CBPTM Exercise on “Aligning credit facilities to Borrowers Business Needs”

Buying Firm : Manama Electricity Inc. (MEI), Bahrain

Buying Firm’s Bank : Bank of Bahrain, Manama
Buyer’s Business Activity : Generation and Distribution of Electricity
Supplier : Gem Generators Ltd. (GGL), Bombay
Supplier’s Bank : Bank One, Mumbai
Supplier’s Business Activity : Manufacturer and Supplier of Electricity Generators
Transaction Details : Supply of Electricity Generators
Expected Value of Generator : US$ 60 million

Manama Electricity Inc. has a well-articulated policy of procuring capital equipment and
raw materials through floating of global tenders. As MEI does not want transactions with
unreliable and unqualified companies, the company accepts bids that are guaranteed by
internationally reputed banks for 0.5 per cent of quoted price. Subsequent to evaluation of
bids, contracts are awarded to the successful bidders on receipt of performance bond
towards 10 per cent of contract value. This is followed by release of mobilization advance
amounting to 10 percent of contract value backed by advance payment guarantee. For the
balance amount, MEI usually arranges letter of credit providing for payment after 60 days
from the date of bill of lading evidencing shipment of generators.

On the basis of the information given above and knowledge acquired by you, attempt the
following:

a) Identify types of credit facilities banks may extend to MEI (buyer) and GGL
(supplier) at various stages of the contract.
b) Purpose and Nature (Fund Based or Non Fund Based; Interest Based or Fee
Based) of facilities.
c) Name the party approaching the respective banks for availing each of the
facility.
d) Name of the bank arranging the credit facility.
e) Role assumed by respective banks under each of the facility.
 Party Bank
S.No. Type of Facility Nature of Facility Purpose of Facility Approaching providing the
the Bank credit facility
Fund Interest/ Fee
Based/ Based
Non- Fund
Based
1. Bid-Bond* (*EMD in Non Fund Fee Based To guarantee the bid. The bid bond GGL Bank One
lieu of Bid-Bond in the Based guarantees that the supplier (GGL) Bombay Bombay
form of call or term considers their bid to the buyer
deposit) (MEI) binding until the contract is
awarded.
2. Performance Bond Non Fund Fee Based To guarantee delivery and GGL Bank One
Based performance. The performance bond Bombay Bombay
is designed to provide assurance that
the seller (GGL) meets his
obligations in the manner, and within
the time, contractually agreed upon.

3. Advance Payment Non Fund Fee Based To secure advance payment, bank GGL Bank One
Guarantee (APG) Based provides advance payment guarantee Bombay Bombay
at the request of the supplier (GGL)
in favour of the buyer (MEI) for the
event that the payment must be
refunded due to non-delivery by
supplier (GGL).

4. Overdraft Fund Interest To meet its day-to-day operational MEI Bahrain BOB
Based Based obligations to supplier (GGL). Manama

5. Term Loan Fund Interest To finance acquisition of fixed assets MEI BOB
Based Based by the buyer (MEI). Bahrain Manama
6. Pre-shipment finance Fund Interest To finance inventory or procure BG Bank One
(Inventory Based) Based Based inputs to manufacture goods. In the Bombay Bombay
Domestic Trade present case, supplier (GGL) will
referred as Cash avail packing credit loan (cash
Credit-Hypothecation credit) for sourcing raw material and
accessories etc. required for
Also refer item 8 manufacturing generators.

7. Letter of Credit (LC) Non Fund Fee Based To guarantee payment to the supplier MEI BOB
Based (GGL) of main equipment as per Bahrain Manama
contract terms

8. Back to Back Letter of Non Fund Fee Based To source raw material and to GGL Bank One
Credit (Inland/Import Based guarantee payment to input suppliers Bombay Bombay
Letter of Credit) (suppliers of inputs to GGL)

9. Bill Discounting Fund Interest To meet working capital finance GGL Bank One
Based Based from the date of shipment until final Bombay Bombay
payment of bills drawn under LC
established by buyer’s bank.
10. Forward Contract Non Fund To lock in/ fix up exchange rate for GGL Bank One
Based payment against import LC (item 8) Bombay Bombay
and/or discounting of bills for
supplies made to buyer (item 9)
10. Forward Contract Non Fund To lock in/ fix up exchange rate for MEI BOB
Based payment against export LC Bahrain Manama
favouring supplier (item 7)