Professional Documents
Culture Documents
A.1 Objectives
A.2 Introduction
2. Various Services
A) The objectives of this Module are to understand the meaning and importance of corporate
banking and the various services offered by banks to corporate, such as:
Cash Management
Salary Payment
Debtors Management
Trusteeship
Custodial Services
Business Advisory
Forex Management
Export Finance
Banks offer various products to business organizations to help them manage their finances on
both the assets and liabilities sides, as also in off balance sheet items.
On the assets side they provide deposit accounts of various maturities to suit the cash flow
requirement of the business unit, cash management product for managing the cash inflows and
outflows across different locations.
On the liabilities side banks provide services such as working capital finance, discounting of
bills, export credit, short term finance, and structured finance and term loans.
In off-balance sheet services banks provide non-funded services such as letters of credit, banks
guarantees and collection of documents.
Banks are also offering value added services to corporates, such as syndication of loans, real
time gross settlement, channel financing, corporate salary accounts, bankers to rights/public
issues, corporate internet banking, forex desk, money market desk, derivatives desk, employees’
trust, tax collection, payment gateway services. The range of services, especially the ITES
(Information Technology Enabled Services) such as the internet based services are made possible
and offered by banks as the competition between them increases.
Corporate banking encompasses services that banks provide to companies a wide range of
banking and financial services provided to domestic and international operations of large local
corporates and local operations of multinationals corporations. Services include access to
commercial banking products, including working capital facilities such as domestic and
international trade operations and funding, channel financing, and overdrafts, as well as domestic
and international payments, Indian Rupee term loans -including external commercial borrowings
in foreign currency, letters of guarantee etc.
Investment Banking provides advisory and financing, equity securities, asset management,
treasury and capital markets, and private equity activities.
Banks usually service their clients by sector based client service teams that combine relationship
managers, product specialists and industry specialists to develop customised financial solutions.
CASH MANAGEMENT
With the availability of IT enabled service popularly known as Core Banking Solution that links
all branches of a bank real time, all major banks provide platforms to banks to transact online to
manage their cash flow and receive reporting anytime, anywhere through our secure online site
access.
Banks offer a complete suite of products for managing clients’ cheque and draft collections at
nearly thousands of locations across India. This includes capabilities to locally clear cheques
even at locations where the bank itself does not have a branch presence.
These services also include provision of comprehensive Management Information System, pick
up services and credit as per pre agreed arrangements.
Electronic Collections
This system is a funds transfer mechanism where transfer of money takes place from one bank to
another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system
through the banking channel. Settlement in 'real time' means payment transaction is not subjected
to any waiting period. The transactions are settled as soon as they are processed. 'Gross
settlement' means the transaction is settled on one to one basis without bunching with any other
transaction. Considering that money transfer takes place in the books of the Reserve Bank of
India, the payment is taken as final and irrevocable.
RTGS is different from Electronic Fund Transfer System (EFT) or National Electronics
Funds Transfer System (NEFT)
Module A: Corporate Banking & Finance Page 5
EFT and NEFT are electronic fund transfer modes that operate on a deferred net settlement
(DNS) basis which settles transactions in batches. In DNS, the settlement takes place at a
particular point of time. All transactions are held up till that time. For example, NEFT settlement
takes place 6 times a day during the week days (9.00 am, 11.00 am, 12.00 noon. 13.00 hours,
15.00 hours and 17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and 12.00 noon).
Any transaction initiated after a designated settlement time would have to wait till the next
designated settlement time. Contrary to this, in RTGS, transactions are processed continuously
throughout the RTGS business hours.
RTGS system is primarily for large value transactions. The minimum amount to be remitted
through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. No minimum or
maximum stipulation has been fixed for EFT and NEFT transactions.
Under normal circumstances the beneficiary branches are expected to receive the funds in real
time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit
the beneficiary's account within two hours of receiving the funds transfer message.
The remitting bank receives a message from the Reserve Bank that money has been credited to
the receiving bank. Based on this the remitting bank can advise the remitting customer that
money has been delivered to the receiving bank.
It is expected that the receiving bank will credit the account of the beneficiary instantly. If the
money cannot be credited for any reason, the receiving bank would have to return the money to
the remitting bank within 2 hours. Once the money is received back by the remitting bank, the
original debit entry in the customer's account is reversed.
National Electronic Funds Transfer (NEFT) system is a nationwide funds transfer system to
facilitate transfer of funds from any bank branch to any other bank branch.
As on December 31, 2009, 52427 branches of 89 banks are participating. Steps are being taken
by RBI to widen the coverage both in terms of banks and branches.
There is no restriction of centres or of any geographical area inside the country. The system uses
the concept of centralised accounting system and the bank's account that is sending or receiving
the funds transfer instructions, gets operated at one centre, i.e., only at Mumbai. The individual
branches participating in NEFT could be located anywhere across the country, as detailed in the
list provided on our website.
The beneficiary gets the credit on the same day or the next day depending on the time of
settlement.
How is it different from RTGS and EFT? NEFT is an electronic payment system to transfer
funds from any part of country to any other part of the country and works on Net settlement,
unlike RTGS that works on gross settlement and EFT which is restricted to the fifteen centers
only where RBI offices are located.
ECS is a mode of electronic funds transfer from one bank account to another bank account using
the services of a Clearing House. This is normally for bulk transfers from one account to many
accounts or vice-versa. This can be used both for making payments like distribution of dividend,
interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as
payments to utility companies like telephone, electricity, or charges such as house tax, water tax,
etc or for loan installments of financial institutions/banks or regular investments of persons.
What are the types of ECS? In what way they are different from each other?
There are two types of ECS called ECS (Credit) and ECS (Debit).
ECS (Credit) is used for affording credit to a large number of beneficiaries by raising a single
debit to an account, such as dividend, interest or salary payment.
ECS (Debit) is used for raising debits to a number of accounts of consumers/ account holders for
crediting a particular institution.
ECS payments can be initiated by any institution (called ECS user) that have to make bulk or
repetitive payments to a number of beneficiaries. They can initiate the transactions after
registering themselves with an approved clearing house. ECS users have also to obtain the
consent as also the account particulars of the beneficiary for participating in the ECS clearings.
The ECS user's bank is called as the sponsor bank under the scheme and the ECS beneficiary
account holder is called the destination account holder. The destination account holder's bank or
the beneficiary's bank is called the destination bank.
The ECS users intending to effect payments have to submit the data in a specified format to one
of the approved clearing houses. The list of the approved clearing houses or the list of centres
where the ECS facility has been provided is available at www.rbi.org.in.
The clearing house would debit the account of the ECS user through the account of the sponsor
bank on the appointed day and credit the accounts of the recipient banks, for affording onward
credit to the accounts of the ultimate beneficiaries.
At present ECS facility is available at more than 60 centres and the full list is available at the
web-site of RBI.
Advantages to clients:
The beneficiaries need to maintain an account with one of the banks at these centres in order to
avail of the benefit of ECS.
The end beneficiary need not make frequent visits to his bank for depositing the physical paper
instruments.
The ECS user saves on administrative machinery for printing, dispatch and reconciliation.
Chances of frauds due to fraudulent access to the paper instruments and encashment are
minimised.
Provides the ability to make payment and ensure that the beneficiaries' account gets credited on a
designated date.
Advantage to banks:
Paper handling also creates lot of pressure on banks as they have to encode the instruments,
present them in clearing, monitor their return and follow up with the concerned bank and
customers.
In ECS banks simply get the payment particulars relating to their customers. All they need to do
is to match the account particulars like name, account number and credit the proceeds
It is a scheme under which an account holder with a bank can authorise an ECS user to recover
an amount at a prescribed frequency by raising a debit in his account. The ECS user has to
collect an authorisation which is called ECS mandate for raising such debits. These mandates
have to be endorsed by the bank branch maintaining the account.
Any ECS user desirous of participating in the scheme has to register with an approved clearing
house. The list of approved clearing houses is available at RBI web-site www.rbi.org.in. He
should also collect the mandate forms from the participating destination account holders, with
bank's acknowledgement. A copy of the mandate should be available with the drawee bank.
The ECS user has to submit the data in specified form through the sponsor bank to the clearing
house. The clearing house would pass on the debit to the destination account holder through the
clearing system and credit the sponsor bank's account for onward crediting the ECS user. All the
unprocessed debits have to be returned to the sponsor bank within the time frame specified.
Banks will treat the electronic instructions received through the clearing system on par with the
physical cheques.
Advantages to clients
Trouble free- Eliminates the need to go to the collection centres/banks by the customers and no
need to stand in long queues for payment
Peace of mind – Customers also need not track down payments by last dates.
The ECS user saves on administrative machinery for collecting the cheques, monitoring their
realisation and reconciliation
Chances of frauds due to fraudulent access to the paper instruments and encashment are avoided.
Advantages to banks
Paper handling also creates lot of pressure on banks as they have to encode the instruments,
present them in clearing, monitor their return and follow up with the concerned bank and
customers.
Module A: Corporate Banking & Finance Page 9
In ECS banks simply get the mandate particulars relating to their customers. All they need to do
is to match the account particulars like name, a/c number and debit the accounts.
Wherever the details do not match, they have to return it back, as per the procedure.
The mandate given is on par with a cheque issued by a customer. The only stipulation under the
scheme is that the customer has to give prior notice to the ECS user, to ensure that they do not
include the debits.
It is left to the choice of the individual customer and the ECS user to finalise these aspects. The
mandate can contain a maximum ceiling; it can also specify the purpose as also a validity period.
This allows clients to concentrate their receivables through a single account with the bank.
Cash Deposits at any of the branches of almost all large banks are credited instantly through the
Core Banking Solutions.
Other services provided are Foreign Currency Collections through strategically placed
correspondents in major financial centres where the payment advices are received by SWIFT.
Banks offer cheques payable at par at all it branches and for customers with bulk cheque writing
requirements. They offer a complete payables outsourcing solution integrated with their state of
the art Delivery Channels.
Banks offer payment outsourcing service that is designed to streamline the cheque payment
process. Through an interface with the bank’s delivery channels (electronic banking platform),
payment data can be taken directly from the client’s accounting system in a single file download
and transmitted to the bank for processing.
Security controls ensure data integrity and confidentiality throughout the import and
transmission process. In addition to this Email payment advices to beneficiaries and
comprehensive MIS are also offered to corporate clients.
Payments by Banker's Cheques and demand drafts can be made at the bank’s branch locations
and through their extensive correspondent bank network at non bank branch locations across the
country.
Instructions for Banker's Cheques can also be given through the bank’s internet banking
platform.
Let us sum up
It facilitates remittances through online real time branch network connectivity and local and
outstation collections
Transfer of funds between different banks is effected electronically through RTGS, NEFT, RBI-
EFT and ECS mechanisms
Key Words
Collection of Cheques: To obtain payment of cheques and drafts submitted by clients drawn on
other banks at different centres
c) What is ECS?
Terminal Questions
a) What are the advantages to clients and banks in RTGS, NEFT and ECS?
b) Write briefly about the various products offered by banks under their Cash Management
System?
a) RTGS is Real Time Gross Settlement – a mechanism for transfer of funds between
different banks, through the RBI. NEFT is also a similar mechanism for transfer of funds
between different banks, through the RBI.
c) ECS is an Electronic Clearing System to handle credits and debits such as dividend and
interest warrants, regular payments to utilities, etc.
d) Payable at Par customer cheques are payable at par at all branches of the bank, provided
to clients as a substitute for drafts. Thus, a customer can issue a cheque to his supplier in
a different city, which can be encashed by the vendor at par at his account with a different
bank, through local clearing at the vendor’s centre.
Banks offer Corporate Salary Payment services designed to offer payroll solutions through in a
24 X 7 environment.
They leverage their extensive network of distribution channels spread across hundreds of centers
through a network of branches and ATMs to provide value to the end user.
Benefits to Corporates
Efficient salary disbursal – the corporate client only needs to give a single instruction, together
with a list showing the name, account number and amount payable to the employee.
Web Upload - Many banks now offer the clients a platform to transfer salaries and
reimbursements directly from their current account with the bank to the employees' accounts
using internet connectivity from their own office.
Benefits to Employees
Unparalleled Access – The employee can draw on his account from an outlet convenient for him
under the anywhere banking facility through the bank’s network of Branches, ATM and Internet
banking facility.
Banks provide to employees International Debit cum ATM cards with enhanced Cash
withdrawal facility and other value add-ons.
Online Banking with funds transfer, online shopping and bill payment options.
Banks also offer preferential pricing on loan products and credit cards and other banking
products and services.
Let us sum up
The company gives a single instruction to the bank, together with a list of employees and the
credits to be made, thereby saving time and effort
Employees benefit by not having to be paid either in cash, or, to go their banks with cheques to
be deposited
Employees also benefit by having access to the other deposit, loan and remittance products of the
bank
Key Words
Web upload: The company uploads the list of employees plus the salary payable to each through
corporate internet banking, from their own offices
Zero balance accounts: Employees need not maintain any minimum balance in their accounts
and are permitted to draw the full amount available
Terminal Questions
a) What is the benefit derived by the bank from the Salary Payment Service?
b) What are the benefits derived by employees from the Salary Payment Service
a) Banks offer the facility to employees to maintain zero balance accounts in which their
salaries are credited at periodic intervals, together with other deposit, loan and remittance
facilities
Receivables Management
Banks offer receivables management services to their clients to manage their collectable debts.
The features of this product are:
Collection Services: Receivables handling for cheques drawn on both local and outstation
locations; lodgment for clearing, and updating of account receivables.
Funds can be transferred by banks into their client’s account from identified counter-parties
through hundreds of bank branches across the country.
Benefit to Clients:
• Savings in interest costs and bank charges through rationalization of account structure
and local clearing at multiple locations across the country
Paper Collection: Banks offer quick realisation of client’s instruments, local or outstation. The
proceeds of all cheques deposited with the bank can be concentrated into a designated central
account at any of our branches. Consequently clients have better control on their cash flows and
the reconciliation and monitoring requirements associated with multiple accounts are eliminated.
Information on these collections is delivered to the client through internet banking.
Banks further deliver a variety of collection reports that can be used for automating the
reconciliation process at the client’s end.
Banks have an extensive network of its own branches and correspondent banks that provide
clients with the capability to clear their instruments in local clearing at over hundreds of
locations across India. The funds collected from these instruments can directly be credited to the
client’s centralised collection account. At each of these locations, banks provide clients with the
option of directly picking up the instruments from their customers. Detailed collection reports
provide clients with information on the instruments deposited at each of the locations.
Banks have correspondent bank relationships with regional banks covering over thousands of
locations across India. This ensures faster realisation of upcountry instruments. Detailed
collection reports and online querying options on internet banking ensure that clients can track
and have complete control over their receivables.
Banks with the help of extensive network of foreign correspondents have a global reach of over
thousands of offices in many countries for efficient collection of foreign currency cheques.
• Direct debit
Let us sum up
Benefits to clients include reduced collection time leading to lower interest costs.
Key Words
Receivables (or Debtors) Management: Banks offer this product to enable corporate clients to
streamline their collection of debts
Terminal Questions
What are the benefits derived by corporate clients from the Receivables Management Product?
Banks offer receivables management services to their clients to manage their collectable debts.
The features of this product are:
Collection Services: Receivables handling for cheques drawn on both local and outstation
locations; lodgment for clearing, and updating of account receivables.
Funds can be transferred by banks into their client’s account from identified counter-parties
through hundreds of bank branches across the country.
Definition
Factoring can be broadly defined as an agreement in which receivables arising out of sale of
goods/services are sold by the firm (client) to a factor (a financial intermediary) as a result of
which the title to the goods/services represented by the receivables passes to the factor.
Henceforth, the factor becomes responsible for all credit control, sales accounting and debt
collection from the buyers. In a full service factoring concept, i.e., without recourse facility, if
any of the debtors fails to pay the dues as a result of his financial inability, insolvency or
bankruptcy, the factor has to absorb the losses.
Mechanism
Credit sales generate the factoring business in the ordinary course of commercial dealings.
Realisation of credit sales is the main function of factoring services. Once a sale transaction is
completed, the factor steps in to realize the sales. Thus the factor intermediates between the
seller and the buyer and sometimes his banker.
A schematic view of the factoring mechanism explaining the interaction between the different
parties and the flow of information between them is summarized below:
The Buyer
Buyer receives delivery of goods with invoice and instructions by the seller to make payment to
the factor on the due date
Buyer makes payment to factor in time, or, gets extension of time, or, is subject to legal process
at the hands of the factor
The Seller
Seller enters into a Memorandum of Understanding (MoU) or contract with the Buyer
Delivers to Buyer copies of invoice, delivery challan, MoU/contract and instructions to pay to
the Factor
Seller receives the balance 20-25% from the Factor after deduction of the latter’s service charges
The Factor
The Factor enters into an agreement with the Seller for rendering factoring services
The Factor makes payment of 75-80% of price of the debt to the Seller on receipt of the sale
documents
The Factor receives payment from the Buyer on due date and remits balance 20-25% money to
the Seller after deducting his service charges
The Factor also ensures that the following conditions are met to give enable the factoring
arrangements:
The invoices, bills and other documents should containing clauses to enable factoring of the
receivables
The Seller should confirm in writing that all payments arising out of these bills are free from all
encumbrances, such as liens, set offs, counter-claims, etc., from any other entity
The Seller should assign the receivables to the Factor to enable him to obtain payment on due
date, or by legal process after default
The Seller confirms in writing to the Factor that all conditions of sale agreed upon with the
Buyer have been complied with, and,
The Seller provides an undertaking from his banker that the latter does not have any charge over
the receivables being factored or the realization proceeds deposited in the Seller’s account with
the bank
Functions of a Factor
Depending on the type or form of factoring, the main functions of a factor can be classified into
5 categories:
The Factor maintains the clients’ sales ledgers. On completion of sale, the client sends an invoice
to the buyer with a copy to the factor. The ledger is usually maintained in the open-item format
in which each receipt is matched against each open invoice.
The factor collects the receivables from the buyer on behalf of the client (seller), thereby
relieving the latter of problems involved in collection, so that he can concentrate on the core
functional areas of his business.
Factoring also enables the client to reduce the cost of collection by way of savings of manpower,
time and effort.
Factors use trained manpower and sophisticated infrastructure to systematically follow up and
obtain payments from buyers. Debtors are also usually more responsive to demands from factors,
who are FIs, rather than the sellers themselves.
The unique feature of factoring is that the factor purchases the book debts of his client at a price,
and the debts are assigned to the factor, who is willing to pay 75-80% of the value of the
receivables in advance.
Where the debts are factored with recourse, the advance provided by the factor would become
refundable in case of default by the buyer. However, when factoring is done without recourse,
the factor’s obligation to the seller becomes absolute on the due date, whether the buyer makes
payment or not.
Firstly, factoring relieves him from the hassles of collection of receivables, and,
Secondly, with the information available with the factor on the credit rating and payment record
of the buyer, the factor is able to provide good advice to the client, leading to better credit
control.
Advisory Services
The services are a spin off benefit of the close relationship between a factor and client. By virtue
of industry wide exposure to credit dealings and corporate behavior, factors can provide valuable
advisory services to clients.
Audit of the procedures followed by the client for invoicing, delivery and dealing with sales
returns, and,
Introduction to banks and FIs dealing with leasing, hire purchase, investment banking, and so on.
Types/Forms of Factoring
Under recourse factoring, the Factor has recourse to the Client (seller) in case the factored debt
turns out to be irrecoverable. In other words, the factor does not assume the credit risk associated
with the receivables. In case the Buyer defaults in payment, the Client has to make good the
amount to the Factor.
In the case of non-recourse factoring, the Factor does not have any recourse to the Client in case
of default. In other words, the Factor takes on the credit risk involved. To compensate the higher
risk involved in this type of exposure, the Factor charges a higher premium, also called a del
credere commission. The Factor grants a line of credit to each buyer, and factoring is done within
such limits.
In both cases, however, the Client pays to the Factor the charges for maintaining his account as
also the interest cost on the advance payment outstanding.
In Advance Factoring, the Factor extends credit to his Client up to 75-80% for which the Client
pays interest charges at a predetermined rate. In some cases, the Client’s bank extends further
credit to the Client, usually around 50% of the residual amount. Thus, if the Factor has advanced
75% to the Client of a certain receivable, the bank will lend a further amount of 12.5% of the
receivable, taking the total amount of advance drawn by the Client to 87.5%. This is called Bank
Participation Factoring.
In maturity factoring (also called collection factoring) the Factor does not make any advance
payment to the Client. Payment is made by the Factor on the guaranteed payment date, or on
collection. The guaranteed payment date is usually determined on the basis of past record of
payments made by the Buyer.
This is the most comprehensive form of factoring encompassing non-recourse factoring with
collection, sales ledger administration, credit protection, and short term finance.
In disclosed factoring the name of the Factor is mentioned on the invoice directing the Buyer to
make payment to the Factor.
But in case of undisclosed factoring, the name of the Factor is not revealed to the Buyer. The
Factors acts in the name of the Client and maintains his sales ledger and also extends advance to
the Client.
In export factoring 4 parties are involved – (i) the Exporter (Client), (ii) the Importer (Buyer),
(iii) the Export Factor, and, (iv) the Import Factor. Since 2 factors are involved in such
transactions, international factoring is also called the two factor system.
The two factor system results two separate but inter-linked agreements: (i) between the Exporter
(Client) and the Export Factor, and, (ii) between the Export Factor and the Import Factor.
Usually the Export and Import Factors have formal Correspondent Relationships with well
defined rules relating to conduct of business.
The Import Factor provides a link between the Export Factor and the Importer and serves to
resolve formalities such as exchange control, legal formalities, and so on. He also undertakes
credit risk, collects receivables and remits funds to the Export Factor in the designated currency.
The Export Factor contacts the Import Factor in the Importer’s country and ascertains his report
on the credit-worthiness and payments record of the Importer
On receipt of a satisfactory report, the Export Factor gives his green signal to the Exporter who
ships the goods to the Importer and hands over the invoice, bills of lading, etc., to the Export
Factor
The Export Factor advances 75-80% of the invoice value to the Exporter, and sends the
documents to the Import Factor
The Import Factor collects the payment of the bill on its due date and remits the proceeds to the
Export Factor
The Export Factor in turn makes residual payment to the Exporter and the transaction is
complete
Similarity: Both provide short term finance to the seller against receivables, which the Seller
would have otherwise received on the due date
Differences:
Bills discounting is always with recourse, whereas factoring can be done with or without
recourse
In Bills discounting the seller collects the receivables and pays to the financing entity, whereas in
factoring, the factor takes on the responsibility of collection
Bills discounting envisages only provision of finance, whereas the factor maintains the sales
ledger and also provides advisory services
Bills discounted can be rediscounted several times, but factored debts can only be refinanced
FORFAITING
The bills or notes are sent to the Exporter, usually after they are guaranteed by a bank, which is
not necessarily the Importer’s bank. The guarantee by the bank is referred to as an Aval,
evidenced by endorsement by the bank guaranteeing payment by the Importer.
The Exporter enters into a forfaiting arrangement with a bank, under which the Exporter sells the
avalled bills or notes to the forfeiter, without recourse, and at a discount.
The forfaiting arrangement includes the cost of forfeiting, margin to cover risk, commitment
charges, days of grace, etc. The cost of forfeiting depends on the credit rating of the avalling
bank, the country risk of the importer and the terms and conditions of export.
The forfeiter may hold these bills or notes till maturity. Alternatively, he can securitise them and
sell them in the secondary market to refinance his cash flow.
Both mechanisms are similar as they provide advance payment on a non-recourse basis. But they
differ in some important respects:
A forfaiter discounts the entire value of the note/bill, whereas a factor usually advances to the
extent of 75-80%, leaving the balance as a factor reserve.
A forfaiter is protected by an avalling bank, whereas a factor usually takes on the credit risk on
himself.
Factoring is essentially short term finance, whereas forfaiting usually extends credit over a
longer period
Forfaiters take on exchange rate risk and charge a premium for the service, whereas factors do
not cover exchange rate risk.
Advantages of Factoring
Scenario 1 – the Company goes in for plain vanilla working capital loans from bank
Other Current 40
Liabilities (OCL)
Net Working 50
Capital
The Factor provides 80% finance against book debts of 80 = 64. The Company uses this cash to
finance his working capital. Thus factoring provides support to him off balance sheet, outside the
purview of the Assessed Bank Finance, and, the Current Ratio improves significantly
Other Current 16
Liabilities (OCL)
Net Working 50
Capital
Factoring helps companies outsource a large part of the effort required for collection of
receivables and its accounting
Collection is more efficient as the factor is not subject to the coercion exercised by buyers with
the threat of choking off future business
In the late 1980s RBI constituted a study group to recommend the future direction of factoring
business in India.
The study group strongly recommended encouragement of factoring for SME units and
according to its recommendation RBI permitted banks to undertake factoring business
departmentally. It was earlier permissible for banks to engage in factoring only through only
subsidiaries established for the purpose.
The factor pays 75-80% upfront to his client, and the balance on realization.
Functions of a factor:
(4) Takes over credit risk from the client to the factor’s account
(5) Provides advisory services to the client on the risk aspects in selecting buyers
(1) Recourse factoring – here the factor does not take over the credit risk. In case of default
he recovers advance paid to his client.
(3) Advance factoring – the factor pays a major part to his client in advance, i.e., before the
debt is collected
(4) Maturity factoring – the factors pays his client only on realization of the receivables
(5) Full factoring – this means the entire gamut of factoring services from maintenance of
sales ledger to business advisory
(6) Disclosed & Undisclosed factoring – in the former type the buyer is notified about the
factor’s interest in the transaction, whereas, in the latter, the buyer is not notified about
intermediation by the factor.
(7) Export factoring – in this case the export dues of the client are sold to the factor, who
collects his dues from a factor on the overseas importer’s side.
Forfaiting: this is the activity where a financial intermediary purchases the receivables (usually
long terms, often payable in a deferred, phased manner, over a period of time) from his exporter
client
Aval: An aval is a guaranteeing bank that avalises or guarantees the deferred receivables on
behalf of the overseas importer-buyer
Key Words:
Factor: A financial intermediary who purchases the receivables arising out of sale of goods and
services
Client: The seller of goods and receivables, who sells the receivables to a factor
Buyer: The purchaser of the goods and receivables who ultimately pays to the factor on the due
date
Receivables: the sale price agreed to between the client and buyer
Advance: the portion (usually 75-80%) of the receivable paid by the factor to the client
Margin: the balance portion of the receivables (20-25%) withheld by the factor till realization of
the debt
Credit risk: the risk of default by the buyer, taken on by the factor in case of non-recourse
factoring
Terminal Questions:
(3) How does factoring help in improving the balance sheet of the client?
(1) In Recourse factoring the factor does not take over the credit risk. In case of default he
recovers advance paid to his client. Whereas, in Non-Recourse factoring the factor takes
over the credit risk. In case of default he cannot recover advance paid to his client.
(2) In Advance factoring the factor pays a major part to his client in advance, i.e., before the
debt is collected, whereas in Maturity factoring the factors pays his client only on
realization of the receivables
Banks act as Trustees for public, charitable religious and other trusts. They also act as trustees of
a settlement, Trustees of a minor's legacy, custodian trustee of properties held under Trusts of
any description like pension, provident and gratuity fund.
(2) Safe keeping of trust property and payment of income to beneficiaries on due dates as per
the instructions of the settlers.
Managing Religious and Charitable Trust: The bank undertaking this service makes payments of
income accrued on Trust corpus, for religious and charitable purpose according to the mandate of
the settler.
Banks also undertake Private Settlements where formation of trust is desired for a specific period
for providing assistance and support to mentally retarded/physically handicapped persons or
other similar objectives
DEBENTURE TRUSTEESHIP:
Many banks are SEBI registered Debenture Trustees. They accept debenture trusteeship of
debentures / bonds issued under private placement.
Advisory on the Debenture / Bond Issue on the following activities relating to the issue:
• creation of charge, registration and compliance of legal and statutory requirements in this
aspect
• Team of well trained, informative, efficient, experienced and professional staff to handle
the work
Banks offering this product typically has a nationwide network of branches which facilitate the
Companies / Government / Semi Government issuers to have security creation process at the
place of their convenience and choice.
SECURITY TRUSTEESHIP:
Banks also accept Security Trusteeship assignment for the loans / advances granted by any bank
or Financial Institution (including loan granted by the bank) to any corporate body.
Under Security Trusteeship the value addition offered by banks to their clients consists of the
entire procedure of security creation is taken over by the Security Trustee.
Security Trustee ensures execution of documents for creation of security and enforcement of
security in case of default.
Security Trustee is appointed with the consent of all the lenders but at the cost of the borrower.
However, monitoring the servicing of loan and advances is out of Security Trustee purview.
Appointment of a Security Trustee is ideal in case of consortium lending and multiple banking.
Banks offer Power of Attorney service. This is a specialized service to help both non-resident
and resident customers, who find it difficult to operate and monitor their accounts and
investments personally. After the bank obtains power of attorney from the customer in their
favour, they execute the clients’ instructions regarding their investments promptly and
meticulously.
Executing a Power of attorney with us for this purpose is a simple and inexpensive process,
which can be completed in no time.
Banks offer trusteeship services for managing religious, charitable or even personal trusts
Banks provide Debenture Trusteeship services for companies in the process of issuing
debentures by providing support in creation of charge, documentation, advisory, and related
activities
In cases of consortium or multiple banking advances, banks offer Security Trusteeship services.
In this activity the bank concerned holds the securities offered by the borrower on behalf of all
lending banks.
Key Words:
Debenture Trusteeship
Security Trusteeship
(1) What are the services provided by banks undertaking Debenture Trusteeship?
(2) What are the services provided by banks undertaking Security Trusteeship?
Terminal Questions:
(1) How do banks equip themselves to offer Debenture and Security Trusteeship services?
(1) The services provided under Debenture Trusteeship Services are - obtaining a rating from
CRISIL, ICRA, etc; appointment of arrangers, i.e., a SEBI registered investment bank;
Module A: Corporate Banking & Finance Page 31
guidance on structured payment mechanism; clarification on legal / statutory matters in
issue of debentures / bonds; documentation process - preparation of all kinds of related
documents; creation of charge, registration and compliance of legal and statutory
requirements in this aspect.
(2) The services provided under Security Trusteeship Services are consists of the entire
procedure of security creation is taken over by the Security Trustee. Security Trustee
ensures execution of documents for creation of security and enforcement of security in
case of default. Security Trustee is appointed with the consent of all the lenders but at the
cost of the borrower. However, monitoring the servicing of loan and advances is out of
Security Trustee purview. Appointment of a Security Trustee is ideal in case of
consortium lending and multiple banking.
Services provided by a bank custodian are typically the settlement, safekeeping, and reporting of
customers’ marketable securities and cash. A custody relationship is contractual, and services
performed for a customer may vary. Banks provide custody services to a variety of customers,
including mutual funds and investment managers, retirement plans, bank fiduciary and agency
accounts, bank marketable securities accounts, insurance companies, corporations, endowments
and foundations, and private banking clients. Banks that are not major custodians may provide
custody services for their customers through an arrangement with a large custodian bank.
A custodian providing core domestic custody services typically settles trades, invests cash
balances as directed, collects income, processes corporate actions, prices securities positions, and
provides recordkeeping and reporting services.
A global custodian provides custody services for cross-border securities transactions. In addition
to providing core custody services in a number of foreign markets, a global custodian typically
provides services such as executing foreign exchange transactions and processing tax reclaims. A
global custodian typically has a sub-custodian, or agent bank, in each local market to help
provide custody services in the foreign country. The volume of global assets under custody has
grown rapidly in recent years as investors have looked to foreign countries for additional
investment opportunities.
A bank may offer securities lending to its custody customers. Securities lending can allow a
customer to make additional income on its custody assets by loaning its securities to approved
borrowers on a short-term basis. In addition, a custodian may contract to provide its customers
with other value added services such as performance measurement, risk measurement, and
compliance monitoring.
From a supervisory perspective, risk is the potential that events, expected or unexpected, may
have an adverse impact on a bank’s capital or earnings. There are nine categories of risk for bank
supervision purposes. These categories are not mutually exclusive; any product or service may
expose a bank to multiple risks.
Credit risk
Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s
failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit
risk is found in all activities that depend on counterparty, issuer, or borrower performance. It
arises any time funds are extended, committed, invested, or otherwise exposed through actual or
implied contractual agreements, whether reflected on or off the balance sheet.
Transaction risk
Transaction risk is the current and prospective risk to earnings or capital from fraud, error, and
the inability to deliver products or services, maintain a competitive position, and manage
information. Risk is inherent in efforts to gain strategic advantage, and in the failure to keep pace
with changes in the financial services marketplace. Transaction risk is evident in each product
and service offered. Transaction risk encompasses product development and delivery, transaction
processing, systems development, computing systems, the complexity of products and services,
and the internal control environment.
Compliance risk
Compliance risk is the current and prospective risk to earnings or capital arising from violations
of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and
procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules
governing certain bank products or activities of a bank’s clients may be ambiguous or untested.
Compliance risk exposes the institution to fines, civil money penalties, payment of damages, and
the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced
franchise value, limited business opportunities, reduced expansion potential, and an inability to
enforce contracts.
Strategic risk
Strategic risk is the current and prospective risk to earnings or capital arising from adverse
business decisions, improper implementation of decisions, or lack of responsiveness to industry
changes. This risk depends on the compatibility of an organization’s strategic goals, the business
strategies developed to achieve those goals, the resources deployed toward these goals, and the
quality of implementation. The resources needed to carry out business strategies are both
tangible and intangible. They include communication channels, operating systems, delivery
networks, and managerial capacities and capabilities. The organization’s internal characteristics
must be evaluated against the impact of economic, technological, competitive, regulatory, and
other environmental changes.
Reputation risk is the current and prospective impact on earnings and capital arising from
negative public opinion. This affects the institution’s ability to establish new relationships or
services or to continue servicing existing relationships. This risk may expose the institution to
litigation, financial loss, or a decline in its customer base. Reputation risk exposure is present
throughout the organization and includes the responsibility to exercise an abundance of caution
in dealing with its customers and community.
The other risks are interest rate risk, liquidity risk, price risk, and, foreign currency translation
risk.
Sensing the growth of inflows in the Indian equity market, overseas and domestic players in the
stock broking business are lining up to offer custodial services. The size of the business in India
is estimated by some analysts to be around Rs 2,000 crore.
Further, opportunities from local mutual funds wanting to outsource their non-core
administrative functions such as fund accounting and growth in the domestic organised pension
sector is expected to take the industry to more than double its current size. Lining up to enter the
fray are French banking major BNP Paribas, SBI-Societe Generale, Hong Kong-based JP
Morgan and domestic players like Religare, Prabhudas Lilladher and Anand Rathi Securities.
The Indian fund industry is moving into its next phase of expansion and change, and the
intensive competition will mean that fund houses focus on their core business of investment
management, and sales and distribution. They will therefore look at partners with strong
technology and in-depth experience to support their operational needs. They are also looking for
partners who can provide them the benefits of economy of scale.
Till recently, only foreign institutional investors, insurance companies and mutual funds were
being serviced by custodians. Now, newer client segments, including high-net worth individuals,
increasingly understand the need and value of engaging a custodian.
The SEBI guideline making it mandatory for portfolio managers with over Rs 500-crore assets to
appoint a custodian has also given a fillip to growth in the industry.
DBS Bank Ltd is striving to become one of the top five custodial service firms in India. At
present there are 16 SEBI-registered custodians operating in India. Dominant among them are
Citicorp, HSBC and Deutsche Bank, catering to FII’s, sub-accounts, MFs and insurance
companies.
Apart from providing custodial services, these institutions also provide other services like fund
accounting, derivative clearing and corporate action reporting. And the entry of global banking
majors is expected to pose fresh challenges to the dominance of existing players. Societe
Custodial Services: Services provided by a bank custodian are typically the settlement,
safekeeping, and reporting of customers’ marketable securities and cash
Core Custody Services: the bank settles trades, invests cash balances as directed, collects
income, processes corporate actions, prices securities positions, and provides recordkeeping and
reporting services
Global Custody Services: Some banks also provide custody services for cross-border securities
transactions
Securities Lending and Other Value-Added Services: Securities lending can allow a customer
to make additional income on its custody assets by loaning its securities to approved borrowers
on a short-term basis
Risks Associated with Custody Services: primary risks associated with custody services are:
transaction, compliance, credit, strategic, and reputation
Key Words:
Settlement: The bank offering custodial services settles the trades of the clients depositing
securities with them
Safe Custody: The bank offering custodial services provides safe custody of the clients’
securities deposited with them
Reporting: The bank also submits regular MIS to clients on all transactions
Securities lending: Banks also offer securities lending to its custody customers
Terminal Questions:
(1) Discuss the various risks associated with banks providing custodial services.
Core Custody Services: the bank settles trades, invests cash balances as directed,
collects income, processes corporate actions, prices securities positions, and provides
recordkeeping and reporting services
Global Custody Services: Some banks also provide custody services for cross-border
securities transactions
(2) Securities Lending and Other Value-Added Services : Securities lending can allow a
customer to make additional income on its custody assets by loaning its securities to
approved borrowers on a short-term basis
The range of services rendered by banks under Business Advisory is covered under the Module
on Investment banking.
Banks offer specialist business advisory services for industry targeted to assist their clients in
strategising for growth and consolidation covering the entire project development cycle and
beyond.
Services are designed to help clients introduce new operational practices and business
approaches that sharpen efficiency, enhance corporate image and improve financial performance.
Banks also assist local and multinational corporate clients in market diversification and planning,
strategies for restructuring and revival, product planning, financial management and business
process restructuring.
Offshore banking refers to the international banking business involving foreign currency-
denominated assets and liabilities. Offshore Banking Units are virtually foreign branches of
Indian banks but located in India. The Reserve Bank of India has given permission to various
banks to set up Offshore Banking Units in the Special Economic Zones. As per the Government's
policy, Special Economic Zone is a specially delineated duty free enclave and deemed to be a
foreign territory for the purpose of trade operations and duties / tariffs so as to usher in export-
led growth of the economy.
Several banks have been granted permission by the Government of India to operate OBU within
the country. This comes in addition to their already existing OBUs in centres such as Singapore,
Bahrai, Mauritius and Bahamas.
Clients get the expert opinions and services of a bank which has an international presence in
several countries through multiple offices.
Interest bearing Foreign Currency Call Deposit Account, with interest indexed to LIBID
(London Inter Bank Bid rate for Deposits)
Foreign Currency Fixed Deposit Account, available for various periods, with interest offered
linked to LIBOR (London Inter Bank Offer Rate for deposits)
Foreign Currency Rolling Deposit Account that provides for automatic renewal of principal and
interest for same period (Rolling Period). The interest rate is indexed on LIBOR
Foreign Currency Switch Deposit Account, that is an extension of Foreign Currency Rolling
Deposit Account, with the added facility to switch deposit from one currency to another
currency. The interest rate indexed on LIBOR
Foreign Currency Trading Deposit Account meant for those who understand the nerves of
foreign exchange market. Banks permit clients to trade in foreign currency a multiple of times
the value of deposit. The interest rate indexed on LIBOR.
Other products
Credit Facilities
Structured finance
Offshore banking refers to the international banking business involving foreign currency-
denominated assets and liabilities. Offshore Banking Units are virtually foreign branches of
Indian banks but located in India
Banks also offer several facilities for International Trade Finance and Instruments as well
as Credit Facilities
Key Words:
Module A: Corporate Banking & Finance Page 40
Offshore banking refers to the international banking business involving foreign currency-
denominated assets and liabilities. Offshore Banking Units are virtually foreign branches of
Indian banks but located in India
Terminal Questions:
What are the benefits derived by clients from the offshore banking products of banks?
The various products on offer are various kinds of Foreign Currency Accounts, such as:
Banks also offer several facilities for International Trade Finance and Instruments as well as
Credit Facilities
Banks offer Foreign Currency Travellers Cheques (FCTCs) that are a safe and easy way to
protect money during foreign travel. FCTCs can be encashed only when needed, and only against
the holder’s signature, unlike cash which can be stolen and misused by anybody, immediately.
Loss of Travellers Cheque can be reported anywhere in the world by making a single phone call
and the pre-fixed amount on the cheques are made refundable.
Travellers Cheques are offered in major currencies like USD, GBP, Euro, CAD, AUD and JPY.
These are available in various denominations to suit clients’ needs. At present many Indian
banks offer American Express Travellers Cheques which are widely accepted at Merchant
Establishments and Financial Institutions across more than 200 countries.
Banks sell foreign currency notes to their clients for travel abroad. Foreign Currency Cash is a
convenient way of meeting personal expenses during the journey, paying for taxis / internal
travel, food expenses etc. Normally currencies that are sold are USD, GBP, EURO, AUD and
CAD.
Banks in India offer FC Demand Drafts to their clients for various expenses such as:
• Payment of application fees for various exams like TOEFL , GMAT etc.
FC Demand Drafts are normally issued in seven currencies – United States Dollars (USD), Great
Britain Pounds (GBP), EURO, Japanese Yen (JPY), Australian Dollars (AUD), Canadian dollars
(CAD) and New Zealand Dollars (NZD).
The bank will then have the cheques sent for collection and the funds will be credited to the
client’s account in Indian Rupees. Banks in India normally accept cheques of various currencies
like USD, GBP, Euro, JPY, Australian Dollars, Canadian Dollars, UAE Dirhams, Hong Kong
Dollars and Swiss Francs.
The collection period varies from 2 international working days for Euro cheques payable in
Frankfurt, to 5 days for USD cheques payable in New York, and on to 10 – 15 working days for
cheques drawn in other currencies at other centres.
Remittances
Banks offer to their clients remittance facilities by which they can send and receive money to and
from friends and relatives abroad.
Most of such remittances are executed through SWIFT, a secure, inter-bank communication
facility.
Cash to Master
Often, foreign ships travel through India and dock their vessels at various ports / harbors in the
country. One of the major requirements during such temporary stays, is that of foreign currency
that has to be made available to the Captain of the Ship for covering crew wages or for other
expenses on board the ship.
These requirements are usually met through a facility called "Cash to Master". To collect this
cash, the master of the ship has to approach the designated branch of an authorized bank with his
passport and a duly filled up application form. This product is available only in United States
Dollars, Pounds Sterling and Euros.
Advance remittance
The client’s overseas exporter may require the client to make full payment in advance for the
goods to be exported to him. The exporter would dispatch the goods to the importer client only
after he receives full payment in advance.
For this purpose, banks will make remittance in foreign currency to the exporter.
• Request Letter cum Debit Authority cum OGL cum FEMA Declaration (Giving all
beneficiary's banking details)
• Form A1 (Duplicate)
• KYC Report
• Purchase Order / Proforma Invoice accepted by the importer with Advance payment term
• Original Bank Guarantee from the Exporters Bank if Advance amount is > $ 1,00,000 or
equivalent.
Direct Remittance
An importer client may require the exporter overseas to dispatch the goods first and then remit
the payment for the goods. The exporter would then dispatch the goods to the client. The
overseas exporter will then send the documents directly to the client. When the client approaches
his bank with the documents for sending remittance to the exporter, the bank will effect the
remittance.
• Request Letter cum Debit Authority cum OGL cum FEMA Declaration. (Giving all
beneficiary's banking details)
• Form A1
• KYC Report
• Invoice
Import Collection
The exporter from overseas exports the goods to the importer client. The overseas exporter /
exporter's bank sends the documents to the client’s bank on collection.
If it is a sight bill (Documents against Payment), then the necessary documents and debit
authority is collected from the importer and remittance is paid to the exporters bank and the
documents are released to the importer.
If it is a usance bill (Documents against Acceptance), then the acceptance letter is taken from the
importer and the documents are released. On the due date remittance is made to the exporter’s
bank by debiting the importer’s account.
• Request Letter cum Debit Authority cum OGL cum FEMA Declaration
• Form A1
• KYC Report
Letters of Credit
In a business cycle, an importer will need to pay for his purchases in international and domestic
markets. Letters of credit helps Indian importers to facilitate purchase of goods in international
and domestic trading operations.
• General Undertaking / Indemnity on Stamp Paper (value applicable as per the state)
• Recommended Board Resolution for Companies / Partnership Deed for Partnership Firms
Export Collection
When an exporter client sells goods overseas, he needs to receive payment for the goods that has
been exported. Through a network of correspondent banks Indian banks ensure faster collection
process for all export bills provided all the necessary documents are in place, which will be sent
to overseas bank for collection.
• Request Letter
• FEMA Declaration
• KYC Report
• Any other documents as per terms and conditions between Exporter and Importer
Commercial Invoice
• Request Letter
• IEC Code
• FEMA Declaration
• KYC Report
• Invoice of Export
• Any other documents as per terms and conditions between Exporter and Importer
• Original FIRC
Outward Remittances (Miscellaneous) for other purposes can be remitted quite easily.
Remittances by way of SWIFT can be effected through a network of correspondent banks to any
part of the world. All transactions are subjected to FEMA regulations.
• Request Letter
• Form A2
• FEMA Declaration
• Annexure A & B
Banks offer several services under foreign currency services, for clients travelling abroad, such
as:
• FC Cash
• FC Demand Drafts
• FC Remittances
• Import collection
• Export collection
• Letters of Credit
• Bank Guarantees
Key Words:
Foreign currency travellers’ cheques, drafts – these are travel related products for clients going
abroad
Letters of Credit – issued on behalf of importer clients to provide assurance to overseas suppliers
Bank Guarantees - issued on behalf of exporter clients to provide assurance to overseas importers
What are the various facilities extended by banks under foreign exchange services?
Terminal Questions:
Banks offer several services under foreign currency services, for clients travelling abroad, such
as:
• FC Cash
• FC Demand Drafts
• FC Remittances
• Import collection
• Export collection
• Letters of Credit
• Bank Guarantees
CORPORATE DEPOSITS
Banks offer a variety of deposit products to corporates so that they may park their temporary
liquidity and meet their day to day expenses. The main ones among them are:
Current Accounts
In today's fast-paced world, businesses regularly require to receive and send funds to various
cities in the country. Banks offer inter-city banking with a single account and access to the entire
network of branches.
The usual facilities that banks offer for such accounts are:
o Facility to upload LCs, salary payment lists, etc., from the clients’ terminal
Most companies require maintaining current accounts with designated banks for payment of
Dividend and Interest Warrants. Once the dividend is declared or the interest falls due for
payment, the entire amount is transferred to this current account. Then Dividend or Interest
Warrants are drawn on these accounts by the company.
Fixed Deposits
Corporates normally keep term deposits with banks for fixed short periods in order to meet
anticipated outgoings such as advance tax, tax deducted at source, service tax, etc.
As the amounts are large, many banks vie for these funds to meet their treasury and statutory
obligations. The interest rates on such deposits rise and fall with the demand-supply situation,
and are generally higher than the card rates.
Banks offer deposit products to companies to park their temporary liquidity. Usual products are
current accounts with facilities for payable at-par cheques, sweep in/out facility, linked to short
term deposits, various modes of electronic funds transfer.
Banks also offer corporate internet banking with the facility to upload documents such as LC
applications, etc., from the client’s workplace.
Banks can also offer Certificates of Deposits to corporates, within the framework laid down by
RBI.
Key Words:
Corporate Internet Banking: This facilitates the client to directly perform several banking
functions, such as funds transfer, uploading of documents, etc., directly from their own office.
Terminal Questions:
The usual facilities that banks offer for such accounts are payable at par cheque facility, sweep-in
and sweep-out facility, free or concessional rates for RTGS/NEFT/SWIFT remittances and
demand drafts, free or concessional rates for collection, both inward and outward, corporate
internet banking facility, facility to upload LCs, salary payment lists, etc., from the clients’
terminal, free door step collection and delivery facility
The aspects of Corporate Finance that we shall see in this Chapter are:
A manufacturing unit needs finance as normally the promoter has only a part of the funds
required to establish and operate it.
a) Long term funds required for purchase of land, construction of factory and office
building, purchase of plant and machinery, utilities, etc. We shall study about this kind of
requirement in a subsequent chapter.
b) Short term funds required to finance Working Capital, that is, hold inventory and
receivables:-
• wait for the entire manufacturing process to be over, till the raw materials are
converted into finished goods,
This is known as the Process Cycle, depicted graphically in the diagram below.
Receivabl In Process
es Goods
Finished
Goods
The Working Capital Cycle begins with cash that is used to purchase raw materials and
consumables. These items are put in the process during which other factors of production such
as labour, power, fuel, etc., are used to convert the raw materials into goods in process during
the process cycle, and finally into finished goods at the end of the cycle.
The finished goods are then supplied to the customer on whom a bill is raised. In other words,
the current assets in the shape physical goods are converted into a financial asset, i.e.,
receivables.
These receivables are realized after the due dates, and cash is received.
And so the cycle goes on. The efficiency of the company is inversely proportion to the cycle
time. In other words, the shorter the cycle, the greater the efficiency in Working Capital
Management.
1 2 5
3 4 6
Operating
Cycle
Cash
Cycle
Point 1: Order placed for purchase of Raw Materials
Point 2: Raw Materials received at factory and are taken into process
Point 5: Process completed and finished goods shipped to purchaser with invoice
Working Capital Finance by way of Short Term funds are also required for other reasons such as:
a) Holding of Safety Stock in order to prevent stock outs in the event of fluctuation in Lead
Time (the time taken from placing an order for Raw Materials till the time it is actually
received at the factory), or, fluctuation in the pattern of consumption of Raw Materials. In
other words, if increased production is required to cater to a sudden increase in demand,
the extra amount of Raw Material required would be met from the Safety Stock.
b) Seasonal nature of availability of an input. Thus, almost all agro-based industry such as
sugar, cotton, jute, oil seeds, etc., need to be procured just after the harvest season, when
the holding of inventory peaks.
Before the 1970s banks used to finance on the basis of the security offered. Thus, loans were
granted against the security of pledge of gold or mortgage of real estate.
Loans to industries used to be granted against the security of factory land and buildings, plant
and machinery and stocks stored in warehouses. In the latter case, the storage would be locked
with the bank’s padlock, and the keys of such would be held at the bank. Delivery of stocks from
these godowns would be made against Delivery Orders issued by the bank manager authorizing
the godown keeper (who was an employee of the bank) to deliver the authorised quantity to the
borrower’s representative.
But rapid industrialization, especially in the SME (Small and Medium Enterprises) Sector
needed a different approach:
a) Banks needed to lend against the future cash flows of the borrowing unit
c) Operation of the bank’s facility needed to be user-friendly. For example, the lock & key
system proved to be a major hindrance in operational convenience for the borrower.
RBI set up a Working Group headed by the then Chairman of Punjab National Bank, was
constituted by the RBI in July 1974 to suggest methods for improving the delivery of industrial
credit based on the performance and projections of the borrower, rather than the security offered.
The study group with eminent personalities drawn from leading banks, financial institutions and
a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for
working capital and suggest ways for optimum utilisation of Bank credit.
This was the first elaborate attempt by the central bank to organise the Bank credit. The report of
this group is widely known as Tandon Committee report. Most banks in India even today
continue to look at the needs of the corporates in the light of methodology recommended by
the Group.
As per the recommendations of Tandon Committee, the corporates should be discouraged from
accumulating too much of stocks of current assets and should move towards very lean
inventories and receivable levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an industry should
be allowed to accumulate These levels were termed as inventory and receivable norms.
Depending on the size of credit required, the funding of these current assets (working capital
needs) of the corporates could be met by one of the following methods:
Banks can work out the working capital gap, i.e., total current assets less current liabilities other
than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a
maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned
funds and term borrowings. This approach was considered suitable only for very small borrowers
i.e., where the requirements of credit were less than Rs.10 lacs.
OCL = Other Current Liabilities, i.e., Current Liabilities other than bank
borrowings
Under this method, it was thought that the borrower should provide for a minimum of 25% of
total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain
level of credit for purchases and other current liabilities will be available to fund the buildup of
current assets and the bank will provide the balance (MPBF). Consequently, total current
liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated
that the working capital needs of all borrowers enjoying fund based credit facilities of more than
Rs. 10 lacs should be appraised (calculated) under this method.
Third Method of Lending: Under this method, the borrower's contribution from long term
funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by
the Study Group as representing the absolute minimum level of raw materials, process stock,
Module A: Corporate Banking & Finance Page 57
finished goods and stores which are in the pipeline to ensure continuity of production and a
minimum of 25% of the balance current assets should be financed out of the long term funds plus
term borrowings.
Where CCA = Core Current Assets, i.e., the portion of Current Assets that does not fluctuate
over time.
(This method was not accepted for implementation and hence is of only academic interest).
As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the
level of current assets. The classification of assets and balance sheet analysis, therefore, assumes
a lot of importance. RBI has mandated a certain way of analysing the balance sheets. The
requirements of this break-up of assets and liabilities differs slightly from that mandated by the
Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more
detailed and accurate picture of the affairs of a corporate. The corporates are required by all
banks to analyse their balance sheet in this specific format called CMA data format and submit to
banks. While most qualified accountants working with the firms are aware of the method of
classification in this format, professional help is also available in the form of Chartered
Accountants, Financial Analysts for this analysis.
All banks have structured appraisal formats for Working Capital Loans. The data that is input in
these forms and the appraisal done thereon is as follows:
a) The static data of the borrowing company, i.e., its name and address, constitution, names
of directors and key management personnel, location of factories, the product code, the
internal credit rating by the bank, etc.
b) The present and proposed facilities, i.e., the limits and outstanding in all existing and
proposed fund based accounts such as term loans, cash credit against stocks, cash credit
against receivables, overdrafts, and non-fund based accounts such as deferred payment
guarantees, letters of credit and bank guarantees. This data is normally presented in a
tabular format, showing the rates of interest and security against each facility
c) Credit Information Bureau of India Ltd., (CIBIL) report on the borrower. CIBIL is an
organization, originally promoted by SBI (40%), HDFC (40%), Dun & Bradstreet (10%)
and Trans Union International (10%). At present the shareholding has been vastly
widened to include most major Indian and foreign banks operating in India. CIBIL
maintains a very detailed credit history of both companies and individuals that can be
accessed by its members
e) Financial Appraisal: This is usually done on the CMA (Credit Monitoring Arrangement)
Data format, that has the 4 Forms:
ii) Form II: Operating statement. This is the profit and loss statement of the
company, reclassified according to the Form
iii) Form III A: Liabilities statement. This is the liabilities side of the balance
sheet, reclassified according to the Form
iv) Form III B: Assets statement. This is the assets side of the balance sheet,
reclassified according to the Form
f) Structuring of Facilities: Once the quantum of fund based limits is determined, the
facilities, i.e., the mechanism of delivery – cash credit against stocks, cash credit against
bills or book debts, working capital term loans, etc., are arrived at according to the RBI
guidelines and the bank’s own credit policy, in consultation with the client.
g) Margin requirements: Once the facilities are structured, the margin requirements against
each facility are arrived at according to the RBI guidelines and the bank’s own credit
policy, in consultation with the client.
h) Security: The assets created out of the bank’s loan are invariably taken as security. This is
known as the primary security. However, when the time comes, in cases of loan default,
to enforce the primary security, it is often found that it may not be sufficient to cover the
bank’s dues, especially in the case of stocks and book debts. In such cases banks insist on
a collateral security, that may be in the form of:
i) Creation of Charge: Charge is created on the security by way of the following usual
ways:
Pledge: the possession of the property pledged passes to the creditor. But in the present
practice, the debtor holds the property as an agent for the creditor.
Hypothecation: the possession remains with the debtor, and the creditor holds a “floating
charge”.
j) Documentation: Depending on the facilities proposed, their terms and conditions, security
charged, and the mechanism for creation of charge are determined, the documentation is
decided upon. Most banks have standard documentation for usual facilities; custom
designed documentation is required only in special cases.
Industrial loans require very close monitoring so as to ensure safety of the bank’s interests. The
two main points to be kept in mind, before we embark on the topic are:
a) Asymmetric information: The borrower has more information about the affairs of his own
industrial unit than the bank officials. Usually sensitive and negative information is with
held by the borrower from his banker. The bank has, therefore, to ascertain the correct
position by remaining constantly vigilant and meticulously follow the procedure
described below laid down for conduct of accounts.
b) Moral hazard: The borrower has far less financial stake than the bank in his project. This
is because loans are usually given with a Debt: Equity ratio of 3:1 or even more. Thus the
borrower has less to lose than the bank in case the enterprise does not succeed. In other
words, there is a possibility that the borrower may not take as much care of the assets
taken by the bank as security, but the possession of which remains with the borrower, as
he would have, had the entire money been his own.
Keeping these two very important aspects in mind, the following guidelines are prescribed by
banks, within the framework stipulated by RBI, for the conduct and monitoring of industrial
loans.
In case of exceptional requirement that could not have been anticipated before, ad hoc additional
limits need to be sanctioned by the appropriate authority. Normally, however, the practice of ad
hoc additional limits should be avoided. Instead, the fluctuations in holding of assets should be
incorporated into the assessment of working capital requirements.
A. Periodic Inspection
Industrial borrowers have to submit the following information periodically to their lending
banks:
QIS I* To be submitted at quarterly (a) estimates of production & sales for the
intervals current year and ensuing quarter and (b)
estimates of Current Assets (CA) and Current
Liabilities (CL) for ensuing quarter
QIS II* To be submitted at quarterly (a) actual production & sales in the current
intervals year & last completed year, and (b) actual CA
and CL for the last completed quarter
Form III To be submitted at half-yearly (a) actual performance for the last half year
A* intervals vis-à-vis the estimates
Form III To be submitted at half-yearly Funds flow for the last half year vis-à-vis the
B* intervals estimates
(*) formats prescribed by the Tandon Committee, modified by the Chore Committee. These
returns are now no longer mandatory. Most banks, however, insist on their submission, so as to
be able to maintain a close watch on the functioning of the industrial unit.
All banks usually have trained field staff for carrying out periodic inspection of the borrower’s
assets secured to the bank. The purpose of these inspections is:
a) To ascertain whether the charged assets are actually all present in the industrial unit to the
full value declared by the borrower, and in good and proper condition.
c) To pick up soft signals at the unit. Much can be learned from the unspoken word, i.e., the
level of activity actually evident at the factory, body language of the employees, and so
on.
According to RBI instructions all sanctions are valid for one year only. The facilities must be
renewed at intervals of not more than a year, based on audited annual financial statements, not
more than 6 months old. All companies close their books as on 31 st March each year and have to
submit their Income Tax Returns based on their audited balance sheets by the following 30th of
September.
In view of this, normally borrowal accounts are renewed during the last quarter of each calendar
year, based on the audited figures for the last Financial Year.
The renewal exercise is akin to the exercise for grant of fresh limits, as a fresh sanction is
granted as a result of the exercise.
In most cases it is observed that the borrower is interested in the renewal of his facilities only
when he needs an enhancement of the existing limits. Otherwise, there is normally no interest on
the part of the borrower. The bank official must closely follow up with the borrower and ensure
that all facilities are renewed on time.
C. Revival of Documents
Care must be taken to ensure that all loan documents taken from the borrower are completely
executed and kept in order. Documents in the nature of a promissory note are normally subject to
the Law of Limitation. That is, such documents become time-barred, and therefore invalid, once
the time limit is over.
Such documents therefore need to be carefully diarised, at least six months in advance, for
revival.
In case it is found that some borrower is unwilling or unable to revive his documents, the
appropriate authority should be reported to and legal or other action should be initiated well in
time.
Commercial loans based on the performance and purpose of the company, rather than on security
offered was started in the 1960s.
Working Capital (WC) appraisal is done on the basis of the cash cycle projected by the borrower
Tandon Committee recommended norms for inventory, norms for WC appraisal and periodic
submission of information by the borrower to monitor the account and ensure end use of funds.
Key Words:
Security – the tangible or intangible items offered by the borrower to the lender against the risk
of default, such as the assets created out of the bank’s finance, other assets, not related to the
loan, personal guarantees of the directors, partners, or, third parties
Margin – banks do not normally finance the entire requirement, but insist on 25-33% stake from
the borrower’s own funds. This is called the margin
Drawing power – the value of the primary security, present or future, less the margin stipulated is
the drawing power. This is calculated usually once a month, based on the monthly statement
stocks and bills/ book debts submitted by the borrower
Current assets (CA) – the raw materials, goods in process, finished goods and the receivables are
the major components of CA
Current liabilities (CL) – credit received from vendors, service providers, etc., are major
components of CL
Documentation – promissory notes and other instruments required to be signed by the borrower
in token of accepting the terms and conditions of advance
What are current assets and liabilities, and how do companies finance the gap between the two?
Terminal Questions:
Current assets (CA) are the raw materials, goods in process, finished goods and the receivables
are the major components of CA, while current liabilities (CL) are credit received from vendors,
India’s exports are extremely valuable as they earn foreign exchange income for the country.
This is very important as our economy runs on imported oil, without which our industry and
transport sectors would grind to a halt.
In order to provide a boost for exports, certain special facilities have provided for extending
finance to the export sector. We shall study each of these facilities.
RBI first introduced the scheme Export Financing in 1967. The scheme is intended to make
short-term working capital finance available to exporters at internationally comparable interest
rates. RBI fixes only the ceiling rate of interest for export credit. However, banks are free to
decide the rates of interest within the ceiling rates keeping in view the BPLR and spread
guidelines and taking into account track record of the borrowers and the risk perception.
In order to enhance transparency in banks' pricing of their loan products, banks have been
advised to fix their Benchmark Prime Lending Rate (BPLR) after taking into account (i) actual
cost of funds, (ii) operating expenses and (iii) a minimum margin to cover regulatory
requirement of provisioning / capital charge and profit margin.
In this section we shall study:
Rupee Export Credit
1. Pre-shipment Rupee Export Credit
2. Post-shipment Rupee Export Credit
3. Deemed Exports – concessive Rupee Export Credit
4. Interest on Rupee Export Credit
Export Credit in Foreign Currency
5. Pre-shipment Credit in Foreign Currency
6. Post-shipment Export Credit in Foreign Currency
7. Interest on Export Credit in Foreign Currency
Export Credit - Customer Service, Simplification of Procedures for Delivery and Reporting
Requirements
8. Customer service and simplification of procedures
9. Reporting requirements
10. Pre-shipment credit to diamond exporters- conflict diamonds
RUPEE EXPORT CREDIT
1. PRE-SHIPMENT RUPEE EXPORT CREDIT
In respect of export credit to exporters at internationally competitive rates under the Interest Rate
schemes of 'Pre-shipment Credit in Foreign Currency' (PCFC) and 'Rediscounting of (% pa)
Export Bills Abroad' (EBR), banks are permitted to fix the rates of interest with
reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable, as
under: Type of Credit
(i) Pre-shipment Credit
Module A: Corporate Banking & Finance Page 79
(a) Up to 180 days Not exceeding 350 basis points over LIBOR/EURO
LIBOR/EURIBOR
(b) Beyond 180 days and up to 360 days Rate for initial period of 180 days prevailing at the
time of extension plus 200 basis points i.e. (i)(a)
above plus 200 basis points
(ii) Post-shipment Credit
(a) On demand bills for transit period (as Not exceeding 350 basis points over LIBOR/EURO
specified by FEDAI) LIBOR/EURIBOR
(b) Against usance bills (credit for total period Not exceeding 350 basis points over LIBOR/EURO
comprising usance period of export bills + LIBOR/EURIBOR
transit period as specified by FEDAI and
grace period wherever applicable)
Up to 6 months from the date of
shipment
(c) Export Bills (Demand or Usance) realized Rate for (ii) (b) above plus 200 basis points
after due date but up to date of
crystallization
RBI has stipulated that banks should not levy any other charges over and above the interest rate under
any name viz., service charge, Management charge etc. except recovery towards out of pocket expenses
incurred by banks as per IBA guidelines.
ii) Interest rates for the above mentioned categories of export credit beyond the tenors as prescribed
above are deregulated and banks are free to decide the rate of interest, keeping in view the BPLR and
spread guidelines.
The Government (Ministry of Commerce and Industry), in consultation with RBI had indicated
in the Foreign Trade Policy 2003-04 that a Gold Card Scheme would be worked out by RBI for
creditworthy exporters with good track record for easy availability of export credit on best terms.
Accordingly, in consultation with select banks and exporters, a Gold Card Scheme was drawn
up. The Scheme envisages certain additional benefits based on the record of performance of the
exporters. The Gold Card holder would enjoy simpler and more efficient credit delivery
mechanism in recognition of his good track record. The salient features of the Scheme are:
(i) All creditworthy exporters, including those in small and medium sectors with good track
record would be eligible for issue of Gold Card by individual banks as per the criteria to be laid
down by the latter.
(ii) Gold Card under the Scheme may be issued to all eligible exporters including those in the
small and medium sectors who satisfy the laid down conditions.
(iii) Gold Card holder exporters, depending on their track record and credit worthiness, will be
granted better terms of credit including rates of interest than those extended to other exporters by
the banks.
(iv) Applications for credit will be processed at norms simpler and under a process faster than for
other exporters.
(v) Banks would clearly specify the benefits they would be offering to Gold Card holders.
(vi) The charges schedule and fee-structure in respect of services provided by banks to exporters
under the Scheme will be relatively lower than those provided to other exporters.
(vii) The sanction and renewal of the limits under the Scheme will be based on a simplified
procedure to be decided by the banks. Taking into account the anticipated export turnover and
track record of the exporter the banks may determine need-based finance with a liberal approach.
Banks should adopt any of the methods, viz. Projected Balance Sheet method, Turnover method
or Cash Budget method, for assessment of working capital requirements of their exporter-
customers, whichever is most suitable and appropriate to their business operations.
In the case of consortium finance, once the consortium has approved the assessment, member
banks should simultaneously initiate their respective sanction processes.
(ii) 'On line' credit to exporters
(a) Banks provide 'Line of Credit' normally for one year which is reviewed annually. In case of
delay in renewal, the sanctioned limits should be allowed to continue uninterrupted and urgent
requirements of exporters should be met on ad hoc basis.
(b) In case of established exporters having satisfactory track record, banks should consider
sanctioning a 'Line of Credit' for a longer period, say, 3 years, with in-built flexibility to step-
up/step-down the quantum of limits within the overall outer limits assessed. The step-up limits
will become operative on attainment of pre-determined performance parameters by the exporters.
Banks should obtain security documents covering the outer limit sanctioned to the exporters for
such longer period
(c) In case of export of seasonal commodities, agro-based products etc., banks should sanction
Peak/Non-peak credit facilities to exporters.
(d) Banks should permit interchangeability of pre-shipment and post- shipment credit limits.
(e) Term Loan requirements for expansion of capacity, modernization of machinery and up
gradation of technology should also be met by banks at their normal rate of interest.
(f) Assessment of export credit limits should be 'need based' and not directly linked to the
availability of collateral security. As long as the requirement of credit limit is justified on the
basis of the exporter's performance and track record, the credit should not be denied merely on
the grounds of non-availability of collateral security.
(iii) Waiver of submission of orders or L/Cs for availing pre-shipment credit.
(a) Banks should not insist on submission of export order or L/C for every disbursement of pre-
shipment credit, from exporters with consistently good track-record. Instead, a system of
periodical submission of a statement of L/Cs or export orders in hand should be introduced.
(b) Banks may waive, ab initio, submission of order/LC in respect of exporters with good track
record and put in place the system of obtaining periodical statement of outstanding orders/LCs
on hand. The same may be incorporated in the sanction proposals as well as in the sanction
letters issued to exporters and appropriately brought to the notice of ECGC. Further, if such
waivers are permitted at a time subsequent to sanction of export credit limits with the approval of
the appropriate authority, the same may be incorporated in the terms of sanction by way of
amendments and communicated to ECGC.
(iv) Handling of export documents
Since exports are very important for the country’s economy, RBI has made special provisions for
extending WC finance for exporters. The main advantages are:
Export finance at concessional rates of interest should be liquidated from export proceeds
remitted from abroad in approved currencies
Module A: Corporate Banking & Finance Page 85
Although each export contract should have to be liquidated individually, in cases of exporters
with good track record, banks may permit “running account facility”
Export credit is available in Indian Rupees as well as in designated foreign currencies, in both
cases at concessional rates of interest.
In case of export credit in foreign currency banks permit their clients to enter into forward
contracts for the sale of foreign exchange
The RBI instructions also lay down detailed instructions for reporting of all export import related
transactions
Key Words:
Pre-shipment finance – WC finance extended by banks for exports in Indian rupees or foreign
currency
Post shipment finance – WC finance extended by banks for export receivables in Indian rupees
or foreign currency
Export Bills Rediscounting (EBR) Scheme – Post shipment export finance in foreign currency
Deemed exports – means those transactions in which the goods supplied do not leave the country
and the supplier in India receives the payment for the goods. It means the goods supplied need
not go out of India to treat them as an export
Terminal Questions:
What are the main differences between export credit in Indian rupees and in foreign currency?
The main advantages are concession in rate of interest, priority in sanction and disbursement and
simplification of procedures for appraisal. Export finance at concessional rates of interest should
be liquidated from export proceeds remitted from abroad in approved currencies.
Industrial sickness is a common phenomenon over the years. However, as bank finance to
industry grew, such sickness led to bad debts in banks. This not only locked up precious
resources in non-performing assets in banks, but it also made banks risk averse.
Defaults in corporate borrowings were being dealt with by banks according to their own
procedures and interpretation of the problems leading up to delinquency. However, it was felt by
RBI that in cases where no moral hazard was involved, and, the company had a potential for
survival, provided the debt service was reduced, a uniform approach was required. Hence RBI
came out with guidelines on Corporate Debt Restructuring (CDR).
In spite of their best efforts and intentions, sometimes corporates find themselves in financial
difficulty because of factors beyond their control and also due to certain internal reasons. For the
revival of the corporates as well as for the safety of the money lent by the banks and FIs, timely
support through restructuring in genuine cases is called for. However, delay in agreement
amongst different lending institutions often comes in the way of such endeavors.
Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in place
institutional mechanism for restructuring of corporate debt and need for a similar mechanism in
India, a Corporate Debt Restructuring System was evolved, and detailed guidelines were issued
in August 2001 for implementation by banks.
Subsequently based on the recommendations made by the Working Group to make the
operations of the CDR mechanism more efficient, the guidelines on Corporate Debt
Restructuring system were revised in terms of RBI in February 2003.
Thereafter a Special Group was constituted in September 2004 with Ms. S. Gopinath, Deputy
Governor, RBI as the Chairperson to review and suggest changes / improvements, if any, in the
CDR mechanism. Based on the suggestions of the Special Group, and the feedback received on
the draft guidelines, the CDR Guidelines have been further revised.
One of the main features of the restructuring under CDR system is the provision of two
categories of debt restructuring under the CDR system:
• Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the
creditors, will be restructured under the first category (Category 1).
• Accounts which are classified as ‘doubtful’ in the books of the creditors would be
restructured under the second category (Category 2).
The main features of the CDR mechanism are given below:
Objective
The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring the corporate debts of viable entities facing problems,
outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.
In particular, the framework will aim at preserving viable corporates that are affected by certain
internal and external factors and minimize the losses to the creditors and other stakeholders
through an orderly and coordinated restructuring programme.
Sometimes corporates find themselves in financial difficulty because of factors beyond their
control and also due to certain internal reasons. For the revival of the corporates as well as for
the safety of the money lent by the banks and FIs, RBI has evolved a scheme for Corporate Debt
Restructuring (CDR).
The objective of the CDR framework is to ensure timely and transparent mechanism for
restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR,
DRT and other legal proceedings, for the benefit of all concerned.
The scheme will not apply to accounts involving only one financial institution or one bank. The
CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts
of corporate borrowers with outstanding fund-based and non-fund based exposure of Rs.10 crore
and above by banks and institutions.
The CDR system has two categories of debt restructuring:
Corporate Debt Restructuring (CDR): This mechanism makes a systematic effort to restructure
debts of companies that are banking with more than one bank, and are facing liquidity problems,
but are otherwise viable.
CDR Standing Forum: The highest level in the 3 tiered structure, consisting of the heads of all
major banks
CDR Empowered Group: The second level, consisting of ED level officials of major banks.
CDR Cell: This is the functional unit, which will prepare the CDR proposal in consultation with
all other creditors.
Stand Still Clause: All creditors will voluntarily forebear legal action during the CDR process
Additional finance: While restructuring existing debt, it might be found by the banks concerned
that the borrower will be viable only if additional finance is provided
Exit option: The process through which a creditor can exit the CDR mechanism
Terminal Questions:
Describe the structure and functions of each tier in the CDR mechanism.
The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring the corporate debts of viable entities facing problems,
outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.
In particular, the framework will aim at preserving viable corporates that are affected by certain
Reference Books
Cash Management
Debt Management
Offshore Services
Trusteeship
Custodial Service
• Back Office & Beyond. A guide to procedures, settlement & risk in financial markets –
Mervyn King