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INTRODUCTION

Trade involves purchase of merchandise from seller by a purchaser for his


onward Selling (with or without value addition to the goods) for a profit.
Any trade transaction involves movement of the documents representing
settlement of the transaction. While the merchandise passes through a range
of Logistics player operating at different levels of supply chain, bank have
traditionally been playing a significant role in the movement of documents
and funds. Though this basic concept of trade and the role played by banks
(as a lender or otherwise) remains the same, the dimensions of trade and the
role of players undergo a lot of change depending on whether the entire trade
transaction (sale/purchase) is carried on in the country, or it is a cross Border
transaction. It is a domestic trade in first situation, and international trade in
other. In banking parlance, the term TRADE FINANCE usually indicates
finance against an international trade transaction involving either import or
export of goods from/to foreign countries.
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PROPOSED METHODOLGY
• Methodology is a systematic procedure of collecting information in
order to analyze and verify a phenomenon.
• The present study is based on data collected from primary and
secondary.
PRIMARY DATA:- It is the information collected directly without any
reference. Primary data consists of information obtained from interaction
and discussion with concerned officials of the organization to elicit their
opinion on various relevant matters. In the process of interaction with
officials it is planned to confirm through secondary sources.
SECONDARY DATA:- Secondary source of data includes collection of data
through study of bank records, financing and banking journal, other financial
magazines and websites on the internet.

DATA SOURCES:-
1. SECONDARY SOURCES
• INSIDE THE COMPANY( TEXT BOOKS)
• OUTSIDE THE COMPANY(TEXT BOOKS,WEBSITES)
2. PRIMARY SOURCES
• MANAGEMENT
• RESPONDENT
• `PERSONAL OBSERVATION
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LIMITATIONS
Though the project is completed successfully a few limitations can be
observed in the study.
• Study has been conducted using secondary data.
• Time constraints in completing the project.
• The study was conducted with the data available, and the analysis
was made accordingly.
• Interpretations are based on the validity of the data collected.
• Due to the busy schedule of the executives, it was very difficult to
get valuable information about the organization.

FRAME WORK
Frame work deals with the topic on which the entire project is depended
up on i.e, trade finance in HDFC bank. This is the focus issue of the
entire 8 weeks project and it consists of five chapters:
CHAPTER1:- Describes the “introduction to the project, objectives of the
work, methodology, limitations of the study”.
CHAPTER2:- Portrays the “profile of the HDFC bank”
CHAPTER3:- this chapter explains about theoretical study of “trade
finance”
CHAPTER4:- case study
CHAPTER5:-this chapter consists of findings, summary and suggestions
relating the topics studied.
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OBJECTIVES
• To gain practical understanding on all aspects of trade finance and
to sharpen the skill sets in dealing with trade finance documents.
• To review the historical perspective and past performance of
HDFC bank in trade finance.
• To gain insights of trade finance activities of HDFC bank

HDFC PROFILE

The Housing Development Finance Corporation Limited (HDFC) was


amongst the first to receive an “in principle” approval from the Reserve
Bank of India (RBI) to step up a private sector bank, as part or the RBI’s
Liberalization of the Indian banking industry 1994. The bank was
incorporated in August 1994 in the name of ‘HDFC Bank Limited’ with its
registered office in Mumbai, India. HDFC Bank commenced its operations
as a Scheduled Commercial Bank in January 1995.

PROMOTERS
HDFC is India's premier housing finance company and enjoys an
impeccable track record in India as well as in international markets.
Since its inception in 1977, the Corporation has maintained a
consistent and healthy growth in its operations to remain the market
leader in mortgages. Its outstanding loan portfolio covers well over a
million dwelling units. HDFC has developed significant expertise in
retail mortgage loans to different market segments and also has a
large corporate client base for its housing related credit facilities. With
its experience in the financial markets, a strong market reputation,
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large shareholder base and unique consumer franchise, HDFC was


ideally positioned to promote a bank in the Indian environment.

BSINESS FOCUS

HDFC Bank's mission is to be a World-Class Indian Bank. The


objective is to build sound customer franchises across distinct
businesses so as to be the preferred provider of banking services for
target retail and wholesale customer segments, and to achieve
healthy growth in profitability, consistent with the bank's risk appetite.
The bank is committed to maintain the highest level of ethical
standards, professional integrity, corporate governance and
regulatory compliance. HDFC Bank's business philosophy is based
on four core values - Operational Excellence, Customer Focus,
Product Leadership and People. HDFC Banks business philosophy is
based on four core values:

1. operational excellence
2. customer focus
3. product leadership
4. people

CAPITAL STRUCTURE
As on 31st March, 2010 the authorized share capital of the Bank is
Rs.550 crore. The paid-up capital as on said date is Rs.
457,74,32,720/- (45,77,43,272 equity shares of Rs. 10/- each). The
HDFC Group holds 23.73 % of the Bank's equity and about 16.97 %
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of the equity is held by the ADS Depository (in respect of the bank's
American Depository Shares (ADS) Issue). 26.59 % of the equity is
held by Foreign Institutional Investors (FIIs) and the Bank has about
4,41,347 shareholders. The shares are listed on the Bombay Stock
Exchange Limited and the National Stock Exchange of India Limited.
The Bank's American Depository Shares (ADS) are listed on the New
York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's
Global Depository Receipts (GDRs) are listed on Luxembourg Stock
Exchange under ISIN No US40415F2002.
CBoP AND TIMES BANK AMALGAMATION

On May 23, 2008, the amalgamation of Centurion Bank of Punjab


with HDFC Bank was formally approved by Reserve Bank of India to
complete the statutory and regulatory approval process. As per the
scheme of amalgamation, shareholders of CBoP received 1 share of
HDFC Bank for every 29 shares of CBoP.

The merged entity will have a strong deposit base of around Rs.
1,22,000 crore and net advances of around Rs. 89,000 crore. The
balance sheet size of the combined entity would be over Rs. 1,63,000
crore. The amalgamation added significant value to HDFC Bank in
terms of increased branch network, geographic reach, and customer
base, and a bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times Bank


Limited (another new private sector bank promoted by Bennett,
Coleman & Co. / Times Group) was merged with HDFC Bank Ltd.,
effective February 26, 2000. This was the first merger of two private
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banks in the New Generation Private Sector Banks. As per the


scheme of amalgamation approved by the shareholders of both
banks and the Reserve Bank of India, shareholders of Times Bank
received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

DISTRIBUTION NETWORK
HDFC Bank is headquartered in Mumbai. The Bank at present has an
enviable network of 1,725 branches spread in 779 cities across India. All
branches are linked on an online real-time basis. Customers in over 500
locations are also serviced through Telephone Banking. The Bank's
expansion plans take into account the need to have a presence in all major
industrial and commercial centers where its corporate customers are located
as well as the need to build a strong retail customer base for both deposits
and loan products. Being a clearing/settlement bank to various leading stock
exchanges, the Bank has branches in the centers where the NSE/BSE have a
strong and active member base.

The Bank also has 4,232 networked ATMs across these cities. Moreover,
HDFC Bank's ATM network can be accessed by all domestic and
international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and
American Express Credit/Charge cardholders.
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RATINGS
Credit Rating
The Bank has its deposit programs rated by two rating agencies - Credit
Analysis & Research Limited (CARE) and Fitch Ratings India Private
Limited. The Bank's Fixed Deposit programme has been rated 'CARE AAA
(FD)' [Triple A] by CARE, which represents instruments considered to be
"of the best quality, carrying negligible investment risk". CARE has also
rated the bank's Certificate of Deposit (CD) programme "PR 1+" which
represents "superior capacity for repayment of short term promissory
obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.)
has assigned the "AAA ( ind )" rating to the Bank's deposit programme, with
the outlook on the rating as "stable". This rating indicates "highest credit
quality" where "protection factors are very high.”
The Bank also has its long term unsecured, subordinated (Tier II) Bonds
rated by CARE and Fitch Ratings India Private Limited and its Tier I
perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd.
CARE has assigned the rating of "CARE AAA" for the subordinated Tier II
Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA
(ind)" with the outlook on the rating as "stable". CARE has also assigned
"CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II
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bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's
Perpetual Debt programme and Upper Tier II Bond issue. In each of the
cases referred to above, the ratings awarded were the highest assigned by the
rating agency for those instruments.

Corporate Governance Rating


The bank was one of the first four companies, which subjected itself to a
Corporate Governance and Value Creation (GVC) rating by the rating
agency, The Credit Rating Information Services of India Limited (CRISIL).
The rating provides an independent assessment of an entity's current
performance and an expectation on its "balanced value creation and
corporate governance practices" in future. The bank has been assigned a
'CRISIL GVC Level 1' rating which indicates that the bank's capability with
respect to wealth creation for all its stakeholders while adopting sound
corporate governance practices is the highest.
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TRADE FINANCE

INTRODUCTION

Trade involves purchase of merchandise from seller by a purchaser for his


onward Selling (with or without value addition to the goods) for a profit.
Any trade transaction involves movement of the documents representing
settlement of the transaction. while the merchandise passes through a range
of Logistics player operating at different levels of supply chain, bank have
traditionally been playing a significant role in the movement of documents
and funds.

Though this basic concept of trade and the role played by banks (as a lender
or otherwise) remains the same, the dimensions of trade and the role of
players under go a lot of change depending on whether the entire trade
transaction (sale/purchase) is carried on in the country, or it is a CrossBorder
transaction. It is a domestic trade in first situation, and international trade in
other.

In banking parlance, the term TRADE FINANCE usually indicates finance


against an international trade transaction involving either import or export of
goods from /to foreign country.
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TRADE FINANCE-THE BASIC FEATURES:

• One important feature of trade is that it is mostly working capital


intensive, and the need for capital intensive assets (plant and
machinery) is comparatively less. In context of trade finance,
therefore lending banks receive request for providing both fund based
and non fund based working capital credit facilities. In the context of
international trade, lending banks provide documentary credit to
facilitate import of capital intensive machinery as well.

• Trade finance thus involves financing of individual transactions or a


series of revolving transactions which are often self-liquidating. This
self-liquidating feature of trade finance is critical to many small,
under capitalized business.

• Trade finance can be divided in to two distinct categories export trade


finance, and import trade finance.

Export trade finance includes:

1. Pre-shipment export credit

2. Post-shipment export credit

Import trade finance includes


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1. Pre-shipment finance

2. Post –shipment finance

IMPORTANCE OF TRADE FINANCE.

Trade finance has been reviewing the global trade market since 1983.Trade
finance is the method of importer and exporters of commodities and goods
use to finance their business. Basically trade finance has been in existence
for many thousands of years and one can trace the roots of trade finance and
structured trade finance right back to the early days of china and the silk
route, Mesopotamia and Europe. Today trade finance is a massive, multi-
billion dollar business. As the world trades mare and more goods and
commodities are brought and sold, so more and more banks and financiers
are needed to lend money to finance the purchases and sale of these goods
and commodities. Trade finance determines how cash, credit, investment
and other assets can be utilized for trade.

The two board categories of trade finance:

 Pre-shipment financing to produce or purchase the material and


labor necessary to fulfill the sales order.

 Post-shipment financing in order to generate immediate cash while


offering payment terms to buyer .
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DOCUMENTARY CREDITS

A country rarely, if ever, produces everything it needs. This means that


countries are dependent upon one another for those products that they need
but which they themselves do not produce. The various steps covering the
movement of goods between countries the payment for such goods and the
relationship between the parties involved form the basis of International
Trade.

Types of International Trade Settlement :

Advance Payment : When the buyer’s credit is doubtful or the political or


economic environment in the buyer’s country is unstable seller may demand
advance payment, which will be to his advantage. Without any assurance for
supply of goods, blocking his capital prior to receipt of goods or services the
buyer will be at a disadvantageous position.

Open Account: By an arrangement between the buyer and the seller


manufactured goods will be delivered to the buyer directly or to his order
and the buyer will pay at the end of the agreed period. This type of trading
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requires a high degree of trust between buyer and seller and it will be more
advantageous to the buyer.

Bills on collection basis : It is an arrangement by which the seller after


shipping the goods submits the documents to his bank as agent for
collection. Documents are presented to the buyer through the correspondent
bank of the seller’s bank, which will be released upon buyer’s payment of
the amount specified.

Documentary Credits : (Letters of credit): It is one of the most convenient


methods of settling payments in International Trade. It provides complete
financial security to the Seller of goods. The Seller may not know the credit
worthiness of the Buyer and the prevailing Regulations in the country of the
buyer. But once a Letter of Credit is established by the buyer’s bank on
behalf of the buyer in favour of the seller and the seller submits the set of
required documents to the opening bank or to the nominated bank, seller is
assured of payment. Buyer also gets the advantage of his banker’s assistance
in closely scrutinizing the documents and only after receiving the relevant
documentary evidence from the seller by the banker nominated in the credit
the nominated banker releases payment.

DOCUMENTARY CREDITS :

OPERATION OF DOCUMENTARY CREDIT

STAGE I

Buyer and Seller arrive at a contract for sale, specifying the terms of sale.
Both the parties may not know the financial capacity of each other. As for
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the Seller is concerned he may prefer a bank should undertake the payment
obligation of the buyer and payment should be made available to him
immediately on dispatch of goods from his country. On the basis of this
agreement buyer (Applicant) requests his bank (Issuing Bank) for
undertaking the payment obligation on his behalf in favour of the Seller
(beneficiary). The arrangement under which a bank on behalf of the buyer
(Importer) undertakes the payment obligation, subject to fulfillment of
certain documentary conditions, is known as Documentary Credit. As per
the requirements of the contract and on the basis of the application given by
the applicant, Issuing Bank establishes the Letter of Credit and forwards the
Letter of Credit to its Correspondent Bank (Advising Bank) in the Seller’s
country, which advises the Letter of Credit to the Beneficiary At times, at
the insistence of the Seller, Buyer requests Issuing Bank to make suitable
arrangement with a bank in the Seller’s country for releasing payment
immediately to the Seller on submission of shipping documents as per
Sellers requirement. In such cases, the Issuing Bank request a bank in the
Sellers country or in any third country, to undertake the payment obligation
on their behalf under this transaction. A bank in the Seller’s country may
agree for this arrangement subject to their Correspondent relationship with
the Opening Bank.

STAGE 2:

The beneficiary after shipping the goods will present the document’s to his
bank (Negotiating Bank). Or he may have a choice of presenting the
documents to the confirming bank directly.
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On receipt of the documents, the Negotiating Bank / Confirming Bank will


scrutinize it thoroughly and pay value to the exporter / beneficiary of the LC
against the shipping documents.

They will claim reimbursement from the bank notified by the Issuing Bank
in the Letter of Credit. Simultaneously, Negotiating Bank will forward the
documents to the Issuing Bank, which will hand over the documents to the
Applicant after recovering the bill value. Applicant / Importer will accept /
pay for the bills if the documents are as per their requirement.

LETTER OF CREDIT:-

Ideally any seller of goods/services would like to receive payment before


the delivery of goods/services to a buyer. Similarly the buyer would also like
to ensure that the goods/services bought are as per his specifications and
deliveries are effected in time, before parting with the money. If the buyer
and seller are at two different, for away stations, both the factors cannot be
satisfied simultaneously.

As a compromise, service of third party as an intermediary are utilized.This


intermediary are utilized. This intermediary is usually a bank request of a
buyer for payment of cost of goods/services sold on certain terms and
conditions,Such an assurance letter is named as a “letter of credit”.

A letter of credit is a written instruement issued by a banker at the request of


a buyer(applicant) in favour of the seller (beneficiary) under taking to
honour the documents or drafts drawn by the seller in accordance with the
terms and conditions.
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Parties to a letter of credit transaction:

• Applicant/buyer -on whose behalf LC is opened.

• Beneficiary/seller -in whose favor the LC is opened.

• Opening bank -which opens/establishes the LC.

• Advising bank -which advices the LC.

• Confirmation bank -which confirms the LC.

• Negotiating bank -normally beneficiary bank.

• Reimbursing bank -which normally maintains nostro account of the


opening bank and reimburses the negotiating bank.

KINDS OF CREDIT:- The different types of letter of credit which banks


generally issue are:

• In Land L/C: An L/C where all the parties to an L/C are located
within the country.

• Foreign L/C: An L/C where either the opener or the benefiary


is located outside the country of issue and arising out of export
or import of goods.

• Revocable credit: A revocable credit may be amended or


cancelled at any movement without prior notice to the
beneficiary.
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• Irrevocable credit: is a definite undertaking of the issuing bank


and cannot be amended or cancelled without the agreement of
issuing bank the confirming bank (if any) the beneficiary.

ASSESSMENT OF LETTER OF CREDIT

For assessing the letter of credit limit requirements of a barrower


following points considered.

i. The necessity for opening L/C.

a) The necessity may raise due to the fact that a particular


raw material or a fixed asset or consumables stores are to
be imported.

b) In case of inland sales also the seller may be willing to


sell the goods against L/C only.
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c) The same may be verified by the original terms of sale


offered by the seller.

ii. Terms of L/C whether DP or DA.

iii. Periodicity of sup[ply by the seller

iv. Lead time: the time taken to receive goods after opening n L/C.

v. Storage facility

DOCUMENTS UNDER THE LETTER OF CREDIT:

Draft :

The Beneficiary should draw it as per the tenor stipulated in the Letter of
Credit.It should be drawn either on the Issuing Bank or on the Confirming
Bank or on the Nominated Bank as per the stipulations of the Documentary
Credit.
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Invoice:

The Beneficiary as mentioned in the Letter of Credit should draw the


invoice.It should be drawn in the name of the opener of Letter of Credit.

BILL OF LADING:

The Bill of Lading should be in sets with the number of non-negotiable


copies as stipulated in the Letter of Credit.

The Shipping Company or its authorized agents should sign it.

INSURANCE POLICY – CERTIFICATE

Insurance Policy should be issued and signed by Insurance-Company or


underwriters or their Agents and it should be as per the terms of the Letter of
Credit.

Cover Notes issued by Brokers cannot be accepted.

CERTIFICATION OF ORIGIN

This should be issued by the Chamber of Commerce or any other authority


as indicated in the Letter of Credit giving information regarding Origin of
Goods, Value, Shipper, Bill of Lading Number etc. The LC should
specifically stipulate by whom such documents should be issued.

PACKING LIST / WEIGHT LIST/ETC.

All other documents like ‘packing list’, ‘weight list’, etc., would be as per
the letter of credit terms and should be in agreement with other documents.
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BANK GUARANTEES:

Definition:

i) A “Contract of Guarantee” under the Indian Contract Act is contract


to perform the promise or discharge the liability of a third person
in case of his default.
ii) A “Contract of Guarantee” should be distinguished from “Contract of
Indemnity”, in the latter case, party promises to save another
person from loss caused to him by the conduct of the promisor
himself or by any other person.

BENEFICIARIES OF GUARANTEES:

Guarantees are generally executed by the bank favouring:

a) Central and state Government Departments including railways.


b) Autonomous bodies, public sector undertakings.
c) Overseas suppliers of goods / machinery on deferred payment terms
(and for obtaining rupee or foreign currency loans).
d) Steamship companies for clearance of goods in the absence of the
relative bills of lading.
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e) Foreign governments for imports under loans sanctioned or under aid.


f) Joint stock companies for issue of duplicate shares etc.,
g) Reputed institutions / limited companies / firms.
h) Tax / Customs / Court authorities.

TYPES OF GUARANTEES:

The different types of Bank guarantees which a borrower may require, can
be broadly classified into three categories:

• Financial Guarantee
• Performance Guarantee
• Deferred Payment Guarantee

The guarantees issued by the bank can be broadly classified into three
categories viz. Financial, Performance and deferred payment guarantees. It
is sometimes difficult to differentiate between the financial and performance
guarantees, as in both cases, the ultimate liability of the bank gets converted
in monetary terms.

A. Financial guarantees:

In case of financial guarantees, the bank guarantees the customer’s financial


worth, credit worthiness and his capacity to take up financial risks.
Therefore, guarantees issued in respect of constituents liability, such as
guarantees favouring tax / customs / excise / court authorities in respect of
disputed claims, payment of taxes, customs and excise etc. will come under
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the classification of financial guarantees. While issuing such guarantees the


branches should be satisfied about the financial strength / liquidity of the
party.

B.Performance guarantees:

(i) Performance guarantees are issued on behalf of constituents


guaranteeing their performance as per the contracts entered into,
performance of machineries supplied, due discharge of other
contractual obligations undertaken etc. In such guarantees, Bank
does not undertake to perform the obligations undertaken by the
customer under the contract, in the event of his failure / default as
they may be of a highly technical nature. The purpose of the
performance guarantee is only to fix the financial responsibility in
the event of default or failure on the part of the customer to
perform the obligations undertaken by him. Hence, in the event of
default of the customer and on being notified to that effect, the
Bank will make payment under the guarantee.
(ii)Guarantees covering security deposit /earnest money/advance
payment / mobilization advance etc. would come under this
category. Similarly, guarantees covering payment for supplies to
be lifted by parties will also be treated as performance guarantees.
(iii) The performance bank guarantee stands on a footing similar to an
irrevocable letter of credit and hence is also known as “standby
letter of credit”.

C.Deferred payment guarantees:


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1) Deferred payment guarantee, which is a financial guarantee, is a way


of raising long term resources for acquiring fixed assets / capital
goods by securing guarnaee of repayment of principal and interest
from his banker to the supplier of capital goods for supplier’s credit.
This also helps the supplier to improve his cash flow by discounting
these bills from his bankers.

a) In case of capital goods / machinery / heavy vehicles/tractors / trailers,


the purchasers have to raise large amount of resources to buy these
items. For this the intending purchaser may approach his bank for
term loan repayable over a medium / long term in installments. It is
possible that due to various constraints like mismatch in resources /
deployment period, funds crunch etc. bank may not be able to
sanction term loans.
b) Under such circumstances, the borrower / intending purchaser may
request the supplier to extend him long term credit. The supplier of
such capital goods etc. may agree to extend such credit repayable over
a period of say 3/5/7 years at say half yearly installments. The
supplier will also charge interest on the credit extended and such
interest may also be recovered in installments along with principal.
c) However, the supplier may not agree to extend such credit, unless he
is satisfied about the capacity of the purchaser to pay the installments
on due date. For this, he may insist on the purchaser’s bank
guaranteeing the repayments.
d) The purchaser (borrower) may then approach his bankers to guarantee
the repayment on due dates. The bank may consider his request and
will extend the guarantee which covers an extended repayment period
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or ‘Deferred Payment’ by the borrower / purchaser to the supplier /


beneficiary. Hence such a guarantee is called ‘Deferred Payment
Guarantee’.

APPRAISAL/SANCTION OF BANK GUARANTEE LIMITS:

(i) General:

(a) An assessment of credit worthiness of the applicant, his past


performance and his capability to discharge the conditions of the
guarantee based on the analysis of financial statements of the
borrower / guarantor, as also detailed opinion and credit report on
proprietor / partners / directors / guarantors etc. is obtained.
(b) While entertaining any request for the issuance of the performance
guarantees, the branch should exercise due care and caution and
should have sufficient knowledge of the customer as regards his
means, experience and capacity to perform the obligations undertaken
and that he is not likely to commit any default. It should particularly
be ensured that the customer has sufficient experience and exposure in
the particular line of activity so that the contractual obligations can be
fulfilled by him without any difficulty. Reasonable cash margin and
charge on collateral securities should be obtained while considering
such guarantees.

INVOKATION OF BANK GURANTEES:


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(i) The beneficiary of a bank guarantee has the right to invoke the
guarantee any time during the currency of the guarantee and before
the expiry of the claim period, if any, and lodge the claim.
(ii)When a demand for payment on guarantee as per terms and conditions
of the guarantee bond is made within the validity period of the
guarantee by the beneficiary, it is deemed to be an invocation. The
demand should be made in writing. Guarantees are sometimes
invoked by telex / telegrams also.
(iii) For invoking a guarantee it is not essential, for the beneficiary to
satisfy the bank regarding the default or the quantum of actual loss
suffered by him. The bank’s obligation under the guarantee is
absolute and independent of any contract entered into by the
applicant customer.
(iv) When a guarantee is invoked by the beneficiary within the validity
period of the relative guarantee bond, it is incumbent on the bank
to meet such demand irrespective of whether the customer requests
us not to pay the amount owing to his dispute with the beneficiary
or for any other reason and also whether the bank is holding any
security or cash margin for the guarantee or not.
(v) Under no circumstances, branches should act on the instructions of the
clients not to make payment under the guarantee. To meet
commitments under the guarantee is an exclusive concern and
obligation of the Bank. If there is dispute between the client and
the beneficiary, the same has to be settled outside the Bank and
branches should not take cognizance of their disputes.
(vi) The payments to the beneficiaries should be made promptly giving
no opportunity to the parties to take recourse to courts and obtain
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injunction against enforcement of guarantees. Needless to mention


that the delay in making payments under guarantees under any
pretext creates a wrong impression that bank officials are in
collusion with the parties which tarnishes the image of the banking
system and the Bank is put in a very embarrassing position. Any
lapse in this regard is viewed seriously by the Bank. We should
carefully note that whenever a guarantee is invoked, steps are
immediately taken to honour the same.
(vii) It has been held that in case a guaranteeing bank pays the amount
of the bank guarantee in the absence of legal and proper invocation
by the beneficiary, then the applicant is not liable to reimburse the
amount in terms of counter indemnity executed by him in favour of
the bank. Therefore it must be ensured that invocation is proper.

CRYSTALLISATION OF BILLS

When a bill is not paid on the due date, the liability in foreign exchange has
to be converted into rupee liability. Such liability obviously cannot be kept
open in foreign currency and accordingly has to be converted into rupee
liability. As such, the bills which remain unpaid, the liability pertaining to
such bills is converted into rupee liability which is known as crystallization.
All exchange risk is to be passed on to exporter. Exporters should be
encouraged to book forward cover. Normal transit period for all foreign bills
as per FEDAI is 20 days.
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All bills on the 30th day from the expiry of normal transit period in case of
unpaid demand bills should be crystallized by converting to rupee liability
(TT selling rate on the date of crystallization or the original bill buying rate
whichever is higher will be applicable).

Interest will also be recovered on the date of crystallization for the period
from date of expiry of the normal transit period / notional due date to the
date of crystallization at the appropriate rate of interest as directed by RBI
for overdue export bills.The unpaid bill will be treated as outstanding under
the sanctioned limit of the customer with the exchange risk open against
him.

Swap cost / gain from due date to date of crystallization shall be absorbed by
authorized dealer.

REALISATION OF BILL AFTER CRYSTALLISATION:

On actual realization, TT buying rate will be applied on the realization


amount or contracted rate in case of forward contract will be applied. The
crystallized amount will be adjusted through this amount and any rise or fall
will be adjusted with the customer’s account. Interest from the date of
crystallization to the date of actual receipt of payment will also be recovered
from the customer. In case of dishonor of bill, the rupee equivalent of the
bill amount arrived at the current TT selling rate or the amount originally
advanced, whichever is higher will be recovered. All applicable charges in
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foreign currency at the current TT selling rate will be applied. Interest at


appropriate rate prescribed by RBI will be recovered.

NORMAL TRANSIT PERIOD:

For all bills in foreign currency other than exports to Iraq … 20 days.For
exports to Iraq … 60 days (provided exports conform to unguidelines).For
bills drawn in rupees … 3 days if reimbursement is provided at the centre of
negotiation.Bank located at 7 days if reimbursement is provided in India
from a centre other than negotiating bank centre 20 days in case of
reimbursing bank outside India Or Bills not under LC.

In case of export usance bills (Foreign / Rupee) where due dates are
reckoned from date of shipment or date of bill of exchange etc., no normal
transit time will be applicable, in case reimbursing bank is other than where
negotiating bank maintains Nostro account or reimbursement obtained
through other bank … normal 5 days transit period interest will be charged.

IMPORT BILLS:

If payable on demand under LC, the import bill will be crystallized, on 10th
day after the date of receipt of documents at the LC opening branch of the
bank.In case of usance bills, it will be crystallized on the due date of the
bill.If the due date or 10th day is a Holiday, the importers liability will be
crystallized the next day.The bills selling rate or the forward cover rate will
be applicable.

INTEREST PAYMENTS (IMPORTS):


Page 30 of 76

Interest if any on the import bill amount will be recovered in full and shall
not be set off against margin amount.

PAYMENT OF COLLECTION BILLS:

In case of collection of bills TT buying rate ruling on the date of payment or


proceeds to the exporter or the forward is contract rate as the case may be
shall be applied and the payment will be made in India only after the foreign
currency amount is credited to the Nostro account of the Bank.

INTEREST PAYMENTS (EXPORTS):

If the exporter has completed all formalities after receipt of payment, the
banks are bound to pay interest. Where:

payment is to be effected in the same branch ... 1 working day.

Where payment is to be made at the same centre but

To another branch of the same bank or another bank … 2 days

Where payment is to be effected to a branch of the same

Bank or another bank at outstation centre … 3 days

FACTORING AND FORFAITING

The main problem nowadays when trading with foreign countries is to


obtain payments from importers. Financing companies offer financial
support to traders in exchange for fees, and guarantees. There are two types
Page 31 of 76

of financing forms: factoring and forfaiting. They are widely used as


alternative financing tools to banks.

FACTORING

Factoring is the process of purchasing invoices from a business at a certain


discount. Factors provide financing service to small and medium-sized
companies who need cash. For this the factor charges a fee equal to a
percentage of the invoices purchased generally 5%. Factoring is a low value
short term financing forms. It involves the purchase of invoices, for an
amount less than $10,000 and 90-120 days payment terms. After shipping
your goods or services, the factor purchases the invoices, and advances cash
to you company. Factoring provide liquid assets to small business. In fact
banks have strict criteria when lending money so it is difficult for these
companies to obtain loans.

FORFAITING

Forfaiting is the purchase of a series of credit instruments such as drafts,


bills of exchange, other freely negotiable instruments on a nonrecourse
basis. Nonrecourse means that if the importer does not pay, the forfeiter
cannot recover payment from the exporter.

The exporter gets immediate cash on presentation of relevant documents and


the importer is the liable for the cost of the contract and receives credit for
“x” years and at certain per cent interest.
Page 32 of 76

The forfaiter deducts interest at an agreed rate for credit period. The debt
instruments are drawn by the exporter, accepted by the importer, and will
bear an aval or unconditional guarantee, issue by the importer’s bank. The
forfeiter takes over responsibility for claiming the debt from the importer.
The forfeiter holds the notes until maturity, or sells them to another investor.
The holder of the notes presents each note to the bank at which they are
payable, as that fall due. Forfaiting is a high-value medium and long term
financing form. It involves the purchase of negotiable instruments for not
less than $100.000 and from six month to five years payment terms. The
forfeiter needs to know some important information, such as:

• who the buyer is and his nationality


• what goods are being sold
• date and duration of the contract
• interest rate already agreed with the buyer

negotiable instruments used identity of the guarantor of payment.

HDFC Bank extends the following facilities to eligible exporters:

Pre-Shipment Credit
.
Pre-shipment Credit is offered to an exporter by way of packing credit to
enable him to finance purchase/import of raw materials, processing and
packing of the goods meant for exports.

Post-shipment Credit.
Page 33 of 76

Post-shipment Credit is offered to an exporter to finance export sales


receivables after the date of shipment of goods till the date of realisation of
export proceeds. We offer our clients a choice of the following services:
Negotiation / Payment / Acceptance of export documents under letter
of credit
Purchase / discount of export documents under confirmed orders /
export contracts etc.
Advances against export bills sent on collection basis
Advances against exports on consignment basis
Advances against undrawn balance on exports
Advances against approved deemed exports
To meet your export financing needs, we offer customised packing / post
shipment credit in rupee terms or foreign currency, tailor-made to match the
clients' profile.

Post Shipment Finance

Post-shipment finance is a loan or advance granted by a bank to an exporter


of goods from India. This facility is available to an exporter subsequent to
the date of shipment of goods upto the date of realisation of export proceeds.

Some key features of post-shipment finance are as follows:

• Finance is extended to either the exporter (seller's credit) or the


overseas buyer of the goods (buyer's credit).

• Finance is extended against evidence of shipping documents.

• Concessive rate of interest is available for a maximum period of 180


days, starting from the date of submission of documents. Normally,
the documents are to be submitted within 21days from the date of
shipment.
Page 34 of 76

Post-shipment finance can be further classified as under :

a. Negotiation of export documents under Letter of Credit (LC).


b. Purchase / Discount of export document under confirmed orders /
export contracts, etc.
c. Advances against export bills sent on collection basis.

1. Who is eligible for post-shipment finance?

Post-shipment finance is extended to the actual exporter who has


exported the goods or to an exporter in whose name the export
documents are transferred.

2. On what basis is post-shipment finance extended?

It is extended against evidence of shipment of export goods.

3. What is the purpose of post-shipment finance?

Post shipment finance is meant to finance export receivables.

4. What is the quantum of this finance?

Post shipment finance can be extended upto 100% of the invoice


value of goods.

5. What is the period for which this funding is available?

In the case of routine exports, the maximum period allowed for realisation of
export proceeds is 6 months from the date of shipment. Banks can extend
post shipment finance at a lower interest rate upto the normal transit period
Page 35 of 76

or the notional due dates (this is calculated as the sum of the Normal Transit
Period + Usance Period, subject to a maximum of 180 days). Beyond that
period, banks lend at non-concessive rates or the normal commercial rates.

Post-shipment credit

Sight Bills - Not more than 10%

Upto 90 days - Not more than 10%

91 days upto 6 months - 12%

Overdue (applicable only on the overdue portion) - Left to the discretion of


the bank, though it is most likely to be the unarranged overdraft rate.

Post-Shipment foreign currency loan - Maximum of Libor + 1.5 pct.

PRE-SHIPMENT FINANCE:-

Pre-shipment finance is issued by a financial institution when the seller want


the payment of the goods before shipment. The main objectives behind pre-
shipment finance or pre export finance to enable exporter to:

• Procure raw material

• Carry out manufacturing process

• Provide a secure warehouse for goods and raw material


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• Process and pack the goods

• Ship the goods to the buyer

• Meet other financial cost of the business

TYPES OF PRE-SHIPMENT FINANCE

• Packing credit

• Advances against receivables from government, like duty draw backs


etc.

• Advances against cheques/drafts etc., representing advances payment.

Pre shipment finance is extended in the following forms:

 Packing credit in Indian rupees

 Packing credit in foreign currency(PCFC)

REQUIREMENTS OF PRE-SHIPMENT CREDIT

This service is provided to the exporter who satisfies the following criteria:
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• Exporter should have a ten-digit importer-exporter code number


allotted by DGFT.

• Exporter should not be in caution list of RBI.

• If the goods to be exported are not under the OGL(open general


license),the exporter should have the required license/quota permit to
export the goods.

ELIGIBILITY

Pre-shipment credit is granted to an exporter who has the export order or LC


in his own name. The exporter is the person or company who actually
delivers the goods to the importer/buyers.

Quantum of finance

There is no fixed formula to determine the quantum of finance that is


granted to an exporter against a specific order/LC or an expected order. The
only guiding principle is the concept of need-based finance. Banks
determine the percentage of margin, depending on factors such as:

• The nature of order

• The nature of the commodity

• The capability of exporter to bring in the requisite contribution.

DIFFERENT STAGES OF THE PRE SHIPMENT FINANCE


Page 38 of 76

Appraisal and sanction of limits

INCOTERMS 2000:

13 Terms are grouped into 4 groups.

• E (EXW)
• F (FCA, FAS, FOB)
• C (CFR, CIF, CPT, CIP)
• D (DAF, DES, DEQ, DDU, DDP)

 EXW … EX works : Seller responsible for ready goods at his own


factory, all other costs to the buyer including taxes of seller’s country to be
borne by buyer. Seller responsible for only quantity, measurement,
weighing.

 FCA … Free Carrier … Goods cleared for export by seller and delivered
to carrier as per directions of buyer (carrier may not be shipping agency).

 FAS … Free Alongside Ship) … Seller responsible for delivery of goods


along side ship as given by buyer in seller’s country.

 FOB … Free on Board … Seller will deliver the goods on board (ship to
be told by buyer).

 CFR … Cost and Freight … (.. named port of destination) … it includes


cost of goods and freight upto the destination by seller. However, risk after
shipment is of buyer.
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 CIF… Cost, Insurance, Freight … all costs upto destination borne by


seller. The risk after boarding is on buyer.

 CPT .. Carriage paid to … Freight of first carrier included. Risk after


boarding on buyer.

 CIP … Carriage and Insurance paid to … Freight and Insurance by seller,


Risk to buyer after loading.

 DAF … Delivered at Frontier … Seller responsible for delivery upto the


custom clearance stage of the adjoining country of buyer.

 DES … Delivered EX Ship … Seller bears all costs upto the named
destination of delivery, the difference between CIF and des is only that the
risk of buyer starts from the time he takes delivery in this case.

 DEQ …Delivered Ex … all costs upto payment of import duty of the


buyers destination. The risk of buyer starts only after that.

 DDU … Delivery duty unpaid … Seller bears all costs upto the stage of
delivery to destination but before payment of import duty or clearance etc.,
buyers risk starts from getting the goods cleared.

 DDP … Delivered Duty paid … Seller is responsible for delivery of


goods till the buyers premises or his designated premises. Entire risk till then
is of seller.
UNIFORM CUSTOMS, PRACTICE AND DOCUMENTARY
CREDITS:
Page 40 of 76

The Uniform Customs and Practice for Documentary Credits (UCPDC) are
universally recognized set of guidelines governing Letters of Credit. The
guidelines are published in the form of a Brochure by International Chamber
of Commerce. The first publication was made in the year 1933. Revised
versions were issued in 1951, 1962, 1974, 1983 and 1994. The latest
publication is known as ICC 600 and adopted with effect from 2nd July,
2007. The International Chamber of Commerce with its Headquarters in
Paris frames the guidelines. UCPDC has now become indispensable since
Letters of Credit has become one of the safe methods of International trade
settlements. The reason being that the Sellers hesitate to release their goods
before receiving payment, while Buyers prefer to have control over the
goods before parting with their money.

Matching payment with physical delivery is rarely possible. So a media


through which payment against ‘Constructive delivery’ by handing over
documents or transferring title to or control over the goods is possible under
this mechanism.

The UCPDC gives the maximum possible guidance and assistance to all
parties. It guides the Buyer as responsible for stipulating clearly and
precisely the documents required and the conditions to be complied with. It
stipulates the liabilities and responsibilities of the Issuing Bank, Advising
Bank, Confirming Bank, Negotiating Bank and Reimbursing Bank.

UCPDC, ICC Publication No.600 shall apply to all Documentary Credits


including to the extent to which they may be applicable to Standby letter(s)
of Credit, where they are incorporated in the text of the credit.
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They will be binding on all the parties thereto, unless otherwise expressly
stipulated in the credit.

For the purpose of UCPDC, the expressions “Documentary credit” means


any arrangement however named or described, whereby a bank (the Issuing
Bank) acting at the request and on the instructions of a Customer (the
Applicant for the Credit):

i) Is to make a payment to or to the order of a third party (the


beneficiary) or is to pay or accept bills of Exchange {Draft(s)}
drawn by the Beneficiary or
ii) Authorises another bank to effect such payment or to accept and pay
such Bills of exchange {Draft(s)} or against stipulated documents,
provided that the terms and conditions of the Credit are complied
with.
iii) Authorises another bank to negotiate.

For the purpose of these articles, branch of a bank in different country is


considered as another Bank.

The Letter of Credit, by nature, are separate transactions from the sale or
other contracts on which they may be based and banks are in no way
concerned or bound by such contracts even if any reference to such contract
is included in the credit. It also clarifies that neither the Beneficiary nor the
Applicant can avail himself of any underlying contractual relationship. Non-
fulfillment of contractual obligations under the Sale contract cannot be
disputed through Letter of Credit mechanism.
Page 42 of 76

In a Letter of Credit all parties concerned deal with documents and not in
goods.

While UCPDC 600, the modified version is a set of comprehensive rules,


however, the important provisions / changes are given as Annexure –
UCPDC 600 guidelines at the end of this manual.
Page 43 of 76

TRADE FINANCE PRODUCTS.

Guarantee
Issuance

A Bank Guarantee is an undertaking given by the Bank on behalf of an


Applicant customer to a Beneficiary to pay a certain sum of money up to a
particular date upon a valid invocation by the beneficiary, in terms of the
Bank Guarantee. Bank Guarantees are of two types-Financial Guarantee and
Performance Guarantee.

Some purposes for which Bank Guarantees are issued

• Margin Money Guarantee


• Security Deposit Guarantee
• Subscription Guarantee
• Bid Bond / tender
• Earnest Money
• Retention Money
• Performance of goods / services
• Excise / Customs dues
• Export performance
Page 44 of 76

Transactional Documentation required for Guarantee issuance and


amendment.

1. Request letter duly signed by Authorised signatories.


2. Typed Guarantee text with adequate franking, once the Text in soft
copy is approved by the Bank.
3. A Foreign Currency Guarantee is sent by SWIFT, where franking of
text is not required.

2. Letter of Credit

A documentary / letter of credit may be defined as “ an agreement by means


of which a bank ( Issuing Bank ) acting at the request of a customer
(Applicant), undertakes to pay to a third party ( Beneficiary) a
predetermined amount by a given date according to agreed stipulations and
against presentation of stipulated documents.

In simple terms LC may be defined as an agreement where payment is made


against documents as per LC Terms. Under a Documentary Letter of Credit,
all the parties concerned deal with documents and not with goods, services
or performances to which the documents may relate. LC governed by
UCPDC 600.
Page 45 of 76

a. Parties Involved

Export Importer Banks


BENEFICIARY APPLICANT ISSUING/OPENIN
G BANK
SHIPPER BUYER ADVISING BANK
SELLER ACCOUNT CONFIRMING
PARTY BANK
MANUFACTURER NEGOTIATING
BANK
VENDOR
SUPPLIER

b. Some commonly used INCO Terms


INCO Matrix Insurance Freight
Terms
FOB Free on Board Buyer Buyer
CFR Cost & Freight Buyer Seller
CIF Cost, Insurance, Freight Seller Buyer
EXW Ex-Works / Ex-Factory Buyer Buyer
c. Transactional Documentation required for Letter of Credit
Issuance and Amendment.

1. One time documents


a. IE Code Number Certificate
b. FEMA Declaration (Annexure)
c. KYC Report
2. Request letter duly signed by Authorised signatories.
3. LC Application duly filled up and signed.
4. Purchase order/ Order confirmation.
Page 46 of 76

5. Insurance to be submitted by the customer for all cases except for


CIF, with HDFC Bank as loss payee/bank clause endorsement.

d. Transactional Documents for acceptance and payment of Sight


Bill under LC.

1. Request letter from client to debit account for release of documents.


2. Requisite Form A1 / FEMA declarations to be received (Annexure).
3. Declaration stating that Bill of entry will be submitted within 90 days
from the date of remittance.

e. Transactional Documents for acceptance and payment of Usance


Bill under LC.

1. Bill Of Exchange duly accepted for payment on due date (foreign bills
stamps affixed if reqd),
2. Covering letter confirming that bill has been accepted for payment
and request to release the documents to be obtained.
3. Requisite Form A1 / FEMA declarations to be received (Annexure).
4. Bill of Entry.

3. Documentary Import Collection

Documentary Collection is a Conditional form of payment in which the bank


acts at the request of the seller (exporter/principal/drawer).

Bank undertakes to release to the buyer (importer/drawee) stipulated


documents after he makes a payment or after he accepts to make a payment
Page 47 of 76

on terms consistent with the collection instruction. The bank that


intermediates in the transaction is the importer’s bank.

• Trade off between higher risk and lower cost.


• Seller ships and asks bank to collect.
• Banks act as a collecting agent only.
• No credit position taken.
• Risk of non-payment due to political and commercial risks

a. Transactional Documents for payment of Sight Bill under


Collection.

1. One time documents

a. IE Code Number Certificate


b. FEMA Declaration (Annexure)
c. KYC Report

2. Request letter from client to debit account for release of documents.


3. Requisite Form A1 / FEMA declarations to be received (Annexure).
4. Declaration stating that Bill of entry will be submitted within 90 days
from the date of remittance.

4. Documentary Export Collection

Documentary Collection is a Conditional form of payment in which the bank


acting at the request of the seller (exporter/principal/drawer).
Page 48 of 76

Bank undertakes to release to the buyer (importer/drawee) stipulated


documents after he makes a payment or after he guarantees a payment on
terms consistent with the collection instruction. The bank that intermediates
in the transaction is the importer’s bank.

• Trade off between higher risk and lower cost.


• Seller ships and asks bank to collect.
• Banks act as a collecting agent only.
• No credit position taken.
• Risk of non-payment due to political and commercial risks

a. Transactional Documents for payment of Bill under Collection.

Type of Export Document from Customs


Export of Goods Shipping Bill/SDF
Export of Services/Software Softex

The Role of Governments in Trade

Financing

The role of government in trade financing is crucial4. in emerging


economies. In the presence of underdeveloped financial and money markets,
traders have restricted access to financing. Governments can either play a
direct role like direct provision of trade finance or credit guarantees; or
indirectly by facilitating the formation of trade financing enterprises.
Governments could also extend assistance in seeking cheaper credit by
offering or supporting the following:

• Central Bank refinancing schemes;


Page 49 of 76

• Specialized financing institutes like

Export-Import Banks or Factoring Houses;

• Export credit insurance agencies;

• Assistance from the Trade Promotion Organisation; and

• Collaboration with Enterprise Development Corporations (EDC) or State


Trading Enterprises (STE).

a) Central Bank Refinancing Schemes

Under this type of schemes, the Central Bank will rediscount the commercial
bills of exporters at preferential rates. This will provide the cheap post-
shipment financing necessary for exporters to quickly turn around funds for
further export business.

Here, the government is subsidizing the cost of funds that exporters have to
pay if they rediscount their bills with commercial banks.

b) Export-Import Bank (EXIM Bank)

The Export-Import Bank (EXIM Bank) specifically caters to the needs of


exporters and importers and those of investors in foreign markets. It offers
various services, including long-term direct loans to foreign buyers for loans
and equipment sales of sufficient sizes.

Several countries, including developed nations, have EXIM banks. For


example, the United States EXIM Bank was created in 1934 and established
Page 50 of 76

under its present law in 1945. Its primary role is to aid in financing US
exports, and for medium-term(181 days to 5 years) transactions, it co-
operates with US commercial banks by providing export credit guarantees.
In setting up the EXIM Bank, the Unrecognized that job creation is a
consequence of exports. Its main customers are SMEs in the United States.

c) Export Credit Insurance Agencies:

Export credit insurance agencies act as bridges between banks and exporters.
In emerging economies where the financial sector is yet to be developed,
governments often take over the role of the export credit insurance agent.
Governments traditionally assume this role because they are deemed to be
the only institutions in a position to bear political risks. Several countries in
Asia and Africa have such an organization. However, the viability of such an
organization depends on the volume of business and income from insurance
premium. In that context, credit insurance policies vary according to the type
of exports. For example, short term policies on the sale of raw materials on
180 days terms are covered up to 95 per cent for commercial risk and 100
percent for political risk. Such trades are considered relatively secure.
Nonetheless, it is good practice to get the exporter to bear a certain portion
of the risk.

d) Support from Trade Promotion Organizations (TPO’s)

As explained earlier, banks are often reluctant to lend to exporters because


of their lack of knowledge about the creditworthiness of the traders, and as a
result may raise interest to compensate for the risks taken. TPOs are in a
position to know the strengths and weaknesses of the individual trading
Page 51 of 76

houses and exporters, and could share information with financial institutions
to facilitate access to financial services. TPOs are the government agencies
that are most directly involved with the trading community, often supporting
promising trading and exporting enterprises. The support and assistance
given by the TPOs could act as a signal to banks as to which companies are
creditworthy companies. In addition, TPOs could establish network of
financial institutions, identify their credit requirement, and match trading
enterprises and financial institutions based on these requirements.

e) Export Development Corporation and State owned


enterprises.

In most emerging economies, there are a few key conglomerates with a


diverse range of products, substantial export capacity and sustainable
financial resources. They could be private sector export development
corporations (EDCs) or state-owned enterprises (SOEs).

Governments could harness these enterprises as mechanisms to assist other


local firms, especially SME’s, to export their products or import goods
Unlike the SME’s, the EDC’s and the SOE’s have the financial resources
and trade expertise needed to participate in trading activities. Smaller
exporters could sell their products to the EDC’s and SOE’s and receive
payment earlier than if they exported directly by themselves. Small
importers could also purchase goods from the EDC’s and SOE’s, which
have the financial strength to bulk purchase from abroad.
Page 52 of 76

Case study
CREDIT APPROVAL MEMO

REVIEW Annual CAM # BBG/HYD/14164


RBBO No:
CAM Date : 02/09/2009
CUSTOMER M/s Siflon Polymers Private CAM Revision Date :
NAME Limited 15/09/2010
PAN.No.AAWFS4671D
ADDRESS Administrative Office CREDIT LABELLING:
Plot No.20& 21, Aleap Industrial Normal
Estates, Gajularamaram (V),
Quthbullapur(M), hyderabad-
500055
Registered Office:
76 & 77, Mythri Nagar, Near
Miyapur, Hyderabad-500050
BORROWER 5- Asset classification:
GRADING STANDARD
SEGMENT Manufacturer RBI Code: 28101
INDUSTRY Manufacturer and Supplier of Faces Code: MRP310
Poly Tetra Fluoro
Ehtylene(PTFE) (Teflon/Hiflon)
Componenets
Page 53 of 76

FACILITY SUMMARY:

Fac No. & Total Amount Tenor


Description (Rs.inLacs) Inc/(Dec)
Cash Credit 80 +15 1 year
Total Credit 80 +15
Exposure

1.FACILITY: TERMS AND CONDITIONS

Name of Tenor Max Limit Interest Rate Margins Purpose of


Facility (in (in Rs. &Processing facility
months) Lacs) Fee
Cash 12 80 lakhs 13% & 0.5% 25% on stocks & Working capital
Credit 50% on debtors
(< 90 days)

1.1.BANKING FACILITY:

In Rs. Lakhs Existing FacilitiesProposed Facilities


(HDFC Bank) (HDFC Bank)
Cash Credit 65.00 80.00
Total 65.00 80.00

1.2Details of Security:
Primary: Hypothecation of stock and book debts
Collateral: Equitable Mortgage on the following properties.
Page 54 of 76

Sr Property Description Owner of the City & Area in Market Type of


No property State sq. ft. Value property
(Rs. (Residential )
Lacs)
1 Property located at Plot Mr.R.Ananthaiah Hyderabad
No.76 & 77, Phase-1, and Mrs.R , AP
Mythrinagar Parvathi
madinaguda, near 533.32S Residential
133.33
Miyapur ‘X’ Roads, q Yards Property
Serlingampally
Municiplaity & mandal,
RR district
*As per the valuation report submitted by M/s Mahender and associates

2. Documentation for the facility:

2.1 Documentation for Cash credit facility of Rs.65.00 Lacs:


Request for the facility - Obtained
Sanction Letter(Duly acknowledged by Borrower) - Obtained
CA Certificate confirming existing borrowings - Obtained
Chartered Accountant Certificate indicating no existing charge on stocks and
receivables - Obtained
Loan Agreements –Fund based limits - Obtained
Personal Guarantee of all the Directors & property owners i.e Mr.
Anantaiah, Mrs R Parvathi, Mr M Ram Prasad and Mr Sreedhar. - Obtained
PG of Shareholders covering 95% of the total shareholding - Obtained
MOA & AOA (certified true copy) - Obtained
DIN form - Obtained
Documents / agreements required for creating and registering the first charge
with ROC (for private and public limited companies - Obtained
No Match/Good RBI & CIBIL and dedupe checks for the Company,
Promoters - Obtained
No considerations letters - Obtained
Board Resolution for availing the limits - Obtained
Corporate Guarantee of M/s Siflon Drugs - Obtained

For CC limit:
Overdraft agreement - Obtained
Demand Promissory Note - Obtained
Letter of Continuity for Demand Promissory Note- Obtained
Page 55 of 76

Letter of General Lien and Set off- Obtained


Notarised power of attorney for hypothecated book debts- Obtained
Hypothecation of Stock and Book Debts for the entire facility amount. -
Obtained

For mortgage of properties


Title Search report of the property - Obtained
Valuation report of the property to be mortgaged - Obtained
Memorandum of Entry of Past Transaction of Creation of Mortgage by
Deposit of Title Deeds- Obtained
Declaration cum Indemnity. - Obtained

Others:
Audit report for 3 Financial years- Obtained
Provisionals to be certified by CA - Obtained
Permanent SSI Certificate – Obtained

2.2 Post disbursement documentation


Comprehensive Insurance on all stocks, movable and immovable assets, and
property with HDFC Bank as 1st loss payee (on assets on which HDFC
Bank has charge). (To be received preferably within 30 days of
disbursement). - Obtained
Stock & receivables statement to be obtained on monthly basis. – Obtained

All the above documetns were obtained at the time of intial disbursement,
now we are proposing the renewal cum enhancement, the below documents
to be obtained from the customer.

Compliance w.r.t Financial covenants stipulated in the previous CAM:


The Firm’s tangible Networth to be maintained at Rs. 161.82 Lacs as at
31.03.08(A) during the currency of the overdraft .The TNW as on
31.12.2008 is at Rs 190.8 Lac

Documentation for the facility of Enhancement of rs. 15 lakhs – Pre


disbursement
General Documents:
Request letter
Approved CAM
Sanction Letter (Acknowledged by the borrower)
Page 56 of 76

Application Form
Personal Guarantee of the all Directors, shareholders covering 95% of total
share holding and the Property Owners
CA Certified networth statement of the guarantors
Board Resolution of the company
MOA and AOA
CA certificate for the existing Share Holding pattern and present Directors
Fresh stock Audit to be conducted and the report to be vetted by credit.
Renewal of insurance policy should be done
Documentation Modification/Creation of charge with ROC
Track of ICICI car loan to be wetted.
Undertaking from the customer that there is no litigation pending against
firm or its directors
Undertaking from the company there is no change in the directors of the
company, if there is any such change Form 32 filed with ROC should be
produced or a CA certificate to that effect.
Declaration from the company that none of its directors, is a director or
specified near relation of a director of a banking company
CA certificate for the Annual sales and MIB of the company as on
31.03.2009

For CC facility
OD agreement
Demand Promissory Note
Letter of Continuity
Letter of General Lien and Set off
Notarized power of attorney
Supplementary Hypothecation of stock and book debts for enhancement
amount

For Mortgage of limit:


Constructive MOE
Declaration cum undertaking
Extension of mortgage for entire Group exposure with all docs approved by
Legal.

Financial covenants now proposed:


The Firm’s tangible Networth to be maintained at Rs. 177.9 Lacs as at
31.3.09 during the currency of the overdraft
Page 57 of 76

Undertaking from the firm for:


Non-Withdrawals of unsecured loans (nil presently) if any, during the
currency of the overdraft.
Conversion of USL into equity as and when required to maintain a positive
TNW

3. Borrower Profile / Background:


Details Remarks / proof
Name of firm M/s Siflon Polymers MOA & AOA
Private Limited
Constitution Private Limited
Whether SSI or not NO
Name of the Directors Mr. Anantaiah MOA & AOA
Mrs R Parvathi
Mr M Ram Prasad
Mr Sreedhar
Main Contact Person & Mr.R.Anantaiah RM Business Banking has
contact nos. 093468-56491 personally met the client.

Firm / Directors / Group companies in RBI Defaulters list – NIL


Interest of Directors / Senior Officers (only approvers) of bank, if any - NIL
Change in constitution or shareholding pattern during the review period-
NIL
Any litigation pending against the Firm. or Proprietor of the firm. - No,
However we have a stipulated a condition in this regard.

3.1. Promoters and Management:


M/s Siflon Polymers Private Limited, a private limited company had been
incorporated during 2004 as per the provisions of Companies Act 1956 by
Mr. R.Ananthaiah, Mrs R Parvathi, Mr M Ram Prasad and Mr Sreedhar as
the directors. Since its inception, company was engaged in manufacturing
and trading of SPPL products which are basically used in Pharma
Manufacturing units and the operations of the unit has commenced during
2004.

The 2 major Shareholders are Ananthiah & Parvathi holding about 95% of
the shareholding in the Company. We have obtained the PG of these 2
directors covering 95% of shareholding.
Page 58 of 76

The company is engaged in manufacturing and trading of SPPL products


which include Poly Tetra Fluoro Ethylene (PTFE) lined SS/MS pipes, bends,
elbows FEP lined Tees, ball Valves, PTFE moulded components and
ECTFE (Halar) coated Vessels , receivers tank.etc.

By academics, Mr. R.Anantaiah is a B.tech (Chemical) and is having a rich


experience of 20 years in the same line of activity. During the year 2000, he
has floated a firm by name Siflon Drugs, which is primarily engaged in bulk
drugs manufacturing. Subsequently during the year 2004, Mr. Anantaiah
alongwith other two directors have floated a company by name M/s Siflon
Drugs and Pharmaceuticals Pvt Ltd, which is into manufacturing of pharma
formulations. The said firm is located at Aleap Industrial Estate.

Group Companies:

Firm Business Sales (Rs. Profit Yearof Banking


description lacs)- FY (Rs. incorpor facility
2008-09 Lacs)- ation
FY
2008-09
M/s Siflon Drugs Manufacturer and 997.13 51.01 2000 Rs. 100.00
Supplier of Drugs lakhs from
Syndicate
Bank
M/s Siflon Drugs and Manufacturer and 65.27 3.26 2006 TL of Rs 95
Pharmaceuticals Pvt Supplier of lacs from
Ltd Vererinary Oral APSFC
Solid dosage
forms like
Tablets, capsules
and liquid orals

There are no inter-group transactions.


Page 59 of 76

6. Banking account conduct:


Credits with Credits
HDFC Bank with HDFC BankTotal Utilizati
Month OD A/c- C/A Credits Sales on
Mar 23.24 2.51 25.75 28.71 85.61%
Apr 29.63 26.74 56.37 25.83 87.49%
May 62.21 28.69 90.9 33.07 81.29%
June 43.35 15.98 59.33 56.05 77.15%
Jul 38.58 38.71 77.29 27.97 76.82%
Aug 38.11 26.08 64.19 82.46%

Banking Account Conduct Checklist & Chec Remarks


comments if any k
Sanctioned credit facility with a bank/ Working Y Yes
capital facility > 6 months
Account behaviour
- Inward cheque bounce less than 3 / quarter Y There is 1 inward cheque
return, which is due to
technical reasons
- Account should be in TOD for less than 10 Y Yes
days / quarter
- Interest servicing within 3 days of the month Y Yes
Amount of debit and credits -Churn of min 75% Y Churn is more than 80%
in the bank a/c
Repayment Track Record
- Positive Repayment record of Term Loan Y Details given below
EMI's

Conduct of TL account with ICICI Bank in respect of Vehicle Loans


Page 60 of 76

There are no instances of Cheque returns in respect of Car Loan taken from
ICICI Bank during the period of Sep 08 to Aug09.
There are no instances of cheque returns observed in respect of Commercial
Vehicle Loan taken from ICICI Bank. (Note :) Above vehicles EMI is going
through our bank, One is from HDFC bank OD A/c of Rs 13427 for TaTa
207 ,other is from HDFC Bank current A/c of Rs 32555 for Skoda

Comments of Stock Audit


We have done the Stock Audit in Oct 08 at the time of renewal. Now, the
case is due for renewal in Sep 09. The present limit is Rs. 65 lakhs. As per
norms, Stock Audit is not required when limit is <Rs.75 lakhs. However, as
we are proposing enhancement to Rs. 80 lakhs and it is more than 1 yr since
we have done the audit, we have stipulated Stock audit as a condition before
disbursement of enhanced limit.

7.BUSINESS ANALYSIS:
7.1 Operational Performance:
Location & Infrastructure:
The company is situated at Plot No.20 & 21, ALEAP Industrial Estate,
Gajularamaram, Quthbullapur Mandal, Hyderabad which is 15 Kms away
from the main city. The property is owned by one of the Promoters – Mrs.
Parvathi. The company is located on a land admeasuring 1080 sq yds with a
total built area of 10000 sq ft. The premises+ Ground Floor+ 1st Floor have
been taken on lease from Mrs. Parvathi. In the same premises, 3rd and 4th
floors have been leased out to M/s Siflon Drugs and Pharmaceuticals Pvt
Ltd.

The company is well connected to the main road which is 21 km away from
Hyderabad in a fairly pollution free environment

Power &Water:
They are having their own borewell of 3 inches and more ever they require
minimal water for the production. They are utilizing the 110 KVA of power
from APSEB and the connection is 150 KVA
Page 61 of 76

Labour:
The industry requires both skilled and unskilled labour in addition to
administrative staff. For both the units, the company has employed around
34 people. From which 16 as technical staff,13 Unskilled people and 05
people as Administrative Staff. The key personnel are as under:
Production Manager: Mr.K.Rajini Kanth, a B.Pharmacy , looks after the
production and inventory control of the company. He is having a rich
experience of around 20 years in this field.
Quality Assurance Manager: Mr.M. Sreenivasa Rao, an Masters of Science,
looks after to establish evaluate, validate and implement all quality control
procedures and methods. He is having a rich experience of 12 year in this
field.

Mr. Anathiah takes care of HR, Marketing, Sales of the Company.

Installed Capacity & Utilization:


The initial installed capacity of the Company was 200 meters per Month.
Gradually, it was increased to 800 Meters per month.

The unit works for 10 hours and based on the orders and project works it
will works 24 hours in 3 shifts. Each shift consists of 8 hours. The Company
has informed that they are operating at about 70% of the total capacity.

Products:
The company is basically is into manufacture and trading of SPPL products
which include Poly Tetra Fluoro Ethylene (PTFE) lined SS/MS pipes, bends,
elbows FEP lined Tees, ball Valves, PTFE moulded components and
ECTFE (Halar) coated Vessels , receivers tank etc. These are primarily used
in all pharmaceutical and bulk drugs manufacturing units.

Raw Material & Suppliers:


The main raw material for this Unit are Ptfe resion, Industry valves,
Tubes ,MS & SS pipes, Blanges. The suppliers of the raw materials are
Supplier name % of total sales
Bharath Tubes corporation 15
Gelaxi metals 10
Hitech Applicators 10
EI Duepont 14
Page 62 of 76

Florfin industrie 9
Rathan mani4
Sri rama trading 2
Perfect engineering 5

There will not be much fluctuation in the raw materials and they can get the
credit period for 60-70 days

Manufacturing Process:
The operations involved in the manufacturing process are simple and well
establishes .The outline of the process are as indicated below.

a) PTFE Lined Pipes:


Poly Tetra Fluoro Ethylene (PTFE) is mixed with lubricant in proper
proportion by rotating machine and it is pre-formed in Hydraulic press. The
pre-formed PTFE is taken in Extruders and mould is fixed. By exerting
pressure, the PTFE is extruded into tubes and taken into MS tubes. Then the
tubes are kept for specific time in Electric oven for sintering purpose. After
sintering the tubes are heated and lined in pre-machined. Then they are
welded and drilled MS/SS pipes of required sizes. The ends are flared. Then
the pipes or elbows after testing for Hydraulic pressure they make it ready
by sparking, final dimensions are painted and they are packed to despatch.

b) FEP Lined Tees, bell valves & Fittings:


As per the requirement of the customer the MS/SS castings are machined
and taken in suitable dies and filled with FEP material. The dies /moulds are
heated to specific temperature where FEP granules are melted and forms
shape as per moulds. Then the moulds are cooled and separated. The FEP
lined products are machined, drilled, welded and assembled for preparation
or Tees, ball Valves, reducers, Flanges etc

c) PTFE Components:
The solid/hollow PTFE tubes extracted from Extruder are milled, drilled and
assembled to produce PTFE components like Gaskets, seatings etc. Which
are widely used for fitting and other purposes.
Page 63 of 76

Demand of the products:


Traditional stainless steel and Glass no longer deliver the best results in
chemical , pharmaceuticals and Bio- chemical Industries. These are widely
replaced by fluro polymer lined and coated components. These products are
chemically inert, non-sticky, non-cracking, non-welting, easily clearable and
can be used for wide temperature range (-270 degrees C to 260 degrees C).
Hence, the demand for these products is growing day by day.

Customers:
M/s Divi’s Laboratories Ltd, M/s Matrix Laboratories Ltd, & Dr. Reddy’s
Laboratories Ltd, Nicolus pharma are the main customers of the company.
Apart from the above clients, all major pharmaceuticals and bulk drug
manufacturers are associated with this company for their products which are
used in their manufacturing activity. They are enjoying the credit period of
90-110 days. Generally payments are received only after the Tubes are
installed and trail production commences with the end Customer. Due to
this, the credit period is on the higher side

Customer name % of total sales


DR Reddys laboratories 30
Divis laboratories 20
Matrix laboratories10
Others 40

Even though the credit offered is on the higher side, there have been no bad
debts till date. The Company has Rate contracts with top Customers. Earlier,
there was no Price Escalation clause in the contract. From the current year
2007, RM price escalation clause has been included in all the rate contracts.

7.2 Market Position:


M/s Siflon Polymers Private Limited, a Private Limited Company and a
manufacturing and trading unit in “ PTFE (Teflon/Hiflon) components”
which are mainly used in pharmaceutical and bulk drug manufacturing units.
In view of Pharma industries boom, the demand for the products of the
company will increase.
Page 64 of 76

Month-wise Sales for the last 2 financial years for Unit 1&2 are as under:

2007-08 2008-09 % of Change 2008-09 2009-10 % of Change


April 29.27 37.24 27.23% 37.24 25.83 -30.64%
May 40.69 25.36 -37.68% 25.36 33.07 30.40%
June 22.73 27.07 19.09% 47.07 56.05 19.08%
July 17.43 47.66 173.44% 27.66 27.97 1.12%
Aug 26.31 47.25 79.59% 47.25
Sep 6.59 33.22 404.10% 33.22
Oct 20.1 17.54 -12.74% 17.54
Nov 42.61 51.26 20.30% 51.26
Dec 48.23 29.21 -39.44% 29.21
Jan 35.62 42.39 19.01% 42.39
Feb 57.95 26.17 -54.84% 26.17
Mar 62.82 28.71 -54.30% 28.71
Total 410.35 413.08 0.67% 413.08 142.92 4.07

The company has achieved Sales of Rs. 413.08 lakhs during 2008-09
compared to sales of Rs. 410.35 lakhs made during 2007-08, thereby shown
a marginal increase of 0.67%.The main reason for marginal growth,
explained by the customer is that, the company is not able to secure orders to
larger extent, as the pharma industry is running under lean phase during the
last financial year and there were no major expansion plans by the
Pharma/Chemical industries during the last financial year.

However during the current financial year, the company is getting the orders
in an encouraging phase and achieved sales of Rs. 142.92 lakhs till Jul'09 as
against sales of Rs. 137.33 lakhs for corresponding period last year and
based on same estimated turnover of Rs. 450lakhs appears reasonable.

Also, the Company has orders to the tune of Rs. 150 lakhs to be executed in
the next 3-4 months. They have added new customers like Rakshita Pharma,
Sun Labs etc from whom also they are expecting orders. In view of the
same, Party has requested for enhancement.
Page 65 of 76

DP Calculation:

Months Stock Debtors Creditors Wc Gap DP


February 132.8 201.06 49.63 284.23 162.91
March 126.73 211.17 78.82 259.08 141.52
April 122.70 391.09 80.55 433.24 227.16
May 126.83 398.56 76.5 448.89 237.03
June 124.59 449.02 107.87 465.74 237.05
jul 126.75 443.13 82.13 487.75 255.03
The average Drawing power of the last 6 months is Rs. 210.11 lakhs

9. Financial Appraisal:

P&L Sheet (All figures in Mar Mar Mar


Rs. lacs) 31,09(P) 31,08(A) 31,07(A)
Total Income 413.2 410.4 694.0
PBDIT 40.2 49.3 61.4
Interest 8.5 4.9 0.4
Depreciation 5.2 4.8 3.3
PBT 26.5 39.6 57.7
Tax 10.4 11.2 19.5
PAT 16.1 28.4 38.2
Cash Profits 21.3 33.2 41.5
Liabilities
Tangible Networth 177.9 161.8 145.1
Short Term Debt 56.8 60.7 0.0
Long Term Debt 12.2 16.2 14.7
Unsecured loans from
promoters 0.0 0.0 0.0
Total Debt 69.0 76.9 14.7
Current Liabilities &
Provisions 129.5 147.7 123.2
Total Liabilities 376.3 386.4 283.0
Assets
Net Fixed Assets 64.7 67.0 61.8
Investments 0.0 0.0 0.0
Page 66 of 76

Loans & Advances 0.0 0.0 0.0


Sundry Debtors 221.9 248.4 156.3
Inventories 69.0 43.0 12.6
Other Current Assets 20.7 27.9 52.4
Total Current Assets 311.6 319.3 221.2
Total Assets 376.3 386.3 283.0
Financial Ratios
Gross Margin (PBDIT/TI) 9.7% 12.0% 8.8%
Net Margin (PAT / TI) 3.9% 6.9% 5.5%
Current Ratio 2.86 2.27 2.62
Interest Coverage 4.72 10.13 157.46
DSCR 2.37 3.71 7.92
Debt / Equity Ratio 0.39 0.48 0.10
Leverage (TOL / Tangible
Networth) 1.12 1.39 0.95
TOL (excl Unsec loans) /
Tangible NW 1.12 1.39 0.95
Current Assets / Sales 75% 78% 32%
Debtor Days 196 221 82
Inventory Days cost of sales 68 43 7
Creditors days as cost of
sales 51 81 49

Remarks on Financials:
The company has achieved Sales of Rs. 413.08 lakhs during 08-09 compared
to sales of Rs.410 lakhs made during 07-08, thereby shown an increase of
0.67%. The revenue growth is only 0.67% The main reason for leser revenue
growth in sales as explained by the customer is that, the company is not able
to secure orders to larger extent, as the pharma industry is running under
lean phase during the last financial year and there were no major expansion
plans by the Pharma/Chemical industries during the last financial year.
However during the current financial year, the company is getting the orders
in an encouraging phase and achieved sales of Rs. 142.92 Lac till Jul'09 and
based on same estimated turnover of Rs.450 lakhs appears reasonable..

The Cash accruals during the last 3 years are indicated below:
FY’2009 --- Rs. 21.3 Lacs
FY’2008 --- Rs. 33.20 Lacs
FY’2007 --- Rs. 41.50 Lacs
Page 67 of 76

The Gross and Net margins are in 9.7:1 and 3.9 respectively, compare to
previous financial year ratios were declined, but the ratios are satisfactory
level to serve the proposed limits.

The TNW increased from Rs. 161.80 lakhs as at 31.03.08 to Rs 177.90 Lacs
as at 31.03.09, due to plough back of some portion of profit.

Current ratio is 2.86:1 and it is above 1.33:1 indicates sufficient working


capital margin. However debtors holding level is 196 days and it is very
high. However, the position has improved in the current year.

Reason for increase in inventory level : Supply of stocks of Poly Tetra


Fluoro Ethylene (PTFE) is time taken process and hence party is holding
higher stocks of this product

Debtor days are on the higher side. About 60% of debtors are less than 90
days old and balance are more than 90 days old. There are no debtors which
are more than 120 days. Party has informed they they are regularly
collecting money from the Customers. The position has improved in current
year.

Position is satisfactory as per provisional financials.


Page 68 of 76

10. WORKING CAPITAL ESTIMATION—For Cash Credit Facility:


Based on Audited Sales Turnover:(FY’2007-08)
Particulars Amount (Rs.
lacs)
A Sales turnover in 2008-9 413.08
B Expected sales turnover in 2008-09 450.00
C Max. working capital limits eligibility @ 25% of 112.50
expected sales
D Minimum margin that would be brought in by the 22.50
promoters(5% of exp sales)
E Max. Working capital limits eligibility 90.00
F Credit facility availed from other banks 0.00
G Limits that can therefore now be extended to the 80.00
establishment
H Proposed fund based Limit 80 (=< G)

Justification for enhancement:

The company has achieved Sales of Rs. 413.08 lakhs during 2008-09
compared to sales of Rs. 410.35 lakhs made during 2007-08, thereby shown
a marginal increase of 0.67%.The main reason for marginal growth,
explained by the customer is that, the company is not able to secure orders to
larger extent, as the pharma industry is running under lean phase during the
last financial year and there were no major expansion plans by the
Pharma/Chemical industries during the last financial year.

However during the current financial year, the company is getting the orders
in an encouraging phase and achieved sales of Rs. 142.92 lakhs till Jul'09 as
against sales of Rs. 137.33 lakhs for corresponding period last year and
based on same estimated turnover of Rs. 450lakhs appears reasonable.

Also, the Company has orders to the tune of Rs. 150 lakhs to be executed in
the next 3-4 months. They have added new customers like Rakshita Pharma,
Sun Labs etc from whom also they are expecting orders. In view of the
same, Party has requested for enhancement

Recommended for sanction considering:


Page 69 of 76

Satisfactory account conduct


Collateral cover of 156% in the form of residential property
Good top line growth in the current year
MIB of 2.09 times the limit
Strong reco of BM

SOURCING CRITERIA:
Remarks -
Fast Track Criteria (Non-ODAP) Actuals Eligibility
1 Years in Business - Min. 5 years 5 Y
2 Annual Sales Turnover - Min. Rs. 60 lacs 413.08 Y
3.1 Proposed WC Limits / Existing Limits - Max. 150% 131% Y
AND
Proposed Limits / Previous Year's Sales - (For Mfr Max.
3.2 20% / For Non Mfr 15%) 19% Y
Promoters Money in Business / Facility Requested (Min. 1
4 Times) 2.09 Y
Facility Amount requested (Min Rs.10 lacs / Max. Rs. 100
5 lacs) 85 Y
6 Banking Account Conduct – Good Good Y
Property Cover - Residential / Commercial - Non Mfr (Min.
7.1 110%) - -
Property Cover - Residential / Commercial / Industrial - Mfr
7.2 (Min. 110%) 156.5% Y
Property Cover - Residential / Commercial - Mfr (Min.
7.3 35%) 156.5% Y
ELIGIBLE
Page 70 of 76

QUALIFYING CRITERIA:

Sr. Criteria to be checked by Credit Managers Appli Actual Reqd.


No. cabilit s Approval of
y (If Deviation)
1 Satisfactory contact point verification by Bank officer Yes Yes No Deviation
2 Satisfactory reference checks with suppliers Yes Yes No Deviation
3 Satisfactory reference checks with customers Yes Yes No Deviation
4 Business vintage above 5 years Yes 5 No Deviation
5 Inward cheque bounces below 3 / quarter Yes 1 No Deviation
6 10 Days in TOD / quarter Yes 0 No Deviation
7 Interest servicing within 3 days per month Yes 0 No Deviation
8 Churn in the bank a/c above 75% Yes 100% No Deviation
9 Satisfactory TL repayments and promoters personal Yes NA NA
track
10 Working capital facility > 6 months (put actuals in yrs) Yes 2 No Deviation
11 (CC + LC + BG) limits restricted to - - -
· 15 % of previous years sales for non manufacturers No NA NA
· 20 % of previous years sales for manufacturers Yes 19.4% No Deviation
12 PMB > 100% of the facility amount requested No NA NA
For ODAP - PMB > 150% of the facility amount
Yes 209% No Deviation
requested
13 Positive NP after tax in the latest financials Yes 16.09 No Deviation
14 Revenue growth of above 10% in the immediate Yes 1% CM with DP
preceeding year
15 Interest coverage above 2 Yes 4.72 No Deviation
16 Current ratio above 1.5 Yes 2.86 No Deviation
17 TOL / (TNW + USL from promoters) upto 1.5 Yes 1.12 No Deviation
18 Current assets / sales below 60% (manufacturers /
Yes 75% RCH
retailers) and below 30% (traders / distributors)
19. Collateral Security – (CC + LC + BG) facilities – 110
Yes 166% No Deviation
1 % of property (residential / commercial / industrial) –
19. For manufacturers – min 35 % of aggregate collateral
No 166% NA
2 to be residential / commercial
Page 71 of 76

19. Margin for ODAP - Collateral Security – OD against


3 property only – 30% of property (residential) / 35% or
40% of commercial property upto Rs. 50 Lacs and Yes 36% Not Permitted
above Rs. 50 Lacs resp.) – OD option not permitted for
manufacturers and NO Deviation permitted
Total number of Deviations 3 Status Complete

13. Risk & Mitigates:

Risk Factors Mitigate Proposed


Revenue growth of In the Current year, the firm is showing growth in its sales and
above 10% in the has already achieved sales of Rs. 142.92 lakhs from April 09 to
immediate preceeding Jul 09 and if we annualise the sales on proportionate basis, the
year – (0.67%) Total sales for the Current financial year would be at Rs.450.00
lakhs which is very reasonable
Current assets / sales is Present Current Assets by Sales are at 75%, mainly because of
75% Debtors level. However, during the current financial year the
company has reduced its debtors levels considerably and also
considering that the major debtors for more than 90 days are by
way of reputed companies like Matrix Laboratories, Dr. Reddy
Laboratories, Divis Laboratories etc., we presume the debtors as
good debtors even though the debtors are for more than 90 days.

Recommended for renewal considering:


Satisfactory account conduct
Collateral cover of 156% in the form of residential property
Good top line growth in the current year
MIB of 2.09 times the limit

14. Ways out:


Business Cash flows
Sale of primary security
Sale of collateral security
Personal guarantee
Legal recourse

15. Recommendations:
Based on the above, Recommended for renewal cum enhancement of Cash
Credit facility of Rs.80.00 Lacs to M/s Siflon Polymers Private Limited The
facilities shall be backed by 1st charge on stocks, book debts of the firm and
Page 72 of 76

also with collateral security by way of Mortgage of residential property


mentioned above.

16. Customer Grading Criteria:


Grade A (4 Grade B (2 Grade C (1 mark)
Criteria: marks) marks)
Management

Years in business>=15 years >=10 years >=5 years


Family in 3rd generation 2nd generation 1st generation
business
Promoter High Multiple No experience, is a side activity
involvement & involvement & businesses, less
competence competence personalised attn
Business Criteria
Dependence on < 5 % 5-10% 10-20%
customers - Max.
Share of any
customer in
applicant's sales
Dependence on Low Medium High
govt. policies
Impact of Low Medium High
technology
change
Financials
PMB/Facility >2 >=1.5 >=1
Amount
Ability to raise >= 50% of >= 25% of (TNW >= 10% of (TNW + USL) of previous ye
funds from (TNW + USL) + USL) of
internal sources of previous year previous year
Current Ratio >=1.5 >=1.33 >=1
ISCR >=4.0 >=3 >=2
Net Profit
Margin
Page 73 of 76

- For >=7.5% >=2.5% >=1.0%


Manufacturing
- For Retail / >=5.0% >=2.0% >=0.5%
Distributors /
Services
Current Assets / <= 25% <=40% <=75%
Sales
Debtor Days
(Days sales)
- For <=60 days <=90 days <=120 days
manufacturers
- For retail / <=30 days <=60 days <=90 days
distributors/
services
Inventory Days
(Days cost of
sales)
- For <=60 days <=90 days <=120 days
manufacturers /
dealers/
distributors /
services
- For retail <= 90 days <=120 days <=180 days
Auditor No qualification Low implication Material Implication
Qualification

TOL (Excl. <=1.5 <=2.0 <=3.0


Unsec loans from
Prom.)/(Tangible
Networth +
Unsec. Loans
from promoters)
Financial Trends
Sales turnover >=110% of last >=90% of last 2 60-90% of last 2 years average
2 years average years average
Net profits >=110% of last >=90% of last 2 60-90% of last 2 years average
2 years average years average
Net worth + >=125% of last >=110% of last 2 >=100% of last 2 years average
Unsec loans from2 years average years average
promoters
Page 74 of 76

Total Outside <=90% of last 2 <=110% of last 2 110-150% of last 2 years average
Liabilities / years average years average
Tangible
Networth
Current ratio >=110% of last >=90% of last 2 60-90% of last 2 years average
2 years average years average
Banking
Behaviour
Overdrawing / No overdrawing Occasional Usually Overdrawn
TOD Overdrawing

Repayment Prompt <=30 days > 30 days


Track Record
Cheque Returns No cheque Outward Cheques Inward Cheques
bounces
Churn >= 75% >= 60% >=50%
Score 64 Rating 5-
Page 75 of 76

SUMMARY

This project has examined the various types of financing alternatives for
trade finance.
The project has examined the financial requirements of trade finance
activities and found out that there is a need for financing at every stage of
the activities performed. The project has delt with various instruments used
in trade finance activities.
Trade finance is the backbone of all economies and key sources of economic
growth.
This project also delt with guidelines /instructions for financing trade
finance activities and also various laws governing trade finance activities are
studied in this project.
Hence how cash, credit, investments and other assets are utilized for trade
finance are studied in this project.
Page 76 of 76

SUGGESTIONS
Banking business and banking risks have become much more complicated
with globalization and the resolution in information technology. There is a
need for banking supervisory tools to keep up with changes in the market to
track the risk and ensure that they are prudently and carefully managed.
While assessing the project the profit element should be considered with risk
element collectively .
Sometimes the client business looks promising and real then certain
relaxation should be provided as far as policies are considered.

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