International Fund Management in RINL

This week I have learnt about the international fund management, that the company is
involving in order to meet its working capital requirement. Since the steel industry is
continue process, so the company must have a proper maintenance of raw materials.
The company doesnt have the captive supply of raw materials. So it has to depend on
the external suppliers. In that process it depends on foreign countries for the import of coking
coal, boiler coal, limestone and dolomite for which the payment has to be done in dollars.
Also, the funds available from the developed countries will be less when compared to that of
the developing countries. So the company heavily depends on the loans from the foreign
countries at the short term level because the volatility of foreign currency in short term is
less.
The company mainly depends on the borrowings from the foreign bank rather than
depending on short term notes or commercial papers. There are many foreign banks which
provides the loan rather than a single bank. This way of borrowing in the foreign currency is
more advantageous when I) their future cash inflows are same as the foreign currency as this
will help in easy repayment without any exchange. II) Also the interest rates over the
countries are not same. The interest rate in developed countries will be very low as compared
in developing countries because in developing countries they have to control the inflation. So
the companies can depend on the foreign banks for acquiring the loans and hedge in order to
prevent the interest rate risk.
But there will be certain guidelines while acquiring the foreign bank loans. The RBI
will make the norms to protect the interest of the local banks. So there is a credit limit for the
foreign banks for providing the loans to companies. So RINL is depending on both domestic
and foreign loans.
RINL is managing the short term borrowings in foreign banks very effectively. Before
they are acquiring the foreign loans they are considering the effective financing rate. This
effective financing rate includes the rate at which foreign banks offers the loan and also the
variations in the currency movement.

E.g., If for instance RINL borrows a loan of $ 1, 00, 000 from a US bank at a rate of 6%
where $ 1= 50 and assume that by the time of repayment assume that $1 = $ 52, then the
effective financing arte is given by:
The amount RINL has to repay if there is no currency fluctuations is (1.06* 1, 00, 000= $ 1,
06, 000) i.e., ($ 1, 06, 000* 50 = 53, 00, 000)
If there is a fluctuation in the currency, then the amount which they have to pay will vary.
There by the effective financing rate is also varying. (1.06* 1, 00, 000 = $ 1, 06, 000) i.e., ($
1, 06, 000* 52 = 55, 12, 000)
Now the change in the amount which they have to pay is (55, 12, 000- 50, 00, 000 = 5, 12,
000).
So now the effective financing rate = (5, 12, 000/ 50, 00, 000= 10.24%)
So by comparing the effective financing rate and the domestic rate they will take the decision.
RINL also locks the exchange rate with some premium to gain the advantage from the
exchange rate risks. So considering all this, they will take the loans.
International Purchases:
And coming to the purchases which made from abroad the company is mainly depending on
letter of credit for making the international transactions. Here RINL will make use of some
bank which will promise the supplier to pay the amount on behalf of the RINL after the
submission of the shipping documents. Then after receiving the inventories then RINL will
pay to the bank and collect the documents. Even sometimes due to foreign country
regulations the supplier might ask any local bank to confirm the LC provided by the bank
approached by RINL. This will help from the foreign regulations of payment. This will help
both importers and exporters to benefit and also the banks will get commission charges for
doing that. Also the banks may give credit to the RINL for the repayment of the amount for
the inventories which are imported. But before giving an LC the banks will see the credit
worthiness of the company and its relations with the banks. And the key document involved
in the LC is Bill of Laden, which shows the description of the inventories and the title. Once
the amount is paid then the banks will give the bill of laden to banks or banks can give the
Bill of Laden and take the collateral of the merchandise.

So overall by doing this, the working capital management can be efficiently managed.
NOTE:
RINL doesnt disclose the exact data of the international fund management as that is
confidential. They just gave an idea on how the international funding will make the company
profitable. Even if company makes the interest less by 1% even then it will bring huge profit
for the company.