Profile of Loan Products in Corporate Banking

Cash Credits: Cash credits are more commonly offered for businesses than
individuals. They require that a security be offered up as collateral on the
account in exchange for cash. This security can be a tangible asset, such as
stock in hand, raw materials or some other commodity. The credit limit extended
on the cash credit account is normally a percentage of the value of the security
offered.
Overdraft accounts, however, act more like a traditional loan. Money is lent by
a financial institution as with a cash credit account, but a wider range of
collateral can be used to secure the credit. For example, you might be allowed to
use mutual fund shares, LIC policies or even debentures. There are even clean
overdraft accounts, in which no specific collateral is offered; instead, clean
overdrafts are granted against the worth of the individual. This is usually only
possible when the borrower has a lot of funds parked at the financial institution
and enjoys a long-standing relationship with the bank.
Non-fund based facilities are facilities extended by banks to the clients
h=which do not need an immediate disbursal of funds. They are also termed as
quasi-credit facilities as no outflow of funds takes place. The major non-fund
facilities are Letters of Credit, Bank Guarantee and Co-acceptance.
Letters of Credit: Issued by the bank at the request of an importer, the letter of
credit states that the bank will pay a specified sum of money to the beneficiary,
the seller, on presentation of particular, specified documents. An LC issued by
the banker is generally irrevocable and cannot be cancelled without the consent
of both the buyer and the seller. The key point in LCs is that the banks deal only
in documents and not in goods. The partners to Letters of Credit are the buyer,
the seller, the issuing bank, the confirming bank, the advising bank, the
negotiating bank and the reimbursing bank. The confirming bank adds another
level of assurance to the seller for his receipt of payment. There are different
types of letter of credit such as inland/foreign LCs and sight /Usance LCs. Sight
LCs demand banks to immediately release money on receipt of proper
documents while Usance LCs give some credit period for the banks to complete
the payment.
A letter of credit shifts the entire liability on the issuing and the confirming bank.
In case of proper documents, the bank would have to honour the payment
irrespective of any conflicts between the buyer and seller. As a result, the bank
must be doubly sure about the ability and the willingness of the buyer to pay for
the LC. One way to ensure this is to take an upfront advance or charge a
premium fee for the facility to the buyer. The risks are further increased in case
of foreign LCs where exchange rate fluctuations and country risks are needed to
be evaluated.
Buyers Credit refers to loans for payment of imports into India arranged on
behalf of an importer through an overseas bank. The benefits are that the
exporter gets paid on the due date while the importer gets time to make an
import payment as per the cash flows.

Suppliers Credit relates to credits for imports into India extended by an overseas
supplier or financial institution outside India.
Bank Guarantee is a contract to perform the promise or discharge the liability
of a third person in case of a default. They are classified into three categories:
Performance Guarantee: It is a undertaking to pay one party in case of a default
by the other party in performing its duties as per the contract.
Financial Guarantee: It is a direct credit substitute wherein the bank irrevocably
undertakes to guarantee the repayment of a contractual financial obligation.
Deferred Payment Guarantee: Used for financing of fixed assets.
The performance guarantees issued by banks are bid bonds, performance
guarantees for 10 to 15 % of the value of the contract once the contract is
awarded, advance payment guarantees called mobilization advances and
retention money guarantees in construction projects.
Co-Acceptance Facilities are also a kind of non-fund facility where buyer wants
to buy plant and equipment ton a deferred credit basis. Such facilities give the
seller the assurance of payment by the buyer on the due date and In case of
default, a co-accepting bank would make the payment.
Exporting goods plays a significant role in the overall economic growth of a
country. Supporting the exporters by the way of credit is, thus, an important role
for a commercial bank. The banks serve the credit needs by providing pre and
post-shipment credit. The funds are available for the purpose of procuring raw
materials, processing, packing, transporting and warehousing of the goods
meant for exports. The credit is available in both local and foreign currency.
Pre-shipment finance: When the seller wants payment before the shipment

Packing Credit: credit for the purpose of purchase, processing

manufacturing or packing of goods prior to shipment on the basis of LC. It
is extended in both Rupee terms and in foreign currency.
Advance against cheques/drafts received in advance of exports:
Credit to the exporter receiving cheques/draft in payment for exports after
making sure it is against the export order.

Post-shipment finance: it is working capital facility for the exporter from the
date of extending credit after the shipment of goods to the date if realization if
export proceeds. It is provided against the evidence of shipment of goods to the
importer. It is extended in the following ways:

Export Bill Purchased/Discounted: The purchase/discounting of bill is

not covered under LC and bank has he risk of non-payment
Export Bill negotiated: Less risk of non-payment as the issuing banks
makes sure about the payment.
Advance against export o consignment: For foods exported on
consignment basis at the risk of exporter for the sale and eventual
payment by the consignee.
Others: other ways include advance against undrawn balances of export
bills and against duty drawback entitlements.

Interest Rates on Export Credit:

Interest rate for the credit is based on the base rate with effect from July 1, 2010.
Export Credit Not Otherwise Specified (ECNOS):
If the pre-shipment advances are not liquidated from proceeds of bills on the
purchase, discount of export document within 360 days from the date of
advance, the advances will be termed as ECNOS. The banks will be free to decide
the rate of interest, instead of the prescribed rate
Key points for the Bank extending export finance

Check whether the proposed export is allowed under the Foreign Trade
Policy, 2009
The bank should ascertain the prime status of LC issuing bank and study
the terms of LC
Check the profile of buyers country especially about the financial and
political environment
Dispensation of export credit should be done in time bound manner, which
is as follows
o New proposal in 45 days
o Renewal of limit in 30 days
o Ad hoc limit in 15 days
Following methods are available to assess the credit limit:
o Projected Turnover Method
o MPBF Method
o Cash Budget Method
Limits must be reviewed annually and it should not interrupt the finance