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PRODUCTS FOR WORKING CAPITAL FINANCE

Total Exposure 15 13 842 crores

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500000 450000 400000 350000 300000 250000 200000 150000 100000 50000 0

T o ta l e x p o s u r e in C ro res

P ercen t

25 200 500 1000 2500 5000 10000 40000 60000 1 0 0 0 0 0 53% 250000 >250000

The Cycle
Cash Raw Materials Components Inventory

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Receivables

Creditors & Expenses Payable Finished Goods Inventory

Working Capital Cycle

Cash Payables Raw Material Work in Process Finished Goods Receivables Bank funding is available at every stage ( (except of course cash!) p )

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Financing Purchases
Letters of Credits Discounting of suppliers Bills

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Financing Inventory a c g e oy
Cash Credit / Overdraft Short Term Loans Commercial Papers Pre shipment Credit

Financing Sales
Sales Bill S l Bills / Supply Bills Discounting S l Bill Di ti Overdraft against Collection Bills Invoice Financing Factoring Similar Products for export sales

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Cash Credit/ Working Capital Demand Loan

Most Prevalent in the country Unique to Indian Conditions Various methods of assessment Primarily against hypothecation of Inventory and receivables y Working Capital Demand Loan

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Structure of Limits CC against Stocks, Purchase bills etc CC against book i tb k debts, sales bills LC for Raw materials Packing Credit Foreign Bills Stock Level Receivables L R i bl Level l Level of purchases through LC, Lead period, Usance period Stock level for Exports Export receivable Level

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Term Loan To Augment Networking Capital

Low networking capital L t ki it l Good asset coverage Good DSCR Medium Term Loans Security Second Charge on Fixed Assets

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Adhoc Short Term Loans

Unforeseen requirements U f i t Temporary Cash flow requirements Importance of Takeout

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Commercial Papers
Eligibility Eli ibilit Terms Mode of Issue Eligible Investors

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Bills Discounting
Negotiable I t N ti bl Instruments t Clean and Documentary Bills Supply Bills Invoice Financing Why Banks prefers Bills

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Factoring
Extensions of I E t i f Invoice discounting i di ti Assignment of receivables With / Without / Partial Recourse Balance sheet management

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Export Fi E t Finance
Facilitating production for exports at mandated interest rates and tenors tenors. Pre Shipment Post Shipment

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Pre shipment : Packing Credit

Against firms orders / L tt of Credit A i t fi d Letter f C dit In Rupees or Dollars Concessional Interest Up to 180 days/270 days To be converted into Post Shipment finance

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Post Shipment Finance

Bill Discounting under L/ or Di ti d L/c Otherwise C/C against collection Bill i t ll ti Bills Facility in Rupee / Foreign Currency Concessional Interest Rate ECGC cover

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Suppliers Credit / Buyers Credit

Arranged for importers by exporters A df i t b t bank abroad Or O arranged b Importers Banks d by I t B k abroad with their foreign Correspondent Bank Against Letter of credit of Importers Bank Low Finance Cost

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Factoring & Forfaiting of Export Receivables

Short Term Receivables: Factoring Medium Term Receivables: Forfaiting Bank abroad takes credit risk on the Importers by Co-accepting Export Bills Bank in India take performance risk on exporters p Discounts Co- accepted Bills Similar process of forfaiting

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Securitisation
Discounting of certain or near certain Di ti f t i t i cash flows Securitisation of f t S iti ti f future receivables i bl involves Performance & Credit risks

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Credit Enhancement Mechanism

Cash Collateralisation C h C ll t li ti Over Collateralisation Cherry Picking Buyback of delinquent portion Credit Support of a Bank Use of Escrow accounts

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Change of Picture Picture.

Up to mid 90s corporates pursued aggressive capacity expansion & diversification Everything produced was sold irrespective of quality/costs. Speculative gains were driving use of working capital. This stopped after liberalisation made cost competitiveness critical and so the demand for Term loans and working capital declined. For last three years up-turn in trade cycle is visible. Regulator is very worried about bubble in investment in real estate Regulator is has preferred inflation control over growth

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Current trends trends.

Efficiency in use of working capital is increasing significantly with use of technology and better practices. Banks are moving money faster. Banks IT systems are talking to customers ERP systems. Banks are managing receivables /payables of clients. Inventory and receivable levels are down and so also the need for bank finance. Suppliers supply goods not credit credit. Banks provide cash-flow finance and not finance against current assets.

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Way Forward.
channel financing is the new buzz channel is word after Retail Financing.. For a large corporate, banks finance corporate suppliers on one hand and dealers on the other. Various kind of comforts offered to the bankers in place of security. Transaction history is an important guide.

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Letter of Credit

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Letter of credit is an arrangement whereby a bank (Issuing Bank) acting at the request and in accordance with the instructions of a customer(applicant) is to make payment to or to the order of a third party (beneficiary) or is to pay accept or pay, negotiate bills of exchange drawn by the beneficiary or authorises such payments to be made or such drafts to be paid, accepted or negotiated by another bank against stipulated documents, provided that the terms and conditions of the LC are complied with.

Request for L/ /c

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PARTIES TO A LETTER OF CREDIT

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A. A Applicant - Applicant is normally the buyer of the goods who has to make payment to the seller - beneficiary. B. Issuing Bank - I B I i B k Issuing b k is one which i bank i hi h issues the credit i.e. it is the bank which undertakes to make the payment to seller against d i t documents. t C. Beneficiary - He is normally the seller of the g goods who has to receive payment from the p y Applicant. He gets payment on presentation of stipulated documents complying with the terms and conditions of the LC.

D. Advising Bank - Advising bank advises the credit to the beneficiary, thereby assuring the genuineness of the b f h b h f h credit. It is normally located in beneficiary's territory. E. E Confirming Bank - Confirming bank adds its guarantee to the credit opened by another bank, thereby,undertaking the responsibility of payment / negotiation / acceptance under the credit, in addition to that of the issuing bank bank.

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F. Nominated Bank - The bank which is nominated and authorised by the Issuing bank to pay, to incur a deferred payment undertaking, to accept draft ( ) or to negotiate. t d t ki t t d ft (s) t ti t In a freely negotiable credit any bank is a nominated bank. F. Reimbursing Bank - It is the bank, authorised to honour the reimbursement claim in settlement of negotiation acceptance / payment lodged with it by the paying , negotiating or accepting bank. bank

TYPES OF LETTER OF CREDIT

A. Revocable / Irrevocable Letter of Credit LC which can/can not be amended or canceled by the issuing bank at any time prior t its expiry without notice t the i to it i ith t ti to th beneficiary. B. B Confirmed Letter of Credit - A confirmed letter of credit is an irrevocable LC to which another bank (usually the advising bank) has, at the issuing bank's request, added its confirmation constituting a definite undertaking of the former former.

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D. Revolving Letter of Credit L/c providing for an automatic renewal of the amount for which the credit is opened. E. Transferable Letter of Credit - A transferable LC is a credit which the beneficiary has the right to give instructions to the negotiating bank to make the credit available in whole or in part to one or more third parties. F. Back-to-back C di - A Back-to-back k b k Credit k b k credit is an ancillary letter of credit which the beneficiary uses to support another LC y pp opened by the seller's bank, favouring his supplier.

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Standby Letter Of Credit

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Another Classification of Letters Of Credit

G. Sight Credit - It is a credit payable against presentation of requisite documents to the designated paying bank. H. Usance Credit - It calls for drawing of drafts at stated usance period requiring acceptance and/or payment by drawee at the end of the usance period I. Acceptance Credit - It is similar to deferred credit except for the fact that in this credit drawing of a usance draft is a must. J. Deferred Payment Credit - It is a usance credit f where payment will be made by designated bank, on respective due dates, as per stipulations of the credit, credit without the drawing of drafts drafts.

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Guarantees
Guarantee is an abstract promise to perform, independent of the underlying transaction. The guarantee is used to secure the performance of a specific obligation, irrespective of whether the performance is owed or not. Performance / Bid Guarantees Financial Guarantees Shipping Guarantees Guarantees under EPCG scheme Deferred Payment Guarantees Standby Letter Of credit.

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Structure of Limits cont.. Bid Bond Guarantee Number & amount of tenders expected to be participated, p p , normally 5% of contract vale Number & value of contracts. Normally 10% of value of contracts

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Financial/Performance BG