Corporate Banking

CORPORATE BANKING

INDEX

A1.

INTRODUCTION

A2.

OBJECTIVES

A3.

CORPORATE BANKING 1. 2. 3.

MEANING IMPORTANCE SERVICE OFFERED

A4.

CORPORATE DEPOSITS

A5.

CORPORATE FINANCE

INTRODUCTION Banks offers various services to business organization to help them to manage their finance on the both side assets and liabilities sides, as also in off balance sheet items. On the asset side they provide deposit accounts of various maturities to suits the cash flow requirements of the business units, cash management product for managing cash inflows and outflows across different locations. On liabilities side they provide various services like working capital finance, discounting of bill, export credit, short term finance, structure finance and term loans. On off balance sheet side banks provide services like letter of credit banks guarantee and collection of documents. Banks are also offering value added services such as syndication of loan , real time gross settlement ,channel financing ,corporate salary accounts, public issues corporate internet banking, money market desk , derivatives desk, employees trust , tax collection, payment gateway services.

A2. OBJECTIVES A) The objective of this module are to understand meaning and importance of corporate banking and the various services offered by banks to corporate, such as:         

Cash Management Salary Payment Debtors Management Factoring & Forfeiting Trusteeship Custodial Services Business advisory services Off Shore Services Forex Management

B) Corporate Deposits and the importance of institutional vis-à-vis retail deposits

C) Corporate finance extended by means of:    

Working Capital Finance Fund and Non-Fund Based Limits Export Finance Corporate Debt Restructuring

A3. CORPORATE BANKING 1. MEANING & IMPORTANCE Corporate banking encompasses services that banks provide companies a wide range of banking & financial services provide to domestic and international operations of range local corporate and local operations’ of multinational corporations. Service include access to commercial banking products , include working capital facilities ,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 customized financial solutions

CORPORATE BANKING SERVICES

CASH MANAGEMENT

Cash management services offered by banks enable their clients to: • Boost efficiency and facilitate better decisions by treasurers • Accurately execute payments and collect receivables with speed • Manage liquidity in different markets 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.

Local and Upcountry Cheque Collections: Banks offers 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 Collections through various electronic modes such as: Real Time Gross Settlement (RTGS)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 the 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). 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 and 3 times during Saturdays. 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.

Electronic Clearing System (ECS) 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. 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.

Working of ECS Credit System ECS Payment 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.

SALARY PAYMENT Banks offer Corporate Salary Payment services designed to offer payroll solutions through in a24 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. DEBTORS MANAGEMENT

Receivable Management Banks offers receivable management services to their clients to manage their collectable Debt. The features of this product are: Collection service: Receivables handling for cheques drawn on both local and outstation locations ;lodgments for clearing ,updating of account receivables lodgment for clearing, and updating of account receivables.

Receivable management : Invoice Management and Account Receivable matching solutions. Other services include collection of receivables through funds transfers and other electronic modes such as RTGS, NEFT, etc. Funds can be transferred by banks into their client’s account from identified counter-parties through hundreds of bank branches across the country

FACTORING & FORFAITING 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 sale generate the factoring business in the ordinary course of commercial dealing . Realization 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 negotiates the terms of purchase with the seller 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 Sells goods to Buyer according to agreement Delivers to Buyer copies of invoice, delivery challan, MoU/contract and instructions to pay to the Factor. Seller receives from the Factor payment of part (usually 75 -80%) payment of invoice value on selling the receivables from the Buyer 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 tothe Seller after deducting his service charges. The factor also ensures that the following conditions are met to give enable the factoring arrangement.: The invoices, bill 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 buyer have been complied with, 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 into5 categories:  Maintenance of Sales Ledger  Collection of Accounts Receivable  Financing facility of trade debts  Assumption of Credit Risk and Credit Protection  Provision of advisory services  Maintenance of Sales Ledger  The Factor maintains the clients’ sales ledgers.

Types/Forms of Factoring The different forms of factoring prevalent in India are: Recourse and Non-recourse 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 with in 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. Advance and Maturity Factoring 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 advanced75% 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.

Full Factoring (also known as old line factoring ) This is the most comprehensive form of factoring encompassing non recourse factoring with collection, sales ledger administration, credit protection, and short term finance. Disclosed and undisclosed factoring 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 us bit 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.

Domestic and Export Factoring In export factoring 4 parties are involved – (i) The Exporter (Client), (ii) The Importer (Buyer), (iii) T h e E x p o r t F a c t o r , a n d , (iv) T h e I m p o r t F a c t o r . S i n c e 2 f a c t o r s a r e i n v o l v e d i n s u c h 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 ( C l i e n t ) a n d t h e E x p o r t F a c t o r , a n d , (ii) B e t w e e n t h e E x p o r t F a c t o r a n d t h e I m p o r t F a c t o r .

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 flow of documents and information in such cases is as follows:

The Exporter informs the Export Factor about his intention to export goods or services to an importer in a foreign country 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 makes residual payment to the Exporter and the transaction is complete Factoring vis-à-vis Bills Discounting 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 Bills discounted do not represent assignment of debts as is in the case of factoring

FORFAITING Forfeiting is a form of financing of receivables pertaining to international trade. The salient features are given below: Exporter sells goods to an Importer on deferred payments basis The Importer draws a series of promissory notes in favor of the exporter falling due in a phased manner, including interest charges, depending upon the tenor of the note. Alternatively , the Exporter draws a series of bills on the Importer, falling due in a phased manner, which is accepted by the Importer. 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 avail evidenced by endorsement by the bank guaranteeing payment by the Importer. The Exporter enters into a forfeiting arrangement with a bank, under which the Exporter sells the availed bills or notes to the forfeiter, without recourse, and at a discount. The forfeiting 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 availing 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 securities them and sell them in the secondary market to refinance his cash flow.

Forfeiting vs Export Factoring Both mechanisms are similar as they provide advance payment on a non-recourse basis. But they differ in some important respects: A forfeiter 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 forfeiter is protected by an availing bank, whereas a factor usually takes on the credit risk on himself. Forfeiting is a pure finance arrangement, whereas factoring includes ledger maintenance, collection, etc . Factoring is essentially short term finance ,whereas forfeiting usually extends credit over a longer period forfeiters take on exchange rate risk and charge a premium for the service, Whereas factors do not cover exchange rate risk.

Functions of a forfeitor (1)Maintenance of Sales Ledger of the client (2)Collection of accounts receivable due to client from the buyer (3)Financing of Trade Debts to the client (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

TRUSTEESHIP SERVICES 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. Banks if appointed as Trustees, assist settlers/authors in: (1)Counseling and drafting of trust deeds. (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. The services rendered are: Advisory on the Debenture / Bond Issue on the following activities relating to the issue: • Obtaining a rating from CRISIL, ICRA, etc. • Appointment of arrangers, i.e., a SEBI registered investment bank • 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 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.

ATTORNEYSHIP:

This is a specialized service to help both non-resident and resident customers, who find it difficult to operate and monitor their accounts and investment personally. Banks offer power of Attorney service. 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.

CUSTODIAL SERVICES Services Provided by a Custodian 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 service performed for customer may vary. Banks provide variety of services to their customer ,including mutual fund and investment manager, 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.

Core Custody Services A custodian providing core domestic custody services typically settles trades, invest cash balances as directed, collects income, processes corporate actions, prices securities positions, and provides recordkeeping and reporting services.

Global Custody 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 .

BUSINESS ADVISORY

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 strategizing for growth and consolidation covering the entire project development cycle and beyond. Services are designed 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.

FOREX SERVICES

Foreign Currency Travellers Cheques Banks offer Foreign Currency Travellers cheques (FCTCs) that are a safe and easy way t o 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. 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).

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. Letters of credit issued by major Indian banks are accepted worldwide. Documentation for Letter of Credits : • L/C Application Form • General Undertaking / Indemnity on Stamp Paper (value applicable as per the state) • Recommended Board Resolution for Companies / Partnership Deed for Partnership Firms • IE Code Number Certificate • OGL cum FEMA Declaration • KYC Report

• Purchase Order / Proforma Invoice (accepted by the applicant) • Insurance Copy only on FOB Basis • Annexure to the LC (Mentioning additional conditions to be incorporated in the LC) • Original License (Exchange control copy), If applicable

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. Documentation for Export Collection: • Request Letter • IE Code Number Certificate • FEMA Declaration • KYC Report • SDF (exchange control Copy) / GR Form / PP Form / Softex Form • Original Transport Documents - Bill of Lading or Airway Bill • Insurance Copy (if on CIF terms) • Bill of Exchange (in case of D/A) • Original L/C in case of L/C Bill • Clarification letter for delay beyond 21 days of export

A.4 – CORPORATE DEPOSITS 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:  Payable at par cheque facility.  Demand draft.  Sweep-in and sweep-out facility. 

Free or concessional rates for R T G S / N E F T / S W I F T r e m i t t a n c e s a n d 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. Most companies require maintaining current accounts with designated banks for payment of D i v i d e n d a n d I n t e r e s t W a r r a n t s . O n c e t h e d i v i d e n d i s d e c l a r e d o r t h e i n t e r e s t f a l l s d u e f o r payment, the entire amount is transferred to this current account. Then Dividend or InterestWarrants are drawn on these accounts by the company. Dividend and Interest Warrants.Once the dividend is declared or the

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

Certificates of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India.

Eligibility . CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs)and Local Area Banks (LABs); and (ii) select all -India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

Who can Subscribe CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on a non-repatriable basis. Such CDs cannot be endorsed to another NRI in the secondary market. Minimum Size of Issue and Denominations Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted from a single subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh thereafter.

A.4 – CORPORATE FINANCE

The aspects of Corporate Finance that we shall see in this Chapter are:

a)Working Capital Finance i) Fund based facilities ii) Non-Fund based facilities iii) Finance of Foreign Trade b)Corporate Debt Restructuring

Working Capital Finance A Manufacturing unit needs finance as normally the promoter has only a part of the funds required to establish and operate it The funds required are basically of 2 types: a) L o n g t e r m f u n d s r e q u i r e d f o r p u r c h a s e o f l a n d , c o n s t r u c t i o n o f f a c t o r y a n d o f f i c e 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 is, hold inventory and receivables:• Purchase raw materials and consumables, • Wait for the entire manufacturing process to be over, till the raw materials are converted into finished goods, • Wait till the finished goods are sold, • Until finally cash is received from the customer. This is known as the Process Cycle, depicted graphically in the diagram below

EXPORT FINANCE 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 Bench mark 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 provision

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

Choice of currency (a) The facility may be extended in one of the convertible currencies viz. US Dollars, Pound Sterling, Japanese Yen, Euro, etc. (b) To enable the exporters to have operational flexibility, it will be in order for banks to extendPCFC in one convertible currency in respect of an export order invoiced in another convertiblecurrency. For example, a n e x p o r t e r c a n a v a i l o f P C F C i n U S D o l l a r a g a i n s t a n e x p o r t o r d e r invoiced in Euro. The risk and cost of cross currency transaction will be that of the exporter. (c) Banks are permitted to extend PCFC for exports to ACU countries. (d) The applicable benefit to the exporters will accrue only after the realisation of the export billsor when the resultant export bills are rediscounted on ‘without recourse’ basis.

Source of Funds in Foreign Exchange for Banks (i)

(ii)

(iii)

The foreign currency balances available with the bank in Exchange Earners Foreign Currency (EEFC) Accounts, Resident Foreign Currency Accounts RFC (D) and Foreign Currency (Non Resident) Accounts (Banks) Scheme are utilized for financing the preshipment credit in foreign currency. Banks can be permitted to utilize the foreign currency balances available under Escrow Accounts and Exporters Foreign Currency Accounts for the purpose, subject to ensuring that the requirements of funds by the account holders for permissible transactions are met and the limit prescribed for maintaining maximum balance in the account under broad based facility is not exceeded. Foreign currency borrowings

Period of Credit (i) PCFC will be available for a maximum period of 360 days. Any extension of the credit will be subject to the same terms and conditions as applicable for extension of rupee packing credit and it will also have additional interest cost of 200 basis points above the rate for the initial period of 180 days prevailing at the time of extension. (ii) Further extension will be subject to the terms and conditions fixed by the bank concerned and if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling rate for the currency concerned. In such cases, banks can arrange to remit foreign exchange to repay the loan or line of credit raised abroad and interest without prior permission of RBI. (iii) For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll over basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate for extended period plus permitted margin 350 basis points over LIBOR/EURO LIBOR/EURIBOR).

Forward Contracts (i) As explained above, PCFC can be extended in any of the convertible currencies in respect of an export order invoiced in another convertible currency. Banks are also permitted to allow an exporter to book forward contract on the basis of confirmed export order prior to availing of PCFC and cancel the contract (for portion of drawal used for imported inp uts) at prevailing market rates on availing of PCFC. (ii) Banks are permitted to allow customers to seek cover in any permitted currency of their choice which is actively traded in the market, subject to ensuring that the customer is exposed to exchange risk in a permitted currency in the underlying transaction. (iii) While allowing forward contracts under the scheme, banks should ensure compliance of the basic Exchange Control requirement that the customer is exposed to an exchange risk in the underlying transaction at different stages of the export finance.

Deemed Exports PCFC may be allowed for ‘deemed exports’ only for supplies to projects financed by multilateral/bilateral agencies/funds. PCFC released for ‘deemed exports’ should be liquidated by grant of foreign currency loan at post-supply stage, for a maximum period of 30 days or up to the date of payment by the project authorities, whichever is earlier. PCFC may also be repaid/ prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to the extent supplies have actually been made.

Refinance Banks will not be eligible for any refinance from RBI against export credit under the PCFC scheme and, as such, the quantum of PCFC should be shown separately from the export credit figures reported for the purpose of drawing export credit refinance.

CUSTOMER SERVICE AND SIMPLIFICATION OF PROCEDURES Customer Service (i) RBI has directed that banks must provide timely and adequate credit and also render essential customer services/guidance in regard to procedural formalities and export opportunities to their exporter clients .(ii) Banks should open Export Counsel Offices to guide exporters particularly the small ones and those taking up non-traditional exports.

Simplification of Procedure for Delivery of Export Credit in Foreign Currency and in Rupees With a view to ensuring timely delivery of credit to exporters and removing procedural hassles, the following guidelines may be brought into effect. These guidelines are applicable to Rupee export credit as well as export credit in Foreign Currency. (i) Simplification of procedures Banks should simplify the application form and reduce data requirements from exporters for assessment of their credit needs, so that exporters do not have to seek outside professional help to fill in the application form or to furnish data required by the banks. Banks should adopt any of the methods, viz. Projected Balance Sheet method, Turnover method o r C a s h B u d g e t m e t h o d , f o r a s s e s s m e n t o f w o r k i n g c a p i t a l r e q u i r e m e n t s o f t h e i r e x p o r t e r - 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 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.

Pre-shipment Finance to exporter Features It can be availed in rupee or in foreign currency. Banks extend packing credit to exporters on production of either a LC or a confirmed order It is also granted as advance against incentives receivable from the govt., advance against duty drawback and advance against checks/drafts received as an advance payment. It is also given as a running account facility to exporter with good track record, provided exporters produce LC within a reasonable time. The period of loan is normally up to 180 days. The rate of interest is concessional. Banks can avail refinance against packing credit from RBI. Packing credit is available for both cash exports and deemed exports

Post-shipment finance to exporter This is a loan or advance to an exporter from the date of extending the credit after the shipment of goods to the date of realization of export proceeds. This isextended against shipping documents. 1. Exporter makes shipment. 2. Exporter presents export documents eg. Bill of lading/airway bill, invoice, billsof exchange, insurance policy, certificate of origin, inspection certificate, packinglist. 3. Bank verifies the documents. 4. Bank negotiates the bill (if against LC) or purchases bills or discounts bill (if w/o LC). 5. Bill is drawn in foreign currency. 6. Bank credits the exporter ‘s account in rupees.