Lending Notes

Chapter 1. Lending Products

FORMS OF LENDING
Many there are two types of advances:
Short-term (maturity within one year)
Long term (maturity with the period of more than one year

a. Categories of borrowers
i. Corporate Borrowers
Borrowing by businesses rather than by individuals.
Type of products
Short-term Lending- Working Capital Financing
Running Finance- Advanced Merchandise/Demand Finance
Receivable Financing- Factoring, Invoice Discounting
Inventory Financing
Trade Finance (L/c)
1. RUNNING FINANCE
This form of finance was previously known as overdraft. When a customer
requires the t e m p o r a r y a c c o m m o d a t i o n , h i s b a n k a l l o w s w i t h d r a w a l h i s
a c c o u n t i n e x c e s s o f c r e d i t balance, which the customer has in its account, a running
finance occurs. The accommodations t h u s a l l o w e d c o l l a t e r a l s e c u r i t y. W h e n i t i s
against collateral securities, it is called a Secured Running Finance
and when the customer cannot offer any collateral security except his
p e r s o n a l s e c u r i t y, a c c o m m o d a t i o n i s c a l l e d a C l e a n R u n n i n g F i n a n c e .
T h e customer is in advantageous position in running finance because he has to
pay the mark-up only the balance outstanding against him on daily product basis.
Overdraft is one sort of offering credit by the account providers, in that withdrawals are
permitted exceeding available balance of the bank account. It is nothing but an over-drawing
leading to a negative balance. The situation is more common with the credit card offerings by the
banks. For enjoying overdraft facility, there should be some agreement or approval in advance

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with the account provider. Generally, the over-draft facility is offered by the banks for some
maximum amount and the same is required to be returned to them (in the respective account)
within some specified time limit.
Demand Finance
This is common form of financing to commercial and industrial
concerns and is made available either against pledge or hypothecation
of goods produce or merchandise. In Demand Finance the party is
f i n a n c e d u p t o a c e r t a i n l i m i t e i t h e r a t o n c e o r a s a n d w h e n required. The
party due to facility of paying mark-up only on the amount it actually
utilizes prefers this form of financing
1.
2.
3.
4.
5.
6.

Ordinary Shares
Preferred Shares
Quoted or Unquoted
Registered
Bearer
Inscribed

2. Receivable Financing
Receivable financing, also known as factoring is a method used by businesses to convert sales on
credit terms for immediate cash flow. Financing accounts receivable has become the preferred
financial tool in obtaining flexible working capital for businesses of all sizes. The receivable
credit line is determined by the financial strength of the customer (Buyer), not the client (The
seller of the receivables).

Accounts Receivable Financing

Accounts receivable financing--also known as accounts receivables funding--is a way for small
businesses to obtain fast working capital without the need for a loan or repayment. A company's
accounts receivable--invoices sent to clients for goods, or services rendered--are listed on a
balance sheet as an asset. The small business can then sell these invoices to a larger company,
which then takes on the risks of collecting the money owed by clients and provides the small
business with immediate funds.
A small business will usually be required to "age" its invoices before receiving accounts
receivable financing. For accounts less than 30 days old, a provider may pay around 75 percent

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of the value of the invoice. But for accounts that have been outstanding for a longer amount of
time, the provider will typically pay less. Some providers are unwilling to take on accounts that
have been outstanding for longer than 90 days.

Invoice factoring:
Invoice factoring, accounts receivable factoring, and factoring freight are effective ways to
secure small business financing without the debt of a small business loan. As your factoring
company, we'll provide working capital for payroll funding, business growth and day-to-day
expenses. Factoring brokers refer their clients to Riviera Finance.
Factoring is a financial transaction whereby a business sells its accounts receivable (i.e.,
invoices) to a third party (called a factor) at a discount.
In "advance" factoring, the factor provides financing to the seller of the accounts in the form of a
cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the
purchase price being paid, net of the factor's discount fee (commission) and other charges, upon
collection. In "maturity" factoring, the factor makes no advance on the purchased accounts;
rather, the purchase price is paid on or about the average maturity date of the accounts being
purchased in the batch.
Factoring differs from a bank loan in several ways. The emphasis is on the value of the
receivables (essentially a financial asset), whereas a bank focuses more on the value of the
borrower's total assets, and often considers, in underwriting the loan, the value attributable to
non-accounts collateral owned by the borrower also, such as inventory, equipment, and real
property,[1][2] i.e., matters beyond the credit worthiness of the firm's accounts receivables and of
the account debtors (obligors) thereon. Secondly, factoring is not a loan it is the purchase of a
financial asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a
purchased account will not collect due solely to the financial inability of account debtor to pay.
In the United States, if the factor does not assume credit risk on the purchased accounts, in most
cases a court will recharacterize the transaction as a secured loan
Invoice discounting

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Invoice discounting is a form of short-term borrowing often used to improve a company's
working capital and cash flow position.
Invoice discounting allows a business to draw money against its sales invoices before the
customer has actually paid. To do this, the business borrows a percentage of the value of its sales
ledger from a finance company, effectively using the unpaid sales invoices as collateral for the
borrowing.
Although the end result is the same as for debt factoring (the business gets cash from its sales
invoices earlier than it otherwise would) the financial arrangement is somewhat different.
Features
When a business enters into an invoice discounting arrangement, the finance company will allow
the business to draw down a percentage of the outstanding sales invoices - usually in the region
of 80%. As customers pay their invoices, and new sales invoices are raised, the amount available
to be advanced will change so that the maximum drawdown remains at 80% of the sales ledger.[1]
The finance company will charge a monthly fee for the service, and interest on the amount
borrowed against sales invoices. In addition, the finance company may refuse to lend against
some invoices, for example if it believes the customer is a credit risk, sales to overseas
companies, sales with very long credit terms, or very small value invoices. The lender will
require a floating charge over the book debts (trade debtors) of the business as security for the
funds it lends to the business under the invoice discounting arrangement.
Responsibility for raising sales invoices and for credit control stays with the business, and the
finance company will often require regular reports on the sales ledger and the credit control
process.
Invoice discounting is targeted at larger companies with established systems and an expected
annual sales turnover in excess of 500,000; providers will need to be satisfied that the client can
manage their own sales ledger administration and credit control facilities.
Benefits

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By receiving cash as soon as a sales invoice is raised, the business will find that its cash
flow and working capital position is improved.

The business will only pay interest on the funds that it borrows, in a similar way to an
overdraft, which makes it more flexible than debt factoring.

Invoice financing can be arranged confidentially, so that customers and suppliers are
unaware that the business is borrowing against sales invoices before payment is received.

Drawbacks

In some industries, financing debts can be associated with a company that is in financial
distress. This can result in suppliers becoming reluctant to offer credit terms, which will
reverse many of the benefits of the arrangement.

Invoice discounting is an expensive form of financing compared to an overdraft or bank

loan.

As the finance company takes a legal charge over the sales ledger, the business has fewer
assets available to use as collateral for other forms of lending - this may make taking out
other loans more expensive or difficult.

Once a business enters into an invoice discounting arrangement, it can be difficult to

leave as the business becomes reliant on the improved cash flow.

3. Inventory Financing:
Inventory financing is bank line of credit secured by the company's inventory. This type of
financing can help to free up some of the cash you have tied up in inventory for more pressing
needs. Although not really available to pure startups as a track record of sales is required by the
lender, the startup founder should be aware of this type of financing for later down the road.
So why is it difficult to locate?
For a retailer, wholesaler, or manufacturer, inventory financing has to largely be funded with

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equity financing (your own money). Due to the movable nature of most inventory and the
potential fluctuations in price, inventory is a difficult item for a lender to secure.
Which Companies Should Use It?
Startups which can use inventory financing include:
those with tangible inventory (in other words, service business need not apply),
those with a proven sales history and good credit since lenders aren't really interested in taking
possession of your inventory if you can't make your loan payments. For this reason startups need
not apply.
Tips for Getting Approved
Demonstrate to lenders that you have a proper inventory management system in place which
provides accurate and timely information on its size and cost.
Ensure that the inventory is protected from damage and shrinkage by either the elements or
people, respectively.
Make sure your assets are maintained in good shape; your lender may require to inspect the
inventory from time-to-time;
Demonstrate to lenders that the inventory is actually selling by showing sales order.
Show that you are managing your inventory as efficiently as possible by keeping the bare
minimum on hand while maximizing the turnover rate.
Inventory Financing Models
There is essentially three inventory financing model, each with its own variations according to
the specific business parameters involved.
Unlike other types of financing, inventory financing programs tend to be molded to a particular

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business application as there is too much variability for a one size fits all financing product. This
is yet another reason why most lenders are not interested in financing inventory.
The first type of inventory financing model is one where the lender has complete control over the
inventory, usually through the use of a third party warehouse. Under this model, inventory is
purchased with the lenders funds and stored in a third party warehouse. Depending on the lender,
the inventory may be owned by you or it may actually be owned by the lender. But in both cases,
the lender has full control.
The lender will release inventory to you as you pay for it. For example, say you purchased
$100,000 worth of inventory and had it financed under this model. You then make a sale and
have to deliver $25,000 worth of the inventory. You would have to pay the lender $25,000 plus
the financing costs, and the lender would release that amount of inventory for delivery. This
process would be repeated for each inventory draw down until all units are paid for.
The key to making this model work is having enough free cash flow to pay for the inventory
as you need it.
The major benefit to you is that you can get inventory in a saleable position without having to
self finance the purchase. In many cases where this model is used, the inventory financer has to
pay a manufacturer 50% of the order cost on order placement or booking and the remaining 50%
of the order cost on shipment from the factory. This capital outlay can be for several months,
especially if the manufacturing is done over seas.
Again, depending on the model, the financing usually ranges between 70% and 100% of the
inventory cost.
The second type of inventory financing involves purchase orders. This is most common with
wholesalers and brokers trying to facilitate buy and sell block orders.
If you have a purchase order for a commodity based product (easy to liquidate) from a well
established purchaser, an inventory lender can potentially finance the purchase of the inventory
required to complete the sale provided that it is directly shipped to your customer and provided

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the customer agrees to pay the inventory lender directly (basically, you dont touch the inventory
or the payment). Once payment is received, the inventory lender will deduct the cost of the
inventory and the financing costs and forward the balance (margin) to you.
The third most common inventory financing model is an asset based loan. In this model, the
lender has first claim on all accounts receivable and inventory, and all incoming funds for the
business are deposited into the asset based lenders account.
Effectively, the asset based lender has complete control over the cash flow. This allows the
lender to manager their risk more effectively through weekly monitoring of cash coming in and
going out.
The net effect of asset based financing is that the lender is prepared to free up the equity held in
inventory and receivables so that more inventory can be purchased to meet demand. The amount
of financing provided is based on the lenders margining equation which determines how much
financing can be made available for each dollar of inventory and receivables held by the
business.
Margining is influenced by the age of receivables and the liquidity of the inventory among other
things.
Each of these three models has numerous variations, but has some basic things in common:
1. The inventory lender reduces risk by controlling a combination of assets and cash flow.
2. The more certain and predictable the purchase and sale cycle the, the higher the probability of
acquiring inventory financing.
3. Inventory to be financed must be easy to liquidate and have enough retail margin to pay for
fast liquidation.
Drawbacks to Inventory Financing
Lenders will most likely need additional security in place to make sure that you are not disposing
of the collateral improperly.

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Most banks are not familiar with inventory financing which means that you will have to put in
extra effort to find a banker who is comfortable with it.
The line of credit may have to be paid off in full every 12 months and then not used at all for one
month.
If sales suddenly decline, two problems arise:
you may have to unload your inventory at a loss, thereby undermining your ability to stay current
on your line of credit, and
the interest on the loan may sap your ability to keep production on schedule.
High interest rates and other fees.

4. Trade finance
What is trade finance?
Trade finance is related to international trade.
While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped,
the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods
that have been shipped. Banks may assist by providing various forms of support. For example,
the importer's bank may provide a letter of credit to the exporter (or the exporter's bank)
providing for payment upon presentation of certain documents, such as a bill of lading. The
exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export
contract.
Trade services and supply chain
Building on what I have termed traditional trade finance, there are a number of ways in which
banks can help corporate clients trade (both domestically and cross-border) for a fee.
A typical service offering from a bank will include:

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Letters of credit (LC), import bills for collection, shipping guarantees, import financing,
performance bonds, export LC advising, LC safekeeping, LC confirmation, LC checking and
negotiation, pre-shipment export finance, export bills for collections, invoice financing, and all
the relevant document preparation.
Despite this focus on the LC, over the years the term trade finance has been shifting away from
this sometimes cumbersome method of conducting business. It is now estimated that over 80%
of global trade is conducted on an open account basis.
Factoring & Forfaiting
Factoring, or invoice discounting, receivables factoring or debtor financing, is where a
company buys a debt or invoice from another company. In this purchase, accounts receivable are
discounted in order to allow the buyer to make a profit upon the settlement of the debt.
Essentially factoring transfers the ownership of accounts to another party that then chases up the
debt.
Factoring therefore relieves the first party of a debt for less than the total amount providing them
with working capital to continue trading, while the buyer, or factor, chases up the debt for the full
amount and profits when it is paid. The factor is required to pay additional fees, typically a small
percentage, once the debt has been settled. The factor may also offer a discount to the indebted
party.
Forfaiting (note the spelling) is the purchase of an exporter's receivables the amount importers
owe the exporter at a discount by paying cash. The purchaser of the receivables, or forfaiter,
must now be paid by the importer to settle the debt.
As the receivables are usually guaranteed by the importer's bank, the forfaiter frees the exporter
from the risk of non-payment by the importer. The receivables have then become a form of debt
instrument that can be sold on the secondary market as bills of exchange or promissory notes.
Structured Commodity Finance

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Lending Notes
Structured commodity finance (SCF) as covered by Trade Finance is split into three main
commodity groups: metals & mining, energy, and soft commodities (agricultural crops). It is a
financing technique utilised by commodity producers and trading companies conducting
business in the emerging markets.
SCF provides liquidity management and risk mitigation for the production, purchase and sale
of commodities and materials. This is done by isolating assets, which have relatively predictable
cash flow attached to them through pricing prediction, from the corporate borrower and using
them to mitigate risk and secure credit from a lender. A corporate therefore borrows against a
commoditys expected worth.
If all proceeds to plan then the lender is reimbursed through the sale of the assets. If not then the
lender has recourse to some or all of the assets. Volatility in commodity prices can make SCF a
tricky business. Lenders charge interest any funds disbursed as well as fees for arranging the
transaction.
SCF funding techniques include pre-export finance, countertrade, barter, and inventory
finance. These solutions can be applied across part or all of the commodity trade value chain:
from producer to distributor to processor, and the physical traders who buy and deliver
commodities.
As a financing technique based on performance risk, it is particularly well-suited for emerging
markets considered as higher risk environments.
Export & Agency Finance
This part of Trade Finances remit covers the roles of the export credit agencies, the
development banks, and the multilateral agencies. Their traditional role is complement lending
by commercial banks at interest by guaranteeing payment.
These agencies have once again become of vital importance to the trade finance market due to
the role that they play in facilitating trade, insuring transactions, promoting exports, creating
jobs, and increasingly through direct lending. All are important in the current global downturn.

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Lending Notes
ECAs are private or governmental institutions that provide export finance, or credit insurance
and guarantees, or both. ECAs can have very different mandates which we will not delve into
here (please refer to Trade Finances annual World Official Agency Guide). As the global
economic crisis continues we are seeing a trend towards a liberalisation of these agencies remits.
The development banks, sometimes referred to as DFIs (development finance institutions), and
the multilaterals similarly have different mandates depending on their ownership or regional
remit. Most will have a form of trade facilitation programme that promotes trade through the
provision of guarantees.
ECAs and multilaterals are becoming a crucial part of the financing of large infrastructure
projects around the world as credit from commercial banks remains scarce.
And the rest
It doesnt stop there, Trade Finance also follows: the trade credit insurance and political risk
insurance markets an important part of doing business in developing economies; the
syndications market as banks and agencies lend funds to enable the trade finance activities of
other institutions; Islamic trade finance through its increasing popularity and expansion beyond
its historic markets; and finally Trade Finance follows the changes in global regulations and
tracks the law firms and in-house legal teams that contribute to making deals happen.
..

Long Term Lending:

What are Long-Term Business Loans?
Bank term loans usually carry fixed maturities and interest rates as well as a monthly or quarterly
repayment schedule. The long-term loan usually has a maturity of 3-10 years although long-term
bank loans can stretch out as far as 20 years depending on its purpose.
Long-term bank loans are always supported by a company's collateral, usually in the form of the
company's assets

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Lending Notes
For example, the bank may specify that the company cannot take on more debt during the life of
the long-term loan. Long-term loans are usually repaid by the company's cash flow over the life
of the loan or by a certain percentage of profits that are set aside for this purpose.
Types of long term lending:
1. Term loan
2. Trade finance/ Letter of credit

1.Term Loan:
A bank loan to a company, with a fixed maturity and often featuring amortization of principal. If
this loan is in the form of a line of credit, the funds are drawn down shortly after the agreement is
signed. Otherwise, the borrower usually uses the funds from the loan soon after they become
available. Bank term loans are very a common kind of lending.
First Steps
What do banks look for when making decisions about term loans? Well, the "five C's" continue
to be of utmost importance.

Character: How have you managed other loans (business and personal)? What is your
business experience? "If a corporate executive wants to open a restaurant, then he'd better
have restaurant experience," says Rob Fazzini, senior vice president at Busey Bank in
Illinois.

Credit capacity: The bank will conduct a full credit analysis, including a detailed review
of financial statements and personal finances to assess your ability to repay.

Collateral: This is the primary source of repayment. Expect the bank to want this source
to be larger than the amount you're borrowing.

Capital: What assets do you own that can be quickly turned into cash if necessary? The
bank wants to know what you own outside of the business-bonds, stocks, apartment

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Lending Notes
buildings-that might be an alternate repayment source. If there is a loss, your assets are
tapped first, not the bank's. Or, as one astute businessman puts it, "Banks like to lend to
people who already have money." You will most likely have to add a personal guarantee
to all of that, too.

Comfort/confidence with the business plan: How accurate are the revenue and expense
projections? Expect the bank to make a detailed judgment. What is the condition of the
economy and the industry: "Are you selling buggy whips or computers?" Fazzini asks.

What is the purpose of term loans

There are various purposes for which a bank will provide a term loan. There is a list of reasons
why this is done and the borrower has to ensure that the reason that they seek a loan for is one of
it. Some of the common reasons listed by the banks include:
* To help retire high cost debt for a business
* To provide an impetus to the research and development activities within an entity
* To shore up the net worth of a business
* To build assets for a business
* To help grow a business through strategic investments
* To strengthen the asset base

Term loans basics

Term loans are one of the most common routes used by entities to raise funds. These funds are
then used for the business in various ways. One big area of lending in case of term loans is the
loans given to small-scale enterprises and businesses that are typically run by individuals or even
firms and companies. Term loans form a significant part of the lending process of an entity and
this is the reason why it requires attention.
What distinguishes term loans from other borrowings is its tenure. Various other loan options
available are short term where the time period is usually around a year and has to be renewed
thereafter. But term loans have slightly longer time period. It is common to find term loans for a
period of 3 years. This is the time frame that will help a business to make proper use of the funds
made available.

2. Trade Finance/ Letter of Credit

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Lending Notes
Trade Finance: The science that describes the management of money, banking, credit,
investments and assets for international trade transactions
A letter of credit is the most widely used trade finance instrument in the world. It has been used
for the last several hundred years and is considered a highly effective way for banks to transact
and finance export and import trade. The letter of credit is a formal bank letter, issued for a
bank's customer, which authorizes an individual or company to draw drafts on the bank under
certain conditions. It is an instrument through which a bank furnishes its credit in place of its
customer's credit. The bank plays an intermediary role to help complete the trade transaction.
The bank deals only in documents and does not inspect the goods themselves.
Role of Banks in Documentary Letters of Credit
Compared to other payment forms, the role of banks is substantial in documentary Letter of
Credit transactions.

The banks provide additional security for both parties in a trade transaction by playing
the role of intermediaries. The issuing bank working for the importer and the advising
bank working for the exporter.

The banks assure the seller that he would be paid if he provides the necessary documents
to the issuing bank through the advising bank.

The banks also assure the buyer that his money would not be released unless the shipping
documents evidencing proper and accurate shipment of goods are presented.

Types of Letters of Credit - 1

A letter of credit may be of two forms: Revocable or Irrevocable
Revocable L/C
This is one that permits amendments or cancellations any time by the issuing bank. This means
that the exporter can not count on the terms indicated on the initial document until such a time as
he is paid. This form is rarely in use in modern day trade transactions.

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Irrevocable L/C
Such a letter of credit cannot be changed unless both buyer and seller agree to make changes.
Usually an L/C is regarded as irrevocable unless otherwise specified. Therefore, in effect, all the
parties to the letter of credit transaction, i.e. the issuing bank, the seller and the buyer, must agree
to any amendment to or cancellation of the letter of credit. Irrevocable letters of credit are
attractive to both the seller and the buyer because of the high degree of involvement and
commitment by the bank(s). By the 1993 revision of the UCP, credits are deemed irrevocable,
unless there is an indication to the contrary.
Types of Letters of Credit - 2
A letter of credit may be of two forms: Confirmed or Unconfirmed.
Confirmed L/C
If the exporter is uncomfortable with the credit risk of the issuing bank or if the country where
the issuing bank is situated is less developed or politically unstable, then as an extra measure, the
exporter can request that the L/C to be confirmed. This would add further comfort to the
transaction; an exporter may request that the L/C be confirmed. This is generally by a first class
international bank, typically the advising bank (now the Confirming Bank). This bank now takes
the responsibility of making payments if no remittance is received from the issuing bank on due
date.
Unconfirmed L/C
In contrast, an unconfirmed credit does not require the advising bank to add its own payment
undertaking. It therefore leaves the liability seller with the issuing bank. The advising bank is
merely as a channel of transmission of documents and payment.
Methods of Settlement
The documentary letters of credit can be opened in two ways:
1. Sight Letter of Credit: A Sight Letter of Credit is a credit in which the seller obtains
payment upon presentation of documents in compliance with the terms and conditions.

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Lending Notes
2. Time Draft or Usance Letter of Credit: A Time Draft or Usance Letter of Credit is a
credit in which the seller will be paid a fixed or determinable future time. A time Draft or
usance letter of credit calls for time or usance drafts to be drawn on and accepted by the
buyer, provided that documents are presented in good order. The buyer is obligated to pay
the face amount at maturity. However, the issuing bank's obligation to the seller remains
in force until and unless the draft is paid.
Financing Importers through Letters of Credit
While the L/C can be used as a payment mechanism, it can also be used to provide financing to
the applicant (importer). Deferred and Acceptance credits (i.e. term credits) are considered to be
financing instruments for the importer/buyer. Both payment structures provide the
importer/buyer the time opportunity to sell the goods and pay the amount due with the proceeds.
Under the Deferred Payment structure payment is made to the seller at a specified future date, for
example 60 days after presentation of the documents or after the date of shipment (i.e. the date of
the bill of lading).
Under the Acceptance structure the exporter is required to draw a draft (bill of exchange) either
on the issuing or confirming bank. The draft is accepted by the bank for payment at a negotiated
future fixed date. This gives the importer the potential time needed to sell the product and pay off
the Acceptance at due date. For example, payment date under an acceptance credit may be at
sight or after 90 days from presentation of the documents or from the shipment of goods.
Special Note on Documentary Letters of Credit
Documentary Letters of Credit hinge much on the appropriateness of documents. Banks involved
in the transaction do not need to know about the physical state of the goods in question but
concern themselves only with documents. If proper documents are presented, banks will make
payment whether or not the actual goods shipped comply with the sales contract.
Thus, special care needs to be taken in preparation of the documents since a slight omission or
discrepancy between required and actual documents may cause additional costs, delays and
seizures or even total abortion of the entire deal.

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Lending Notes
(1) Documents associated with an L/C
Documents are the key issue in a letter of credit transaction. Banks deal in documents, not in
goods. They decide on the basis of documents alone whether payment, negotiation, or acceptance
is to be effected. A single transaction can require many different kinds of documents. Most letter
of credit transactions involve a draft, an invoice, an insurance certificate, and a bill of lading.
Transactions can culminate in sight drafts or acceptances. Because letter of credit transactions
can be so complicated and can involve so many parties, banks must ensure that their letters are
accompanied by the proper documents, that those documents are accurate, and that all areas of
the bank handle them properly.
The four primary types Documents associated with an L/C are as follows:

Transfer documents

Insurance documents

Commercial documents

Other documents

Transfer documents are issued by a transportation company when moving the merchandise from
the seller to the buyer. The most common transfer document is the Bill of lading. The bill of
lading is a receipt given by the freight company to the shipper. A bill of lading serves as a
document of title and specifies who is to receive the merchandise at the designated port (as
specified by the exporter). It can be in nonnegotiable form (straight bill of lading) or in
negotiable form (order bill of lading). In a straight bill of lading, the seller (exporter) consigns
the goods directly to the buyer (importer). This type of bill is usually not desirable in a letter of
credit transaction, because it allows the buyer to obtain possession of the merchandise without
regard to any bank agreement for repayment. A straight bill of lading may be more suitable for
prepaid or open account transactions. With an order bill of lading the shipper can consign the
goods to the bank, which retains title until the importer acknowledges liability to pay. This
method is preferred in documentary or letter of credit transactions. The bank maintains control of
the merchandise until the buyer completes all the required documentation. The bank then

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Lending Notes
releases the bill of lading to the buyer, who presents it to the shipping company and gains
possession of the merchandise.
Insurance documents, normally an insurance certificate, cover the merchandise being shipped
against damage or loss. The terms of the merchandise contract may dictate that either the seller
or the buyer obtain insurance. Open policies may cover all shipments and provide for certificates
on specific shipments.
Commercial documents, principally the invoice, are the seller's description of the goods shipped
and the means by which the buyer gains assurances that the goods shipped are the same as those
ordered. Among the most important commercial documents are the invoice and the draft or bill
of exchange. Through the invoice, the seller presents to the buyer a statement describing what
has been sold, the price, and other pertinent details. The draft supplements the invoice as the
means by which the seller charges the buyer for the merchandise and demands payment from the
buyer, the buyer's bank, or some other bank. Although a draft and a check are very similar, the
writer of a draft demands payment from another party's account.
In a letter of credit, the draft is drawn by the seller, usually on the issuing, confirming, or paying
bank, for the amount of money due under the terms of the letter of credit. In a collection, this
demand for payment is drawn on the buyer. The customary parties to a draft, which is a
negotiable instrument, are the drawer (usually the exporter), the drawee (the importeror a bank),
and the payee (usually the exporter), who is also the endorser. A draft can be "clean" (an order to
pay) or "documentary" (with shipping documents attached).
A draft that is negotiable:

Is signed by the maker or drawer

Contains an unconditional promise to pay a certain sum of money

Is payable on demand or at a definite time

Is payable to order or to bearer

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Lending Notes

Is two-name paper

May be sold and ownership transferred by endorsement to the "holder in due course."

The holder in due course has recourse to all previous endorsers if the primary obligor (drawee)
does not pay. The seller (drawer) is the secondary obligor if the endorser does not pay. The
secondary obligor has an unconditional obligation to pay if the primary obligor and the endorser
do not, therefore the term "two-name paper."
Other documents include certain official documents that may be required by governments in
order to regulate and control the passage of goods through their borders. Governments may
require inspection certificates, consular invoices, or certificates of origin. Transactions can entail
notes and advances collateralized by trust receipts or warehouse receipts.

Purpose of borrowing
The money being borrowed can be used for number different reasons. For example, you can use
this money to purchase new equipment that is needed, purchasing additional inventory or
materials, hiring employees, covering payday, etc.
For example, think about how you are going to use the funds borrowed:
-Are you looking to start your business and get things going?
-Do you have a business but are now looking to expand?
-Do you just need a little help with this months payroll?
-Have you considered other financing to cover the funds you need?

Classification of loan:

Secured, unsecured/clean, asset-backed

Funded and non-funded facilities/direct and contingent
Size-Corporate, Commercial, SME

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Lending Notes
Secured loan:
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as
collateral for the loan, which then becomes a secured debt owed to the creditor who gives the
loan. The debt is thus secured against the collateral in the event that the borrower defaults, the
creditor takes possession of the asset used as collateral and may sell it to regain some or all of the
amount originally lent to the borrower, for example, foreclosure of a home. From the creditor's
perspective this is a category of debt in which a lender has been granted a portion of the bundle
of rights to specified property. If the sale of the collateral does not raise enough money to pay off
the debt, the creditor can often obtain a deficiency judgment against the borrower for the
remaining amount. The opposite of secured debt/loan is unsecured debt, which is not connected
to any specific piece of property and instead the creditor may only satisfy the debt against the
borrower rather than the borrower's collateral and the borrower. Generally speaking, secured debt
may attract lower interest rates than unsecured debt due to the added security for the lender,
however, credit history, ability to repay, and expected returns for the lender are also factors
affecting rates
Purpose
There are two purposes for a loan secured by debt. In the first purpose, by extending the loan
through securing the debt, the creditor is relieved of most of the financial risks involved because
it allows the creditor to take the property in the event that the debt is not properly repaid. In
exchange, this permits the second purpose where the debtors may receive loans on more
favorable terms than that available for unsecured debt, or to be extended credit under
circumstances when credit under terms of unsecured debt would not be extended at all. The
creditor may offer a loan with attractive interest rates and repayment periods for the secured
debt.
Types of secured loan.

A mortgage loan is a secured loan in which the collateral is property, such as a home.

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Lending Notes

A nonrecourse loan is a secured loan where the collateral is the only security or claim
the creditor has against the borrower, and the creditor has no further recourse against the
borrower for any deficiency remaining after foreclosure against the property.

A foreclosure is a legal process in which mortgaged property is sold to pay the debt of
the defaulting borrower.

A repossession is a process in which property, such as a car, is taken back by the creditor
when the borrower does not make payments due on the property. Depending on the
jurisdiction, it may or may not require a court order.

Unsecured debt
In finance, unsecured debt refers to any type of debt or general obligation that is not
collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or
liquidation or failure to meet the terms for repayment.
In the event of the bankruptcy of the borrower, the unsecured creditors will have a general claim
on the assets of the borrower after the specific pledged assets have been assigned to the secured
creditors, although the unsecured creditors will usually realize a smaller proportion of their
claims than the secured creditors.
In some legal systems, unsecured creditors who are also indebted to the insolvent debtor are able
(and in some jurisdictions, required) to set-off the debts, which actually puts the unsecured
creditor with a matured liability to the debtor in a pre-preferential position.

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Loan Scheme for Corporate

Lending Notes

The Bank finances the corporate sector for its business activity and for setting up units,
modernisation, diversification and upgradation.
Such finance is extended in the form of

Funded facilities

Non Funded facilities

Funded facilities
1. Term Loans :

Repayment in instalments over a fixed time.

Purpose : For acquisition of fixed assets / machinery or for financing projects.
Amount of Loan : Generally 75% of the cost of maintaining a margin of 25%.
Rate of Interest : check current interest rate
Security : Charge on assets.
2. Cash Credit :

Running account facility.

Purpose :To meet working capital requirements.
Amount of facility : Based upon the Bank's assessment of the working capital
requirement.
Rate of Interest : .
Security : Charge on current assets, collaterals if required.
3. Bill Discounting :

In the nature of post sales limit.

Amount of facility : Generally upto a specified percentage of the value of the bill.
Discounting under : L/C or firm order.
Rate of Interest :
4.

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5. Security : Charge on the Bill, Collateral if required.

Lending Notes
Direct loan: a loan by a lender to a customer without the use of a third party; direct lending
gives the lender greater discretion in making loans
Contingent loan: A contingent loan is a loan that depends on financial ability to pay it back

--------------------------

Individual/Consumer Borrower:
Type of products

Overdrafts, loans, revolving credit

Credit Cards
Leasing
Mortgage

Overdraft
An overdraft occurs when money is withdrawn from a bank account and the available balance
goes below zero. In this situation the account is said to be "overdrawn". If there is a prior
agreement with the account provider for an overdraft, and the amount overdrawn is within the
authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative
balance exceeds the agreed terms, then additional fees may be charged and higher interest rates
may apply.

Reasons for overdrafts

Overdrafts occur for a variety of reasons. These may include:

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Lending Notes

Intentional short-term loan - The account holder finds themselves short of money and
knowingly makes an insufficient-funds debit. They accept the associated fees and cover
the overdraft with their next deposit.

Failure to maintain an accurate account register - The account holder doesn't

accurately account for activity on their account and overspends through negligence.

ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient
availability of funds. The account holder may or may not be aware of this fact at the time
of the withdrawal. If the ATM is unable to communicate with the cardholder's bank, it
may automatically authorize a withdrawal based on limits preset by the authorizing
network.

Temporary Deposit Hold - A deposit made to the account can be placed on hold by the
bank. This may be due to Regulation CC (which governs the placement of holds on
deposited checks) or due to individual bank policies. The funds may not be immediately
available and lead to overdraft fees.

Unexpected electronic withdrawals - At some point in the past the account holder may
have authorized electronic withdrawals by a business. This could occur in good faith of
both parties if the electronic withdrawal in question is made legally possible by terms of
the contract, such as the initiation of a recurring service following a free trial period. The
debit could also have been made as a result of a wage garnishment, an offset claim for a
taxing agency or a credit account or overdraft with another account with the same bank,
or a direct-deposit chargeback in order to recover an overpayment.

Security
There are a wide variety of securities that banks will accept to sanction the overdraft facility. One
point is that the securities and the details of applicability will vary across banks, depending upon
what each bank has decided. Also, each borrower has to carefully look at what is applicable to
them
Overdraft basics

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Lending Notes
Taking a loan every time there is a requirement of funds is not an easy task as far as any business
is concerned. This calls for the presence of some security which on being deposited with the
bank, will the funds be made available for the business. Instead of looking for loans and
expecting to raise money in this manner, there is a better way for dealing with this kind of
situation. Here, an investor can earn returns on his/her investment just like a normal investment
and at the same time use this investment as a means to raise funds that can be used for the
business.
An overdraft facility calls for using some investment of the borrower as a security and then
providing a facility to borrow against this amount. There is a specific amount that is allowed as
the borrowing. The security earns the normal rate of return for the investor and at the same time
provides additional finance facility. The good part of the entire exercise is that the borrowers will
pay interest only for the time period for which they have borrowed the amount and that too for
the specific amount for which they have overdrawn the account.

Revolving credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to
installment credit. Examples of revolving credits used by consumers include credit cards.
Corporate revolving credit facilities are typically used to provide liquidity for a company's dayto-day operations. They were first introduced by the Strawbridge and Clothier Department Store.
[1]

Characteristics of revolving credit:

A revolving loan facility provides a borrower with a maximum aggregate amount of capital,
available over a specified period of time. However, unlike a term loan, the revolving loan facility
allows the borrower to drawdown, repay and re-draw loans advanced to it of the available capital
during the term of the facility. Each loan is borrowed for a set period of time, usually one, three
or six months, after which time it is technically repayable. Repayment of a revolving loan is
achieved either by scheduled reductions in the total amount of the facility over time, or by all
outstanding loans being repaid on the date of termination. A revolving loan made to refinance
another revolving loan which matures on the same date as the drawing of the second revolving
loan is known as a "rollover loan", if made in the same currency and drawn by the same

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Lending Notes
borrower as the first revolving loan. The conditions to be satisfied for drawing a rollover loan are
typically less onerous than for other loans.[2]
A revolving loan facility is a particularly flexible financing tool as it may be drawn by a
borrower by way of straightforward loans, but it is also possible to incorporate different types of
financial accommodation within it - for example, it is possible to incorporate a letter of credit
facility, swingline facility or overdraft facility within the terms of a revolving credit facility. This
is often achieved by creating a sublimit within the overall revolving facility, allowing a certain
amount of the lenders' commitment to be drawn in the form of these different facilities.

Credit card:
A credit card is a small plastic card issued to users as a system of payment. It allows its holder
to buy goods and services based on the holder's promise to pay for these goods and services.[1]
The issuer of the card creates a revolving account and grants a line of credit to the consumer (or
the user) from which the user can borrow money for payment to a merchant or as a cash advance
to the user.
A credit card is different from a charge card: a charge card requires the balance to be paid in
full each month.[2] In contrast, credit cards allow the consumers a continuing balance of debt,
subject to interest being charged. A credit card also differs from a cash card, which can be used
like currency by the owner of the card. Most credit cards are issued by banks or credit unions,
and are the shape and size specified by the ISO/IEC 7810 standard as ID-1. This is defined as
85.60 53.98 mm (33/8 21/8 in) in size.[3]

How credit cards work

Credit cards are issued by a credit card issuer, such as a bank or credit union, after an account has
been approved by the credit provider, after which cardholders can use it to make purchases at
merchants accepting that card. Merchants often advertise which cards they accept by displaying
acceptance marks generally derived from logos or may communicate this orally, as in "We
take (brands X, Y, and Z)" or "We don't take credit cards".
When a purchase is made, the credit card user agrees to pay the card issuer. The cardholder
indicates consent to pay by signing a receipt with a record of the card details and indicating the
amount to be paid or by entering a personal identification number (PIN). Also, many merchants

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Lending Notes
now accept verbal authorizations via telephone and electronic authorization using the Internet,
known as a card not present transaction (CNP).
Electronic verification systems allow merchants to verify in a few seconds that the card is valid
and the credit card customer has sufficient credit to cover the purchase, allowing the verification
to happen at time of purchase. The verification is performed using a credit card payment terminal
or point-of-sale (POS) system with a communications link to the merchant's acquiring bank.
Data from the card is obtained from a magnetic stripe or chip on the card; the latter system is
called Chip and PIN in the United Kingdom and Ireland, and is implemented as an EMV card.
For card not present transactions where the card is not shown (e.g., e-commerce, mail order, and
telephone sales), merchants additionally verify that the customer is in physical possession of the
card and is the authorized user by asking for additional information such as the security code
printed on the back of the card, date of expiry, and billing address.
Each month, the credit card user is sent a statement indicating the purchases undertaken with the
card, any outstanding fees, and the total amount owed. After receiving the statement, the
cardholder may dispute any charges that he or she thinks are incorrect (see 15 U.S.C. 1643,
which limits cardholder liability for unauthorized use of a credit card to $50, and the Fair Credit
Billing Act for details of the US regulations). Otherwise, the cardholder must pay a defined
minimum proportion of the bill by a due date, or may choose to pay a higher amount up to the
entire amount owed. The credit issuer charges interest on the amount owed if the balance is not
paid in full (typically at a much higher rate than most other forms of debt). In addition, if the
credit card user fails to make at least the minimum payment by the due date, the issuer may
impose a "late fee" and/or other penalties on the user. To help mitigate this, some financial
institutions can arrange for automatic payments to be deducted from the user's bank accounts,
thus avoiding such penalties altogether as long as the cardholder has sufficient funds.
Parties involved

Cardholder: The holder of the card used to make a purchase; the consumer.

Card-issuing bank: The financial institution or other organization that issued the credit
card to the cardholder. This bank bills the consumer for repayment and bears the risk that
the card is used fraudulently. American Express and Discover were previously the only
card-issuing banks for their respective brands, but as of 2007, this is no longer the case.
Cards issued by banks to cardholders in a different country are known as offshore credit
cards.

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Lending Notes

Merchant: The individual or business accepting credit card payments for products or
services sold to the cardholder.

Acquiring bank: The financial institution accepting payment for the products or services
on behalf of the merchant.

Independent sales organization: Resellers (to merchants) of the services of the

acquiring bank.

Merchant account: This could refer to the acquiring bank or the independent sales
organization, but in general is the organization that the merchant deals with.

Credit Card association: An association of card-issuing banks such as Discover, Visa,

MasterCard, American Express, etc. that set transaction terms for merchants, card-issuing
banks, and acquiring banks.

Transaction network: The system that implements the mechanics of the electronic
transactions. May be operated by an independent company, and one company may
operate multiple networks.

Affinity partner: Some institutions lend their names to an issuer to attract customers that
have a strong relationship with that institution, and get paid a fee or a percentage of the
balance for each card issued using their name. Examples of typical affinity partners are
sports teams, universities, charities, professional organizations, and major retailers.

Insurance providers: Insurers underwriting various insurance protections offered as

credit card perks, for example, Car Rental Insurance, Purchase Security, Hotel Burglary
Insurance, Travel Medical Protection etc.

Transaction steps

Authorization: The cardholder presents the card as payment to the merchant and the
merchant submits the transaction to the acquirer (acquiring bank). The acquirer verifies

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Lending Notes
the credit card number, the transaction type and the amount with the issuer (Card-issuing
bank) and reserves that amount of the cardholder's credit limit for the merchant. An
authorization will generate an approval code, which the merchant stores with the
transaction.

Batching: Authorized transactions are stored in "batches", which are sent to the acquirer.
Batches are typically submitted once per day at the end of the business day. If a
transaction is not submitted in the batch, the authorization will stay valid for a period
determined by the issuer, after which the held amount will be returned to the cardholder's
available credit (see authorization hold). Some transactions may be submitted in the batch
without prior authorizations; these are either transactions falling under the merchant's
floor limit or ones where the authorization was unsuccessful but the merchant still
attempts to force the transaction through. (Such may be the case when the cardholder is
not present but owes the merchant additional money, such as extending a hotel stay or car
rental.)

Clearing and Settlement: The acquirer sends the batch transactions through the credit
card association, which debits the issuers for payment and credits the acquirer.
Essentially, the issuer pays the acquirer for the transaction.

Funding: Once the acquirer has been paid, the acquirer pays the merchant. The merchant
receives the amount totaling the funds in the batch minus either the "discount rate," "midqualified rate", or "non-qualified rate" which are tiers of fees the merchant pays the
acquirer for processing the transactions.

Chargebacks: A chargeback is an event in which money in a merchant account is held

due to a dispute relating to the transaction. Chargebacks are typically initiated by the
cardholder. In the event of a chargeback, the issuer returns the transaction to the acquirer
for resolution. The acquirer then forwards the chargeback to the merchant, who must
either accept the chargeback or contest it.

Credit cards in ATMs

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Lending Notes
Many credit cards can also be used in an ATM to withdraw money against the credit limit
extended to the card, but many card issuers charge interest on cash advances before they do so on
purchases. The interest on cash advances is commonly charged from the date the withdrawal is
made, rather than the monthly billing date. Many card issuers levy a commission for cash
withdrawals, even if the ATM belongs to the same bank as the card issuer. Merchants do not offer
cashback on credit card transactions because they would pay a percentage commission of the
additional cash amount to their bank or merchant services provider, thereby making it
uneconomical.

3. Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must
pay a series of contractual, periodic, tax deductible payments.
The lessee is the receiver of the services or the assets under the lease contract and the lessor is
the owner of the assets. The relationship between the tenant and the landlord is called a tenancy,
and can be for a fixed or an indefinite period of time (called the term of the lease). The
consideration for the lease is called rent. A gross lease is when the tenant pays a flat rental
amount and the landlord pays for all property charges regularly incurred by the ownership from
lawnmowers and washing machines to handbags and jewellry.[1]
A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a
capital asset, but allows the lessee to use it. The lessee makes payments under the terms of the
lease to the lessor, for a specified period of time.
The lease finance facilities are available for a variety of assets (imported/local) conforming but
not limited to the following categories:
1. Vehicles (Private & Commercial)
2. Plant, Machinery and equipment
3. CNG Equipment

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Lending Notes
4. Generators(Industrial & Commercial)
Leasing is, therefore, a form of rental. Leased assets have usually been plant and machinery, cars
and commercial vehicles, but might also be computers and office equipment. There are two basic
forms of lease: "operating leases" and "finance leases".
Operating leases
Operating leases are rental agreements between the lessor and the lessee whereby:
a) the lessor supplies the equipment to the lessee
b) the lessor is responsible for servicing and maintaining the leased equipment
c) the period of the lease is fairly short, less than the economic life of the asset, so that at the end
of the lease agreement, the lessor can either
i) lease the equipment to someone else, and obtain a good rent for it, or
ii) sell the equipment secondhand.
Finance leases
Finance leases are lease agreements between the user of the leased asset (the lessee) and a
provider of finance (the lessor) for most, or all, of the asset's expected useful life.
Suppose that a company decides to obtain a company car and finance the acquisition by means of
a finance lease. A car dealer will supply the car. A finance house will agree to act as lessor in a
finance leasing arrangement, and so will purchase the car from the dealer and lease it to the
company. The company will take possession of the car from the car dealer, and make regular
payments (monthly, quarterly, six monthly or annually) to the finance house under the terms of
the lease.
Other important characteristics of a finance lease:
a) The lessee is responsible for the upkeep, servicing and maintenance of the asset. The lessor is
not involved in this at all.
b) The lease has a primary period, which covers all or most of the economic life of the asset. At
the end of the lease, the lessor would not be able to lease the asset to someone else, as the asset
would be worn out. The lessor must, therefore, ensure that the lease payments during the primary
period pay for the full cost of the asset as well as providing the lessor with a suitable return on
his investment.
c) It is usual at the end of the primary lease period to allow the lessee to continue to lease the
asset for an indefinite secondary period, in return for a very low nominal rent. Alternatively, the

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Lending Notes
lessee might be allowed to sell the asset on the lessor's behalf (since the lessor is the owner) and
to keep most of the sale proceeds, paying only a small percentage (perhaps 10%) to the lessor.
Why might leasing be popular
The attractions of leases to the supplier of the equipment, the lessee and the lessor are as follows:
The supplier of the equipment is paid in full at the beginning. The equipment is sold to the
lessor, and apart from obligations under guarantees or warranties, the supplier has no further
financial concern about the asset.
The lessor invests finance by purchasing assets from suppliers and makes a return out of the
lease payments from the lessee. Provided that a lessor can find lessees willing to pay the amounts
he wants to make his return, the lessor can make good profits. He will also get capital allowances
on his purchase of the equipment.
Leasing might be attractive to the lessee:
i) if the lessee does not have enough cash to pay for the asset, and would have difficulty
obtaining a bank loan to buy it, and so has to rent it in one way or another if he is to have the use
of it at all; or
ii) if finance leasing is cheaper than a bank loan. The cost of payments under a loan might exceed
the cost of a lease.
Operating leases have further advantages:
The leased equipment does not need to be shown in the lessee's published balance sheet, and so
the lessee's balance sheet shows no increase in its gearing ratio.
The equipment is leased for a shorter period than its expected useful life. In the case of hightechnology equipment, if the equipment becomes out-of-date before the end of its expected life,
the lessee does not have to keep on using it, and it is the lessor who must bear the risk of having
to sell obsolete equipment secondhand.

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Lending Notes
The lessee will be able to deduct the lease payments in computing his taxable profits.

Hire purchase
Hire purchase is a form of instalment credit. Hire purchase is similar to leasing, with the
exception that ownership of the goods passes to the hire purchase customer on payment of the
final credit instalment, whereas a lessee never becomes the owner of the goods.
Hire purchase agreements usually involve a finance house.
i) The supplier sells the goods to the finance house.
ii) The supplier delivers the goods to the customer who will eventually purchase them.
iii) The hire purchase arrangement exists between the finance house and the customer.
The finance house will always insist that the hirer should pay a deposit towards the purchase
price. The size of the deposit will depend on the finance company's policy and its assessment of
the hirer. This is in contrast to a finance lease, where the lessee might not be required to make
any large initial payment.
An industrial or commercial business can use hire purchase as a source of finance. With
industrial hire purchase, a business customer obtains hire purchase finance from a finance house
in order to purchase the fixed asset. Goods bought by businesses on hire purchase include
company vehicles, plant and machinery, office equipment and farming machinery.

5. Mortgage:
A mortgage loan is a loan secured by real property through the use of a mortgage note which
evidences the existence of the loan and the encumbrance of that realty through the granting of a
mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most
often used to mean mortgage loan.
The word mortgage is a Law French term meaning "death contract," meaning that the pledge
ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.[1]

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Lending Notes
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the
property from a financial institution, such as a bank, either directly or indirectly through
intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan,
interest rate, method of paying off the loan, and other characteristics can vary considerably.
In many jurisdictions, though not all (Bali, Indonesia being one exception[2]), it is normal for
home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid
funds to enable them to purchase property outright. In countries where the demand for home
ownership is highest, strong domestic markets have developed.
Basic concepts

Property: the physical residence being financed. The exact form of ownership will vary
from country to country, and may restrict the types of lending that are possible.

Mortgage: the security interest of the lender in the property, which may entail
restrictions on the use or disposal of the property. Restrictions may include requirements
to purchase home insurance and mortgage insurance, or pay off outstanding debt before
selling the property.

Borrower: the person borrowing who either has or is creating an ownership interest in
the property.

Lender: any lender, but usually a bank or other financial institution. Lenders may also be
investors who own an interest in the mortgage through a mortgage-backed security. In
such a situation, the initial lender is known as the mortgage originator, which then
packages and sells the loan to investors. The payments from the borrower are thereafter
collected by a loan servicer.[3]

Principal: the original size of the loan, which may or may not include certain other costs;
as any principal is repaid, the principal will go down in size.

Interest: a financial charge for use of the lender's money.

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Lending Notes

Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or
seize the property under certain circumstances is essential to a mortgage loan; without
this aspect, the loan is arguably no different from any other type of loan.

Mortgage loan types

There are many types of mortgages used worldwide, but several factors broadly define the
characteristics of the mortgage. All of these may be subject to local regulation and legal
requirements.

Interest: interest may be fixed for the life of the loan or variable, and change at certain
pre-defined periods; the interest rate can also, of course, be higher or lower.

Term: mortgage loans generally have a maximum term, that is, the number of years after
which an amortizing loan will be repaid. Some mortgage loans may have no
amortization, or require full repayment of any remaining balance at a certain date, or even
negative amortization.

Payment amount and frequency: the amount paid per period and the frequency of
payments; in some cases, the amount paid per period may change or the borrower may
have the option to increase or decrease the amount paid.

Prepayment: some types of mortgages may limit or restrict prepayment of all or a

portion of the loan, or require payment of a penalty to the lender for prepayment.

The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate
mortgage (ARM) (also known as a floating rate or variable rate mortgage).
In many countries (such as the United States), floating rate mortgages are the norm and will
simply be referred to as mortgages. Combinations of fixed and floating rate are also common,
whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that
period.

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In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for
the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs
(such as property taxes and insurance) can and do change. For a fixed rate mortgage,
payments for principal and interest should not change over the life of the loan,

In an adjustable rate mortgage, the interest rate is generally fixed for a period of time,
after which it will periodically (for example, annually or monthly) adjust up or down to
some market index. Adjustable rates transfer part of the interest rate risk from the lender
to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or
prohibitively expensive. Since the risk is transferred to the borrower, the initial interest
rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the
price differential will be related to debt market conditions, including the yield curve.

Value: appraised, estimated, and actual

Since the value of the property is an important factor in understanding the risk of the loan,
determining the value is a key factor in mortgage lending. The value may be determined in
various ways, but the most common are:
1. Actual or transaction value: this is usually taken to be the purchase price of the
property. If the property is not being purchased at the time of borrowing, this information
may not be available.
2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value
by a licensed professional is common. There is often a requirement for the lender to
obtain an official appraisal.
3. Estimated value: lenders or other parties may use their own internal estimates,
particularly in jurisdictions where no official appraisal procedure exists, but also in some
other circumstances.
Foreclosure and non-recourse lending
In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions principally, non-payment of the mortgage loan - occur. Subject to local legal requirements, the

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property may then be sold. Any amounts received from the sale (net of costs) are applied to the
original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped
from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender
may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower
remains responsible for any remaining debt.
In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged
property apply, and may be tightly regulated by the relevant government. There are strict or
judicial foreclosures and non-judicial foreclosures, also known as power of sale foreclosures. In
some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may
take many months or even years. In many countries, the ability of lenders to foreclose is
extremely limited, and mortgage market development has been notably slower.
Islamic concept:
Islamic Sharia law prohibits the payment or receipt of interest, meaning that Muslims cannot use
conventional mortgages. However, real estate is far too expensive for most people to buy
outright using cash: Islamic mortgages solve this problem by having the property change hands
twice. In one variation, the bank will buy the house outright and then act as a landlord. The
homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the
property. When the last payment is made, the property changes hands.[citation needed]
Typically, this may lead to a higher final price for the buyers. This is because in some countries
(such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the
government on a change of ownership. Because ownership changes twice in an Islamic
mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction
taxes on change of ownership which may be levied. In the United Kingdom, the dual application
of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate
Islamic mortgages.[15]
An alternative scheme involves the bank reselling the property according to an installment plan,
at a price higher than the original price.

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Both of these methods compensate the lender as if they were charging interest, but the loans are
structured in a way that in name they are not, and the lender shares the financial risks involved in
the transaction with the homebuyer.
Purpose of borrowing (see detail in your internship report)
Personal use- running finance
Property
Automobile
Classification
Secured, unsecured/clean, asset-backed
Secured & unsecured loan ( as described above)
Asset backed loan:
An asset-backed security is a security whose value and income payments are derived from and
collateralized (or "backed") by a specified pool of underlying assets. The pool of assets is
typically a group of small and illiquid assets that are unable to be sold individually. Pooling the
assets into financial instruments allows them to be sold to general investors, a process called
securitization, and allows the risk of investing in the underlying assets to be diversified because
each security will represent a fraction of the total value of the diverse pool of underlying assets.
The pools of underlying assets can include common payments from credit cards, auto loans, and
mortgage loans, to esoteric cash flows from aircraft leases, royalty payments and movie
revenues.

b. Regulations and Practices

Relevant SBP laws for lending including: lending limits, exposure calculation, disclosure

and Reporting requirements

Prevalent market practices and bank policies with respect to lending products

Read following articles:

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PRUDENTIAL REGULATIONS FOR CONSUMER FINANCING

(Updated on January 31, 2011) (Page 1 to 25)
PRUDENTIAL REGULATIONS FOR CORPORATE /COMMERCIAL
BANKING. (Updated on January 31, 2011) (page 1 to 73)
(For exposure/lending limit etc. study page 1 to 20)
SBP SME Financing Products
(For Lending product detail see page 1 to 40, but Definition page 1 to 2 are most
important)
----------------------

c. Pricing
1. Calculation of pool rates and internal cost of funds
2. Structuring floating mark-up rates and their impact during change of interest rates
3. The basis for floating mark-up rates using:

Karachi Inter-bank Offer Rates (KIBOR),

SBP Discount Rate and
PIB Rates matching the facility tenor
4. Banks spread over cost of deposits relating to customer and transaction risks
5. Methods and frequency of mark-up recovery and their impact on income
recognition

(Oops . Exact data is not found) Please Consult any Lending book.
Pool Rate is the overhead costs for a Homogeneous Cost Pool divided by the appropriate Cost
Driver associated with the pool.
Homogeneous Cost Pool is a group of overhead costs associated with activities that can use the
same Cost Driver.
Cost Driver is a factor that has a direct cause-effect relationship to a cost, such as direct labor
hours, machine hours, beds occupied, computer time used, flight hours, miles driven, or
contracts.
Loan rates:
The contractual loan rate is set at some mark-up over the base rate, so that interest income
varies directly with movements in the level of borrowing costs.

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The magnitude of the mark-up reflects differences in perceived default and liquidity risk
associated with the borrower.
Floating-rate loans are popular at banks because they increase the rate sensitivity of loans in
line with the increased rate sensitivity of bank liabilities.
Floating-rate loans:
increase the rate sensitivity of bank assets
increase the GAP
reduce potential net interest losses from rising interest rates
Because most banks operate with negative funding GAPs through one-year
maturities, floating-rate loans normally reduce a banks interest rate risk.
Given equivalent rates, most borrowers prefer fixed-rate loans in which the bank
assumes all interest rate risk.
Banks frequently offer two types of inducements to encourage floating-rate
pricing:
1. Floating rates are initially set below fixed rates for borrowers with a
choice
2. A bank may establish an interest rate cap on floating-rate loans to limit the
possible increase in periodic payments
KIBOR:
The karachi Interbank Offered Rate, or KIBOR, is the average interest rate at which term
deposits are offered between prime banks in the Pakistani wholesale money market or interbank
market.

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It is Karachi Inter Bank Offer Rate (KIBOR), given by specialized institution on daily, weekly,
monthly and on 1, 2 and 3 yearly basis to all the commercial banks of Pakistan so that they
charge interest to their customers on that basis. This rate is inflation adjusted rate and then banks
by adding 2 or 3% in KIBOR rate charge their customers for their profit.
Daily current Kibor rate:
SBP Discount rate: The central bank is scheduled to announce monetary policy for the period of
next two months on Friday (today) and it is expected that discount rate will stay unchanged at 12
per cent.
The offered rates for the Pakistan Investment Bonds (PIBs) have shot up to 13.11 percent as
compared with 12.7 percent last month.
-------------------------------------------------

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Chapter # 2
Lending Risk Assessment and Management
Overview
Fundamental concept of Risk Management
Risk and the economic environment
Corporate governance and organizational structure
External reporting
b. Sources of lending risk
Obligor Risk
Obligor Business and industry risk cycles, price trends of raw materials, price trends of
competition products
Transaction failure risk
Other risks political, economic, market, liquidity, foreign exchange, interest rate risk
c. Risk Assessment
Financial analysis
Market check
Market research
Compliance with regulation requirement
Customer Integrity and capability
d. Risk Management
Credit Policy
Delinquency portfolio trends and control measures
Collection and Recovery strategies and methods

Study following document . Guidelines by SBP

Risk Management
Guidelines for Commercial Banks & DFIs. (Page 1 to 42)
e. Types of collateral
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Stated and implied lien over customers assets
Hypothecation
Assignment of receivables
Pledge of paper securities
Pledge of goods
Mortgage of immovable assets

Types of collateral
There is a wide range of possible collaterals used to collateralize credit exposure with various
degrees of risks.

Implied lien
Implied lien is a lien which may be implied and declared by a court of equity out of general
considerations of right and justice as applied to the relations of the parties and the circumstances
of their dealings. It will be based upon the fundamental maxims of equity and it may be created
in the absence of an express contract.
The lien in favor of a vendor who has conveyed the legal title to real estate to a purchaser, as
security for the unpaid purchase money is an implied lien. The implied lien of a vendor is only
permitted as a security for an unpaid purchase price. Such an implied lien will not be enforced
when it would operate as a means of deception or in prejudice of good faith to those affected by
it.

Hypothecation
Hypothecation is the practice where a borrower pledges collateral to secure a debt. The
borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor
in that he has the right to seize possession if the borrower defaults. A common example occurs
when a consumer enters into a mortgage agreement, in which the consumer's house becomes
collateral until the mortgage loan is paid off.
The detailed practice and rules regulating hypothecation vary depending on context and on the
jurisdiction where it takes place. In the US, the legal right for the creditor to take ownership of
the collateral if the debtor defaults is classified as a lien.

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Rehypothecation is a practice that occurs principally in the financial markets, where a bank or
other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing.
Hypothecation in consumer and business finance
Hypothecation is a common feature of consumer contracts involving mortgages the borrower
legally owns the house, but until the mortgage is paid off the creditor has the right to take
possession in the hypothetical case that the borrower fails to keep up with repayments.[1] If a
consumer takes out an additional loan secured against the value of his mortgage (approximately
the current value of the house minus outstanding repayments) the consumer is then
hypothecating the mortgage itself the creditor can still seize the house but in this case the
creditor then becomes responsible for the outstanding mortgage debt. Sometimes consumer
goods and business equipment can be bought on credit agreements involving hypothecation the
goods are legally owned by the borrower, but once again the creditor can seize them if required.

'Assignment of Accounts Receivable'

A lending agreement, often long term, between a borrowing company and a lending institution
whereby the borrower assigns specific customer accounts that owe money (accounts receivable)
to the lending institution. In exchange for assignment of accounts receivable, the borrower
receives a cash advance for a percentage of the accounts receivable. The borrower pays interest
and a service charge on the advance.
In other words,
If the borrower retains ownership of the accounts, then the borrower continues to collect the
accounts receivable and passes the payments on to the lender. Since the borrower retains
ownership, he also retains the risk that some accounts receivable will not be repaid. In this case,
the lending institution may demand payment directly from the borrower. This arrangement is
called assignment of accounts receivable with recourse. Assignment of accounts receivable
should not be confused with pledging or factoring of accounts receivable.
Disposition of A/R: Assignment and factoring

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To shorten the cash-to-cash operating cycle (see diagram), a company may transfer the
receivables to another company or third party for cash:
Cash => purchase => sell goods => collect cash
Goods

on account

Firms may assign their receivables in a borrowing arrangement whereby the A/R serve as
collateral. Assignment can be of two types:
1. General assignment:
All of the receivables serve as collateral for the note (the borrowed funds). The company records
the following journal entry:
Cash....................x
Notes payable.............x

No journal entry is made to the A/R to record the assignment.

However, the arrangement should be disclosed parenthetically or in a note.
New A/R can be substituted for the ones collected during the loan period.
If the company fails to pay back the loan, the lender can seize the assigned A/R.

2. Specific assignment:
Specific A/R are assigned as collateral. (Under general assignment, only a general dollar amount
of A/R is assigned.)
The borrower and lender agree on the conditions:
(1) Who is to receive the collections
(2) The finance charges (in addition to any interest on the borrowed funds)
(3) The specific accounts that will serve as collateral
(4) Notification or non-notification of the account debtors
The following journal entries recognize the liability and reclassify the assigned A/R:
Cash..............................x
N/P......................................x
A/R (assigned)............x
A/R......................................x

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Pledge of paper securities

Definition of pledge of securities
Securities may be pledged such that the person for whose benefit the pledge is established has
the right to demand satisfaction of a claim out of the pledged securities.
Application of provisions concerning possessory pledge
The provisions concerning possessory pledge apply to a pledge of securities unless otherwise
provided by law.
Establishment of pledge on securities
(1) A pledge of bearer securities is created upon delivery of the securities to the pledgee.
(2) A pledge of other securities is created upon delivery of the securities on the basis of a written
pledge contract or endorsement.
Pledge of documents of title
(1) By pledging securities which grant rights in particular goods (document of title), the goods
are also pledged.
(2) If in addition to a document of title there is a special pledge instrument (warrant) and if the
document of title has a notation concerning the pledge which indicates the amount of debt and
due date of the claim, the pledge of the warrant is sufficient for establishment of a pledge on the
goods.
Representation of pledged shares
Pledged shares do not grant the pledgee the right to participate in a general meeting as a
shareholder. This right is retained by the shareholder.
Performance of claim upon pledge of registered securities and bearer securities
If bearer securities, bills of exchange or other securities which may be transferred by
endorsement are pledged, the pledgee has the right to submit a claim arising from the specified
securities regardless of the due date of the claim. The debtor shall perform the obligation of the
securities to the pledgee.

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Pledge of paper securities as collateral:
By collateral security is meant stocks, bonds, and other evidences of property deposited by the
borrower to secure a loan made to him by the bank. Such securities are deposited as a pledge or
guarantee that the loan will be repaid at maturity; if not paid the securities may be sold to
reimburse the lender. Collateral loans though made generally to brokers on such security as
stocks are made also to merchants and commercial houses, and all kinds of collateral are offered.
They may be made on "time," running for thirty days to several months, or on "call," that is,
subject to payment on demand. The various forms of collateral offered to secure bank loans may
be roughly grouped into three divisions: stocks and bonds, merchandise, and real estate. Some of
the more important types of collateral loans may now be briefly considered.
Pledge of goods
Pledging is defined as Offering assets /stocks /goods to a lender as collateral for a loan.
Though the asset will be pledged to the lender, it it still owned by the borrower unless he/she
defaults on the loan.
Pledge of Goods may be considered for use where a debt is owed or may in the future be owed
by a person, and additional security is required. By signing this Cession and Pledge of Goods,
the debtor agrees to transfer to the creditor the right to the goods being ceded or pledged should
the debtor default. The goods may include, for example, shares, Kruger Rands, or an investment
account

How mortgage, pledge and hypothecation are different to each other?

MORTGAGE:
Mortgage as the transfer of interest in specific immovable property for the purpose of securing
the payment of money, advanced or to be advanced by way of loan, an existing or future debt, or
the performance of an engagement which may give rise to a pecuniary liability.
The transferor is called the mortgagor, the transferee is a mortgagee. The principal money
and interest thereon, the payment of which is secured are called the mortgage money.
PLEDGE:
Pledge as bailment of goods as security for payment of a debt or performance of a promise.
The person who offers the security is called pawner or pledger and the bailee is called the
pawnee or pledgee.

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In case of pledge:

There should be bailment of goods; and

the objective of the bailment should be to hold the goods as security for the payment of a
debt or the performance of a promise. The bailment should be on behalf of a debtor or an

intending debtor.
The pawner or pledger remains the owner of the property except to the extent of interest

which rests with the pledge because of the loan borrowed from the bank.
There is actual or constructive delivery of goods.
Pledge is not created in respect of future goods. The goods must be specific and be

capable of identification.
The goods must be in possession of pledgee. Otherwise there is no pledge.
Pledge agreement may be oral or implied.

HYPOTHECATION:
Hypothecation is a charge against property for an amount of debt where neither ownership nor
possession is passed to the creditor. Hypothecation is a charge against movable property. The
goods will, unlike a pledge, be retained by the borrower and be in the borrowers possession. The
borrower gives only a letter stating that the goods are hypothecated to the banker as security for
the loan granted. There will be no transfer of the property to the borrower.
Features:

It is an equitable charge created against immovable property.

Neither the possession nor the ownership of the property is transferred to the banker.
The contents of the letter of hypothecation determine the rights of the banker.
The banker has the right to take possession of the property (if there is default) and sell the

hypothecated goods to realize his dues.

If selling rights are not incorporated in the letter, the banker has to approach a court of

law to recover the dues against the hypothecated property.

Hypothecated goods can be sold any time to the genuine purchaser for value without the
knowledge of the banker or the hypothecated property can be pledged to another person
provided the pledgee has no knowledge of the previous hypothecation.

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Mortgage of immovable assets

A mortgage loan is a loan secured by real property through the use of a mortgage note which
evidences the existence of the loan and the encumbrance of that realty through the granting of a
mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most
often used to mean mortgage loan.
The word mortgage is a Law French term meaning "death contract," meaning that the pledge
ends (dies) when either the obligation is fulfilled or the property is taken through foreclosure.
A home buyer or builder can obtain financing (a loan) either to purchase or secure against the
property from a financial institution, such as a bank, either directly or indirectly through
intermediaries.
Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method
of paying off the loan, and other characteristics can vary considerably.

How Mortgages Work

In simple terms, a mortgage is a loan in which your house functions as the collateral. The bank
or mortgage lender loans you a large chunk of money (typically 80 percent of the price of the
home), which you must pay back -- with interest -- over a set period of time. If you fail to pay
back the loan, the lender can take your home through a legal process known as foreclosure.
(See detail of Legal process taken by bank in case of default in IBP journal)
------------------------------------------

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Chapter # 3

Documentation and Collateral

a. Different types of financing agreements

Project financing
Account receivable financing
Lease financing

Project financing
Project finance is the long term financing of infrastructure and industrial projects based upon
the projected cash flows of the project rather than the balance sheets of the project sponsors.
Usually, a project financing structure involves a number of equity investors, known as sponsors,
as well as a syndicate of banks or other lending institutions that provide loans to the operation.
The loans are most commonly non-recourse loans, which are secured by the project assets and
paid entirely from project cash flow, rather than from the general assets or creditworthiness of
the project sponsors, a decision in part supported by financial modeling.
The financing is typically secured by all of the project assets, including the revenue-producing
contracts. Project lenders are given a lien on all of these assets, and are able to assume control of
a project if the project company has difficulties complying with the loan terms.
Project financing is an innovative and timely financing technique that has been used on many
high-profile corporate projects, including Euro Disneyland and the Eurotunnel. Employing a
carefully engineered financing mix, it has long been used to fund large-scale natural resource
projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects.
Increasingly, project financing is emerging as the preferred alternative to conventional methods
of financing infrastructure and other large-scale projects worldwide.
Project Financing discipline includes understanding the rationale for project financing,
how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds.
In addition, one must understand the cogent analyses of why some project financing plans have
succeeded while others have failed. A knowledge-base is required regarding the design of

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contractual arrangements to support project financing; issues for the host government legislative
provisions, public/private infrastructure partnerships, public/private financing structures; credit
requirements of lenders, and how to determine the project's borrowing capacity; how to prepare
cash flow projections and use them to measure expected rates of return; tax and accounting
considerations; and analytical techniques to validate the project's feasibility
Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline,
power station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project
finance is different from traditional forms of finance because the financier principally looks to
the assets and revenue of the project in order to secure and service the loan. In contrast to an
ordinary borrowing situation, in a project financing the financier usually has little or no recourse
to the non-project assets of the borrower or the sponsors of the project. In this situation, the
credit risk associated with the borrower is not as important as in an ordinary loan transaction;
what is most important is the identification, analysis, allocation and management of every risk
associated with the project.
Parties to a Project Financing
There are several parties in a project financing depending on the type and the scale of a project.
The most usual parties to a project financing are;
1. Project company
2. Sponsor
3. Borrower
4. Financial Adviser
5. Technical Adviser
6. Lawyer
7. Debt financiers
8. Equity Investors
9. Regulatory agencies

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10. Multilateral Agencies
11. Host government / grantor
Contractual Framework
The typical project finance documentation can be reconducted to four main types

Shareholder/sponsor documents

Project documents

Finance documents

Other project documents

Loan Agreement
An agreement between the project company (borrower) and the lenders. Loan agreement governs
relationship between the lenders and the borrowers. It determines the basis on which the loan can
be drawn and repaid, and contains the usual provisions found in a corporate loan agreement. It
also contains the additional clauses to cover specific requirements of the project and project
documents. Basic terms of a loan agreement include the following provisions.

General conditions precedent

Conditions precedent to each drawdown

Availability period, during which the borrower is obliged to pay a commitment fee

Drawdown mechanics

An interest clause, charged at a margin over base rate

A repayment clause

Financial covenants - calculation of key project metrics / ratios and covenants

Dividend restrictions

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Representations and warranties

The illegality clause

See detail related its regulations & practices in law in following document:
SBP Guidelines for
Infrastructure Project Financing (IPF) ( Page 1 to 26)
-------------------

Account receivable financing

A type of asset-financing arrangement in which a company uses its receivables - which
is money owed by customers - as collateral in a financing agreement. The company receives an
amount that is equal to a reduced value of the receivables pledged. The age of the receivables
have a large effect on the amount a company will receive. The older the receivables, the less the
company can expect. Also referred to as "factoring".

Uses of Receivable financing:

Receivable financing allows you to improve cash flow and business output.

Receivable financing is a tremendous source of immediate capital for your business.

It is a great solution for solving cash flow problems with a business, and also has tons of
distinct advantages over more traditional options like a standard business loan or a small
business line of credit.

With receivable financing you sell your accounts receivables to a third party company
that will pay you for the invoices.

This gives your business instant cash instead of having to wait to receive payment which
is why many businesses run into cash flow issues.

Advantages to receivable financing

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The 3 Main Advantages of account receivables financing:

Immediate Cash/No Waiting. You can receive quick payment following shipment,
delivery and invoicing (less than 24 hours in some cases) to generate cash much sooner
than if you collect the money on your own.

Analysis of customers' creditworthiness. Prior to purchasing your invoice, a factor

conducts a credit analysis on the client you are invoicing to determine the risk. You are
entitled to the resulting analysis and can assist you in your future business dealings with
that customer/client.

You are not borrowing money. Again, the cash advanced is based on your client's credit
status, not yours.

With receivable financing you can also take advantage of discounts on inventory or purchases for
your business through being able to buy in larger volumes or being able to take advantages of
early payment discounts from the suppliers. There is also no limit on the amount of capital you
can get with this financing option because the capital available increases as sales increase.

Lease Financing
Leasing is a super financing alternative if you are seeking funding to obtain business equipment.
Finance companies, banks, and many firms that sell high-priced equipment will lease to you.
When you lease an item, the lessor retains ownership of it. You use the equipment by virtue of
the monthly payments you will be required to make. You can often purchase the equipment at the
end of the lease term for its market value or less.
Advantage to leasing
A great advantage to leasing is that it may be allowed to be "off the balance sheet." This means
that leases can be disclosed as balance sheet footnotes. They do not appear as debt even though
they represent an ongoing company liability. This may sound like financial doublespeak, but it's
not. Let's say a supplier is considering whether or not to extend credit to you, or a bank is

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weighing a loan proposal you have submitted. The lease commitment will play a relatively minor
role in evaluating your debt burden.

b. Types of collateral documentation

Hypothecation agreement
Lien agreement
Pledge agreement
Standby letter of credit

Hypothecation Agreement
An agreement between a borrower and a lender where by the borrower pledges asset as collateral
on a loan without the lender taking possession of the collateral. It especially applies to
mortgages; the borrower hypothecates when he/she pledges the house as collateral for payment
of the mortgage, or he/she may hypothecate the mortgage in order to borrow against the value of
the house.
In both situations, the borrower retains possession of the house, but the lender has the right to
take possession if the borrower does not service the debt. Hypothecation agreements also occur
in trading; a broker will allow an investor to borrow money in order to purchase securities with
those securities as collateral. The investor owns the securities, but the broker may take them if
the debt is not serviced or if the value of the securities falls below a certain level.
Lien Agreement:
A legal claim against an asset which is used to secure a loan and which must be paid when the
property is sold. Liens can be structured in many different ways. In some cases, the creditor will
have legal claim against an asset, but not actually hold it in possession, while in other cases the
creditor will actually hold on to the asset until the debt is paid off. The former is a more common
arrangement when the asset is productive, since the creditor would prefer that the asset be used
to produce a stream of income to pay off debt rather than just held in possession and not used. A
claim can hold against an asset until all the obligations to the creditor are cleared (a general lien),
or just until the obligations against that particular assets are cleared (a particular lien).
Pledge Agreement:

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A contract of pledge specifies what is owed, the property that shall be used as a pledge, and
conditions for satisfying the debt or obligation. In a simple example, John asks to borrow $500
from Mary. Mary decides first that John will have to pledge his stereo as security that he will
repay the debt by a specific time. In law John is called the pledgor, and Mary the pledgee. The
stereo is referred to as pledged property. As in any common pledge contract, possession of the
pledged property is transferred to the pledgee. At the same time, however, ownership (or title) of
the pledged property remains with the pledgor. John gives the stereo to Mary, but he still legally
owns it. If John repays the debt under the contractual agreement, Mary must return the stereo.
But if he fails to pay, she can sell it to satisfy his debt.
Pledged property must be in the possession of a pledgee. This can be accomplished in one of two
ways. The property can be in the pledgee's actual possession, meaning physical possession (for
example, Mary keeps John's stereo at her house). Otherwise, it can be in the constructive
possession of the pledgee, meaning that the pledgee has some control over the property, which
typically occurs when actual possession isimpossible.
For example, a pledgee has constructive possession of the contents of a pledgor's safety deposit
box at a bank when the pledgor gives the pledgee the only keys to the box.

In pledges both parties have certain rights and liabilities.

Pledger Rights:
The contract of pledge represents only one set of these: the terms under which the debt or
obligation will be fulfilled and the pledged property returned. On the one hand, the pledgor's
rights extend to the safekeeping and protection of his property while it is in possession of the
pledgee. The property cannot be used without permission unless use is necessary for its
preservation, such as exercising a live animal. Unauthorized use of the property is called
conversion and may make the pledgee liable for damages; thus, Mary should not use John's
stereo while in possession of it.
Pledgee Rights:

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Lending Notes
For the pledgee, on the other hand, there is more than the duty to care for the pledgor's property.
The pledgee has the right to the possession and control of any income accruing during the period
of the pledge, unless an agreement to the contrary exists. This income reduces the amount of the
debt, and the pledgor must account for it to the pledgee. Additionally, the pledgee is entitled to be
reimbursed for expenses incurred in retaining, caring for, and protecting the property. Finally, the
pledgee need not remain a party to the contract of pledge indefinitely. She can sell or assign her
interest under the contract of the pledge to a third party. However, the pledgee must notify the
pledgor that the contract of pledge has been sold or reassigned; otherwise, she is guilty of
conversion.

Standby Letter of Credit - SLOC'

A guarantee of payment issued by a bank on behalf of a client that is used as "payment of last
resort" should the client fail to fulfill a contractual commitment with a third party.
Standby letters of credit are created as a sign of good faith in business transactions, and are proof
of a buyer's credit quality and repayment abilities. The bank issuing the SLOC will perform brief
underwriting duties to ensure the credit quality of the party seeking the letter of credit, then send
notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Also known as a "non-performing letter of credit".
Standby letters of credit are issued by banks to stand behind monetary obligations, to insure the
refund of advance payment, to support performance and bid obligations, and to insure the
completion of a sales contract. The credit has an expiration date.
Use of standby letter of credit
The standby letter of credit is often used to guarantee performance or to strengthen the credit
worthiness of a customer. In the above example, the letter of credit is issued by the bank and held
by the supplier. The customer is provided open account terms. If payments are made in
accordance with the suppliers' terms, the letter of credit would not be drawn on. The seller
pursues the customer for payment directly. If the customer is unable to pay, the seller presents a
draft and copies of invoices to the bank for payment.

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Lending Notes
Standby Letter of credit is Domestic Transaction
The domestic standby letter of credit is governed by the Uniform Commercial Code. Under these
provisions, the bank is given until the close of the third banking day after receipt of the
documents to honor the draft.
Procedures required to execute a Standby Letter of Credit are less rigorous.
The standby credit is a domestic transaction. It does not require a
correspondent bank (advising or confirming). The documentation
requirements are also less tedious as compared to commercial letter of
credit.
c. Safe-keeping of borrower/customer documentation
In-house arrangements and its modus operandi
Ex-house arrangements and its modus operandi
Arrangements for storage of documents and the system for recording
Procedures to be followed for depositing and retrieving documents
In-House Arrangements
In-house arrangements are explained in various manuals obtainable via the secretary. New staff
is required to acquaint themselves with the contents of an elaborate file describing operational
processes and procedures. Volunteers are required to read information applicable to them and so
are interns.
The purpose of written, in-house arrangements and policies is to ensure as smooth an operation
as possible and to provide clarity and stability to all parties about agreed on practices. There is a
process in place of regularly reviewing policies and in-house arrangements are reviewed on a
regular basis.
Recording File Movements
Files are issued to action officers in at least three circumstances.

A document arrives in the records office, is recorded and filed, and the file is passed to the
officer.
A file is to be brought up to the officer (see Section 8).

The officer requests the file in person or by telephone.

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Lending Notes
Records office staff must be able to determine the location of every file for which they are
responsible. Each time a file moves, this fact must be recorded in the records office. File
movements are monitored in a number of ways: on file transit sheets that are filed in a file transit
book, on transit ladders that appear on file covers, on file movement slips and through regular file
censuses.
Retrieving Files from the Records Centre
Files that have been closed and transferred to the records centre may only be retrieved by
authorised staff. The records centre will not accept requests for files from anyone except the
head of the records office in the agency concerned, or an agency that is a successor to it. All
requests for files should therefore be directed through the head of the records office.
When a user requests a file which is held in the records centre, consult the records centre
Transfer file to determine the exact title, reference number, box number and location number.
Then complete three copies of the Records Centre Request Form. The three copies of the form
should be sent or taken to the records centre and the file collected. One copy of this form will be
sent with the file requested to the records office. The two other copies will be retained by the
records centre.
[See exact data & detail in any Lending book sorry data is not found ]

d.Banks risk under various types of collateral

Ideally, collateral taken by a central bank as part of its OMO should not carry credit
or liquidity risk, though it will inevitably carry some market risk.
The majority of central banks, for a variety of reasons, extend the list of eligible
collateral beyond domestic-currency denominated government (or central bank)
Securities and face trade-offs between minimizing additional risk (credit, liquidity,
exchange rate, operational) and providing access to a sufficiently wide group of
counterparties to allow the effective implementation of monetary policy and liquidity
management.

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Lending Notes
The incentives for adverse selection will change depending on market conditions.
Central banks need to remain alert to such changes and the impact on the markets
Use of collateral.
Risk associated with various types of collateral:

Increases Operational Risk

Legal Risk

Concentration Risk

Settlement Risk

Valuation risk

Increasing Market Risk

Increased overhead

Reduced trading activity

Risk faced by banks:

Credit risk risk that party to contract fails to fully discharge terms of contract
Interest rate risk risk deriving from variation of market prices owing to
interest rate change
Market risk more general term for risk of market price shifts
Liquidity risk risk asset owner unable to recover full value of asset when sold
(or for borrower, credit not rolled over)
Market liquidity risk risk that a traded asset market may vary in liquidity of the
Claims traded

Other risks

operational risk
risk of fraud
reputation risk

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Lending Notes
Systemic risk that the financial system may undergo contagious failure following other forms
of shock/risk.

e. Monitoring of charge/margin

Appointment and role of Muccudums

Obligations of the custodial services under the arrangement
Monitoring Guarantees- issuers status, guarantee validity, conditions for claims
Monitoring of Insurance Policies- issuers status, policy validity, conditions for claims
Monitoring of Immovable Assets
Monitoring of stock reports and valuation
Proper system and credible sources for monitoring prices of financed assets and collateral

Source: www. Google.com and websites searched from Google.

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