PROGRAM MBA - SEMESTER IV

SUBJECT CODE & NAME - MA0043

CORPORATE BANKING
1. Who are the parties involved in Letters of
Credit ? Explain the Letters of Credit
mechanism covering the liabilities and
rights
of
both
the applicant and the
beneficiary.
Parties involved in Letters of Credit (L/C)
Applicant/opener: It is generally the buyer of the goods who gets the letter
of credit issued by his banker in favour of the seller. The person on whose
behalf and under whose instructions the letter of credit is issued is known as
applicant/ opener of the credit.
Opening bank/issuing bank:It is the bank issuing the letter of credit.
Beneficiary:The seller of goods in whose favour the letter of credit is issued.
Advising bank:Notification regarding issuing of letter of credit may be
directly sent to the beneficiary by the opening bank. It is, however,
customary to advise the letter of credit through some other bank operating
at the location of the seller. The bank which advises the letter of

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2.
Compare and contrast financial and
operating lease.
Financial Lease
One of the fundamental features of a financial bank lease is a condition in
accordance with which the lesser agrees to transfer the title for the asset at
the completion of the lease period at a nominal cost. This kind of lease also
gives an option to the lessee to purchase the utilized asset when the lease
period is over. On the lessers part, about 90 per cent of the fair price of
asset is recovered by the lease rentals and the lease tenure is about 75 per
cent of the economic life of the asset. It is to be noted that in a financial
bank lease, only the title deeds remain with the lesser. Almost all the risks
incidental to the ownership of the asset and all the

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3.
Project financing involves some basic
decisions viz. period of analysis, choice of
financing mix, cut-off decision and choice of
evaluation techniques. Illustrate those.

Project Finance
Before any project financing is carried out, some basic decisions must be in
place. These include the period of analysis, a tentative choice of financing
mix, cut-off decision and choice of evaluation techniques.
1. Period of Analysis
Usually, the period of forecast is a matter of the companys policy based on
the consideration of factors like product life cycle, business cycle, rate of
change in technology, rate of change in taste, managerial ability to foresee
in the future and database available to support forecast. Information
technology projects typically can be planned for about three years due to the
technological development rate, short product life cycle and uncertainty
caused by low entry

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4.
Forfaiting is a form of international
supply chain financing. Explain in detail. How
does it differ with factoring ?
Forfaiting
Forfaiting is a form of international supply chain financing. It involves the
discounts of future payment obligations on a without-recourse basis.
Forfaiting represents the buying of obligations, due at a date in future and
arises from the goods or services delivery in export transactions, without
recourse to the preceding holder of the obligation. Under forfaiting, the
forfaitor deducts interest in advance for the whole period of credit and
disburses the net proceeds to the exporter. The sole responsibility of the

exporter is to manufacture and deliver the goods to the importer, which

creates a valid payment obligation of the importer. Forfaiting

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5. Explain the loan pricing mechanism
followed by the commercial banks. Give
examples.
Loan Pricing Mechanism
The loan price depends on cost of funds to an individual bank, operating
cost, risk premium for the type of loan and advance, expected profit margin
of the bank etc. The cost of funds to a bank include the components such as
interest paid on deposits, interest paid on borrowings availed from other
organizations, dividend payment on equity and any other cost incurred in
raising the resource.
The total interest paid on deposits depends on the deposit mix of a particular
bank i.e., the proportion of different deposits in total deposits (current
deposits, savings deposits and term deposits). Higher the proportion of
low/no interest deposits, lower will be the cost of fund to the bank. Similarly,
cost of borrowing also depends on the source of borrowings. The

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6. Explain some of the important exchange

rate quotes in foreign exchange transactions.
Important exchange rate quotes
Some of the popular exchange rate quotes are as follows:
(i) Spot and forward rates:The current exchange rate of a spot transaction is
known as the spot rate. In a spot transaction, the settlement is usually done
within two business days and such rates are called forward rates. The
forward transactions therefore involve a delivery date in the future, which
may extend even up to a year. As the settlement is done at a predetermined
exchange rate, this is a popular mechanism to reduce the exchange rate risk
of the traders. The Spot Exchange rate is the rate at which a currency can be
bought or sold for immediate delivery

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