A Case Study on HDFC Bank – Business Banking

Business Banking service bouquet for SMEs
As one of the fastest developing private banks itself, HDFC relates best with the resources requirements of SMEs during the evolution and sustenance phase. The Bank has proactively put in place a separate business group viz Business Banking Group to cater to the banking requirements of Small and Medium Enterprise (SME) sector in line with the RBI guidelines. The extant guidelines are issued by RBI vide its circular RPCD.PLNFS.BC .No.6/06.02.31/2007-08 dated July 2, 2007. The high level of professional expertise and experience in trade services coupled with networks of over 500 branches and correspondent relationship with banks worldwide enables them to meet the various business requirements.

This group offers a bouquet of customised products /services (secured and unsecured) suited to the various requirements of the SME customer. These products cater to the entire working capital cycle including trade finance products like LCs/ Bank Guarantees/ bills discounting facilities, export finance, term loans, current account services and other financing requirements including forex risk management products in a simplified manner to the SME sector. For running an establishment, two types of capital are required:

Classification of Capital Working Capital: Cash for purchasing /stocking for raw materials, payment of operational expenses; for financing the interval between the supply of goods and receipt of payment post sales i.e. during the operating cycle

Fixed Capital: Cash required for acquiring fixed assets such as land, equipments building, etc.

shares & debentures. Product and Services Bouquet The products offered can be broadly classified into Fund based and Non-Fund based V. against certain securities.V. A letter of recording should be obtained from a customer when a temporary overdraft is granted to him. However. • • • Overdraft is a running account and hence debits and credits are freely allowed Interest is applied on daily product basis and debited to the account on monthly basis.A. where against the security of stocks or receivables a limit up to sanctioned level of lending is made available to the borrower in the form of running account allowing withdrawals up to the limit of the requirement . such a facility is called an “overdraft “facility .It can also be by the way of Overdraft where the credit limit up to the amount to be lent is set in the current account or a Cash Credit account. LIC policies and bank’s own deposits etc and also on unsecured basis. regular overdraft limits are sanctioned . temporary overdrafts should be granted sparingly to meet the short term requirements of customers. • In case it is decided to withdraw/reduce overdraft facility to the customer sufficient notice of the same should be given to the customer. . V.1 Fund Based The lending of funds can be by way of Demand Loan repayable on demand or Term Loan repayable over a period of time at agreed intervals . • Temporary overdrafts should be allowed only on written request of the customer.However.1.Lending can also take the form of Bill Discounting where the bank lends against bill of exchange drawn in favour of the borrower but payable at future date by placing the amount of the bill less discount charges at the disposal of the borrower by discounting the bill .A.1) Overdraft: When a customer maintaining a current account is allowed by the bank to draw more than the credit balance in the account.At the request and the requirement of customers temporary overdrafts are also allowed . Overdrafts are generally granted against the security of government securities.Salient features of this type of account are as follows.A.

. into the account. There are no restrictions as regards number of debit and / or credit transactions in the account. • Repayment: Cash-Credit facility is technically repayable on demand and there is no specific date of repayment.1. • Running Account: A Cash-Credit account is an active running account. It is expected that all the sales /purchase /other transactions of the borrower should be routed through this account.The bank sanctions a limit called the cash-credit limit to each borrower up to which he is allowed to borrow against the security of stipulated tangible assets i. The drawings are restricted upto the sanctioned limits or available Drawing Power (whichever is lower) and should be only for the purposes for which the limit has been sanctioned.Salient features of cash-credit system are as under: • Sanction of the limit: Cash-Credit limit is sanctioned after taking into account several factors detailed later in the product note. . applied on calendar monthly basis 2.A.e. Interest is calculated on daily product basis. the facility of frequent and unrestricted transactions is available . For credit balance lying in cash-credit account. • Application of interest and service charges : 1.2) Cash Credit A Cash Credit is an arrangement to extend short term working capital under which the bank establishes a credit limit and allows the customers to borrow money up to a certain limit . stocks. book debts etc .V.The customer need not draw at one the whole of the credit limit sanctioned but can withdraw from his cash-credit amount as and when he needs the funds and deposit the surplus cash/funds proceeds of sale etc. no interest is payable as cash-credit is in the nature of current account. Quarterly behaviour scoring shall indicate the health of the account and an annual review to be conducted to decide on account renewal. In fact a healthy churn rate in the account to be encouraged. the account may move freely between debit and credit balances as well. Besides this.

plant & machinery etc for the purpose of setting up of new units or expansion . the existing facility nature and the behaviour thereof must be documented in the CAM .e. • • Period: A term loan is granted for a period exceeding 3 years but not exceeding 5 years. Lump sum payments also to be allowed. repayment schedule is fixed by way of Equated Monthly Instalments. V.1. • Granting of additional loan : A fresh loan account should be opened for every new advance sanctioned and a new DP Note be taken .4) Term Loan A term loan is an advance allowed for a fixed period either in lump sum or in instalments and which is repayable according to a schedule of repayment as against on demand and at a time . • Interest: Interest is calculated on debit products on daily products basis and applied on calendar month basis. • Further debits: Demand loan is not a running account and as such no further debits to an account is made subsequent to the initial advance expect for interest.3) Demand Loan: A demand loan is a loan sanctioned for a period upto 35 months repayable on demand. cheque bounce and other sundry /incidental charges. Service charges as per current account rules are to be levied. Purpose: Term loans are generally granted to meet the need of capital expenditure i. adding more bays . as per terms of sanction.When a further loan/facility is proposed to be sanctioned against the same security or to the same borrower . • Repayment: Although all demand loans are payable on demand. V. The loan is disbursed by way of single debit to the account.3.replacement of existing units .1. modernisation .A.A. The amount needs to be repaid in instalments. building . acquiring of fixed assets like land. • Further Credits: No restrictions on credits in the account as they would go towards repayment of the demand loan outstanding.renovation .

V. are called documents to title to goods. bill of lading.Demand bills are purchased and usance bills are discounted . MTR. etc are documentary bills. more floors in a departmental store etc. Documents under bills are either deliverable against acceptance or against payment. Bills accompanied by title to goods i. such a bill is called “Documentary Bill “ • Documents. 1) Clean & Documentary bill: • When documents to title to goods are not enclosed with the bill. etc.Bills may be either clean or documentary . Security: Term Loans are granted against the security of immovable property. then the documents including documents title to goods are delivered to the buyer only against payment of the bill.(Documents against payment –DP . The buyer is expected to pay the amount of such bill immediately at sight . 2) Demand & Usance Bill When the bill of exchange either clean or documentary is made payable on demand or sight. plants & machinery. vehicles. Bills without such documents are known as clean bills. • Repayment: A monthly repayment schedule is fixed and accordingly loan is repaid in instalments.5) Bills purchase/Discounting: These represent advances against bills of exchange drawn by the customers on their clients . the due possession of which give the title to the goods covered by them such as RR/MTR.A. R/R. acceptable liquid securities. as per terms for the supplied. such a bill is called a “Clean Bill “.Bills are either purchased or discounted . When documents to the title to goods along with other documents are attached to the bill . delivery orders etc.If such a demand bill is a documentary bill.e. • Cheques and drafts are also examples of Clean Bills. A seller of goods draws a bill of exchange (draft) on buyer (drawer). Such bills can be routed through the banker of the seller to the banker of the buyer for effective control. • • Interest: Interest is as per the EMI schedule calculations.1. such a bill is called Demand Bill.in the service station .

the bill is called Usance Bill. Thereafter the drawer’s bank sends the bill to collecting bank at the centre of drawer either to its own branch or drawee’s bank . In case of documentary usance bill. with instructions to release the documents to title against acceptance and thereafter . the documents are delivered to the buyer (drawee/acceptor) against his acceptance of bill (Documents against acceptance-DA Bills) 3) Finance against bills of exchange: Working capital finance to meet the post sale requirements of borrowers can be also met through Bill finance either by Purchasing Bills or Discounting. when he accepts to pay the bill on due date and on due date the bill is presented again for Payment.1.6) Export Finance: Export Finance is broadly classified into: A. to his banker who discounts the bill i. Post-shipment finance Financial assistance extended prior to the shipment of goods shall fall under pre-shipment finance . Pre-shipment finance B. V. levies discount charges for the unexpired portion of the duration of the bill and credit the balance amount to the seller’s account.Bills) When a bill.e. preferably to its own branch at the place of drawee or to its correspondent bank or to the buyers (drawee’s) bank. A) Bill Purchase facility is extended against clean demand bills like cheques /drafts/bills of exchange/hundis and demand documentary bills. the seller tenders the usance bill drawn by him usually along with documents to title to goods.to recover the bill amount on due date . B) Bills discounting facility is extended against usance bills. Such bill is presented to the buyer one for Acceptance. Sometimes the accepted usance bills are also tendered and discounted by the bank. either clean or documentary is drawn payable after certain period or on a specific date.A. whereby the bank lends money to the payee of the cheque /drafts/and to the drawer of the bills by purchasing the same against tendering of such bills by the payee/drawer. In such cases. The bank in turn sends the bills for collection.

international trade practices .whereas. procedures and principles of lending . is very much essential . Exim –Policy etc. etc. knowledge of the Exchange Control. Paris . Export finance is governed . Trade Policy procedures and directives of trade control authorities . particularly those of International Chamber Of Commerce (ICC).It is an additional responsibility on the part of lending banker to keep in mind all such rules and regulations . and . over and above usual practices . . financial assistance extended subsequent to the shipment of goods shall fall under the preview of Post-shipment Finance. by and large by RBI directives. therefore .

There are many situations wherein.A. We come across a Guarantee in two capacities . the beneficiaries of Guarantee are generally Statutory /Government authorities. V. the bank by issuing such guarantees steps into the shoes of the constituent and assumes the financial risk and responsibility attached to it. the Bank is the creditor. The need for such guarantees to be issued by banks arises due to the business and financial requirement of Bank’s constituents. in the latter case. The other as a guarantor. These are called Non-Fund Based Credit. when the bank itself promises to pay the dues or discharge the liabilities of its customers in favour of a third party. Even though funds are not involved at the initial stage. the constituent is required to provide a guarantee from his banker in lieu of some money owed by the constituents to others or likely loss / damage that may be caused by constituent’s performing/non-performing of specified task. Typically. A performance Guarantee issued by the bank on behalf of a customer to third party for fulfillment of terms of contract.V. we will have to pay out funds to the beneficiary on behalf of the customer and recover it later from him. party promises to save another person from loss caused to him by the conduct of the promissory or by any other person.2. Letter of Credit issued by the bank on behalf of its customer favoring the third party in India or abroad is some of the examples of this type of finance.1) Bank Guarantees A Contract of Guarantee under the Indian Contract Act is a contract to perform the promise or discharge the liability of a third person on case of his default. Bank’s liability is co-extensive with that of the debtor. While in the former case.One as a beneficiary when somebody guarantees the payment of debt of bank‘s borrower in case of default. A Contract of Guarantee should be distinguished from Contract of Indemnity in the latter case. bank is taking risk. Public Sector . and on failure of its client to fulfill terms of guarantee or letter of credit. Thus.2 Non-Fund Based There are certain types of advances which do not involve deployment of funds at least in the initial stage.A.

Reputed institutions /limited companies /firms. While issuing such guarantees one needs to be sure about the financial strength /liquidity of the party. customs and excise etc . Guarantees covering security deposit/earnest money/advance payment /mobilisation advance etc. guarantee issued in respect of constituents liability. performance of machineries supplied.Similarly. Hence. the Bank will make payment under the guarantee. in the event of default of the customer and on being notified to that effect. Financial Guarantees: In case of financial guarantees. credit worthiness and his capacity to take up financial crisis. Performance Guarantees: Performance guarantees are issued on behalf of constituents guaranteeing their performance as per the contracts entered into. Therefore. Types of Guarantees: Guarantees issued are broadly classified into 3 categories Financial. guarantees covering payment for supplies to be lifted by parties will also be treated as financial guarantees.will come under the classification of financial guarantees. would come under this category . payment of taxes. Performance and Deferred Payment Guarantees. such as guarantees favouring tax/customs/excise/court authorities in respect of disputed claims. 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. Bank does not undertake to perform the obligations undertaken by the customer under the contract. the bank guarantees the customer’s financial worth. .Undertakings. due discharge of other contractual obligations undertaken etching such guarantees. Overseas suppliers of goods /machinery on differed payment terms.

For this the intending purchaser may approach his bank for term loan repayable over a medium/long term in instalments. funds crunch etc. For this. the purchaser has to raise large amount of resources to but these items. the borrower /intending partner may request the supplier to extend him long term credit.Here such a guarantee is called Deferred Payment Guarantee. unless he is satisfied about the capacity of the purchaser to pay the instalments on due date. This also helps the supplier to improve his cash flow by discounting these bills from his bankers. he would be required to furnish a bid . The bank may consider his request and will extend the guarantee which covers an extended repayment period or Deferred Payment by the borrower/purchaser to the supplier/beneficiary . The purchaser may then approach his bankers to guarantee the repayment on due dates. which is a financial guarantee. In case of capital goods / machinery /heavy vehicles/tractors/trailers. Bid Bond Guarantees: Whenever a constituent participates in an international tender/bid. The supplier of such goods etc may agree to extend such credit payable over a period of say 3/5/7 years at say half yearly instalments. he may insist on the purchaser’s bank guaranteeing the repayments. the supplier may not agree to extend such credit.bank may not be able to sanction term loans. It is possible that due to various constraints like mismatch in resources /deployment period. is a way of raising long term resources for acquiring fixed assets /capital goods by securing guarantee of repayment of principal and interest from his banker to the supplier of capital goods for supplier’s credit. However. Under such circumstances.Deferred payment Guarantees: Deferred Payment Guarantee. The supplier will also change interest on the credit extended and such interest may also be recovered in instalments along with principal.

It should be noted that once the bid is accepted. working capital facilities would also be required for completion of the contract/project on time. Therefore at this stage it is not proposed to issue bid bond guarantee under this programme V. Similarly the buyer would also like to ensure that the goods/services bought are as per his specifications and deliveries are effected in time. A letter of credit is a written instrument issued by a banker at the request of a buyer (applicant) in favour of the seller (beneficiary) undertaking to honour the documents or drafts drawn by the seller in accordance with the terms and conditions specified in the credit. within a specified time.both the factors cannot be satisfied simultaneously. etc. the technical and financial capability of the party to complete the project/contract successfully should carefully be analysed and branches should satisfy themselves thoroughly about all these aspects. far away stations .The intermediary is usually a bank who issues a letter of assurance to a seller at the request of a buyer for payment of most of goods/services sold on certain terms and conditions . Therefore requests for bid bond should be examined in totality as in the case of financing of large projects/contracts. Further. before parting with the money . Thus the credit is made available to the seller against delivery of certain specified documents.bond guarantee. When the credit stipulates payment of money when the documents are presented to the paying bank. guarantee in respect of advance payment received. the party would require various facilities such as performance guarantee for earnest money deposit. Further the amount of the Bid Bond Guarantee would be relatively small compared to other facilities that the Bank may constrain to sanction at later stage. Such tenders would be of large magnitude and the completion may involve considerable time. In other words we may have to consider sanctioning of several other facilities which might not have been envisaged at the time of issuing the Bid Bond Guarantee.2.A.If the credit stipulates the delivery of documents by the seller . As compromise services of third party as an intermediary are utilised . the L/C is called a Document against payment . Besides the viability of the project/contract.Such an assurance letter of credit.If the buyer and the seller are two different .2) Letters of Credit : Ideally any seller of goods/services would like to receive payment before the delivery of goods/services to buyer.

• Seller/Beneficiary: The party to whom the credit is addressed (seller or supplier of the goods/services). the L/C is called usance L/C or D/A L/C . It constitutes a definite undertaking of such conforming bank in addition to that of the opening bank. • Revocable Credit: A credit that can be cancelled or amended at any time without the prior knowledge of the beneficiary. • Confirmed Credits: Where credits carry the confirmation of the advising bank. • • • Applicant: The buyer of the goods/services(borrower) Opening Bank: The Bank /Branch which lends its name/credit Advising Bank: Opening Bank’s branch or another bank at beneficiary’s place to whom the letter of credit is sent for onward transmission to the beneficiary. Parties to a letter of credit: Following are the parties to a letter of credit. . Kinds of Credit: The different types of letters of credits which banks generally issue are: • • Inland L/C: An L/C where all the parties to an L/C are located within the country.In practice . Foreign L/C: An L/C where either the opener or the beneficiary is located outside the country of issue and arising out of exports or import of goods/services out of /into the country of issue. • Irrevocable Bank :It is a definite undertaking of the issuing bank to honour documents strictly drawn as per the terms and conditions of credit which cannot be amended or cancelled without the agreement of all the parties to the credit in particular the beneficiary . Conforming Bank: The bank adding conformation to the letter of credit. • • Negotiating Bank: Opening bank’s branch or another bank that negotiates the documents.LC are almost always irrevocable .against acceptance and that payment will made on the due date .

• Transferable Credits :A transferable Credit is a credit under which the beneficiary (1 st beneficiary)may request the bank authorised to pay. particularly in SMEs and Micro Enterprises. Business Banking offers a bouquet of financial services to meet the clients’ customized financial requirements.accept or negotiate(the transferring bank ) or in the case of a freely negotiable credit . to make the credit available in whole or in part to beneficiary (is)second beneficiary/beneficiaries. and the needs are constantly evolving. the bank specifically authorised in the credit as transferring bank . They now prefer to take an expert opinion / recommendation before making a decision. So the division has adopted push strategy along with pull strategy and planned to set up a sourcing channel of CONNECTORS comprising of chartered accountants. • Revolving Credit: Which provide that the amount of drawings made there under would be reinstated and made available to the beneficiary again and again for further drawings during the currency of credit. The business banking division of the bank is mainly engaged in sourcing the assets for the bank. has grown due to rising cost of funds and fluctuating currency markets coupled with multiple of suppliers claiming to have superior product and service mixes. and that it is anything but “small” and as demanding as ever. • Acceptance Credits: Where the payment is to be made on the maturity date in terms of the credit. incur a deferred payment undertaking . financial consultants and DSAs having SME clients. The Business Banking division vertical was set up to cater to the growing demands of capital or working capital requirements of SMEs. up to a certain sum subject to certain conditions specified therein. Marketing Methodology HDFC Bank understand how much hard-work goes into establishing a successful SME. In keeping with this requirement. This channel would help the bank to reach out directly to the prospective customers. The conventional ways of sourcing were: • • • Through the applications submitted in the branches offices Cross selling Through the Direct Sales Agents (DSAs) But the skepticism in the market to borrow funds. Such connectors shall refer HDFC bank’s products to .

Business Banking division devised a team of Management trainees to initiate discussions with such financial advisors / consultants / potential clients.their clients for availing any credit facility and HDFC shall pay them referral fees if the referred party avail the facility. Based on above the thought process. . our special purpose team of management trainees was appointed for a stipulated period of two months. the bank organized a seminar “SYNERGY” on SME Lending & FOREX and provided them a platform to discuss their queries with the senior officials of the bank. In order to develop CONNECTORS’ knowledge and confidence in HDFC’s products and services. To implement the aforesaid thought process. The execution stages can be outlined hereafter.

Ritesh Dineshbhai Parikh . roll no. student of Welingkar Institute of Management Studies. hereby declare that I have completed my two months project on: “Marketing Strategies For Financial Product Of a Bank” The information included in this report is true to the best of my knowledge and belief. PGDBA(DLP) – Marketing (2009-10). Ritesh Dineshbhai Parikh.Declaration I. DPGD/JL08/1046.