to its expiry without notice to thebeneficiary.
B. Confirmed Letter of Credit - A confirmedletter of credit is an irrevocable LC to whichanother bank (usually the advising bank)
has, at the issuing bank's request, added itsconfirmation constituting a definiteundertaking of the former.
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D. Revolving Letter of Credit L/c
providing for an automatic renewal of theamount for which the credit is opened.
E. Transferable Letter of Credit - Atransferable LC is a credit which thebeneficiary has the right to giveinstructions to the negotiating bank tomake the credit available in whole or in
part to one or more third parties.F. Back-to-back Credit - A Back-to-backcredit is an ancillary letter of credit whichthe beneficiary uses to support another LC
opened by the seller's bank, favouring hissupplier.
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Standby Letter Of CreditStandby Letter Of CreditStandby Letter Of CreditStandby Letter Of Credit
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G. Sight Credit - It is a credit payable againstpresentation of requisite documents to the
designated paying bank.H. Usance Credit - It calls for drawing of drafts at
stated usance period requiring acceptance and/orpayment by drawee at the end of the usance
periodI. Acceptance Credit - It is similar to deferred credit
except for the fact that in this credit drawing of ausance draft is a must.
J. Deferred Payment Credit - It is a usance creditwhere payment will be made by designated bank,on respective due dates, as per stipulations of thecredit, without the drawing of drafts.
Another Classification of Letters Of Credit
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Performance / Bid Guarantees
Financial Guarantees
Shipping Guarantees
Guarantees under EPCG scheme
Deferred Payment Guarantees
Standby Letter Of credit.
Guarantees
Guarantee is an abstract promise to perform, independentof the underlying transaction. The guarantee is used to
secure the performance of a specific obligation, irrespectiveof whether the performance is owed or not.
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Number & amount of
tenders expected tobe participated,normally 5% of
contract vale
Bid Bond Guarantee
Number & value ofcontracts. Normally10% of value of
contracts
Financial/PerformanceBG
Structure of Limits cont..
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Financeanalysis
Risk rating
Portfolio Credit Risk management
Financial statements Business information Business plans & forecasts
Credit decision framework
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Qualitative : an undertaking of a non quantitative nature designed to protect
the lender against loss.
Restriction on investment in subsidiaries
Quantitative is a measurable benchmark standard of performance typicallyfinancial performance or constraint to which borrower agrees to be bound.
Restrictions on fresh secured borrowings from other sources
Minimum current ratio requirement
Minimum net-worth requirement/Max TOL-TNW ratio
Restrictive/Negative :
Negative pledge
Cross default
a material adverse change clause.
Covenants
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Failure to pay interest when due,
Insolvency of borrower
Cross default by borrower
Material adverse change in borrowers business like a founder promoter sellingout partially/fully
Breach of warranty/conditions of contract
If a warranty in agreement of a revolving credit arrangement likecash credit is found to be false, further drawings can be stopped bythe lender.
Breach of warranties may give the bank a legal remedy fordamages too.
Events of Default
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Members (share holders)M.A & A.A.
Chairman & MDBoard of Directors
Top Management
Other levels of management and others
A Public Limited Company
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Legal Issues and Documentation
Memorandum & Articles of AssociationDoctrine of Constructive Notice
Doctrine of Indoor Management
Borrowing Powers
Charge Creation & Registration
Board ResolutionPower of Attorney Holders
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Remedial Management
Early warning signals
Better immediately than later
Need to take decision away from relationshipmanager
Loan Review Mechanism
Remedial management Group