Unit-2

Financing of sick units

Symptoms of sick units

1. Financial symptoms

1. irregularity in bank accounts unable to provide security

2. Non payment of interest on borrowings
3. Non payment of installments dues on loans.
4. inability to pay the creditors on tine
5. adverse reaction in the stock exchange to the shares of the company

2. Non-financial symptoms

1. Incapacity to produce according to schedule

2. in ability to market the goods produced
3. Fast turnover of labor.
4. Generally poor reputation in the market

Causes

Internal causes
1. Low productivity of labour.
2. High cost of labour.
3. Obsolete plant and machinery
4. Obsolete technology
5. A weak marketing department
6. Inefficient and dishonest management.
7. Poor financial panning.
External causes
1. Non availability of raw material
2. High cost of raw material.
3. Non availabity of infrastructure facilities
4. Marketing difficulties because of government interference.
5. Non availability of finance due to governmental measures.

Sick unit: sec 3(i) (o) of SICA

Sick industrial company (being a registered for not less than 5 years) which has at
the end of the financial year accumulated losses equal to exceeding its entire net worth.

Sick Industrial Companies Act – SICA

BIFR (Board for Industrial and financial Reconstruction)
BIFR was set up in January in 1987.the main role of BIFR is to fulfill the
objective of SICA.
Role of BIFR
1. Ensuring timely detection of sick and potentially sick companies.
2. Speedy determination by group of experts of the various measures to be taken
in respects of a sick company.
3. Speedy enforcements of such measures.

Management of BFIR:
BIFR has a chairman and 14 members drawn from various fields like banking,
labour, accounting, economics etc. Based at New Delhi.

Level of sick units

1980- 22,366
1991- 2.23 lakhs
2001 - 24.23 lakhs.
2005 – 75.23 lakhs.

Course of Action by BIFR

1. Allowing the company time on its own to make its net worth positive with in a
reasonable period.
2. Having a scheme through the operating agency in respect of the company.
3. Deciding of the winding up of the company.

The scheme may be of the following

1. Financial assistance.
2. Merger.
3. Sale or lease of a part of the company.
4. Suspension of existing contracts
The BIFRs binding on all concerned.

Powers of BIFR

1. To appoint special director on the sick company in case of mis management.

2. To debar the compact management and all other units of the management
from credit facilities from the organized sector for a period of 10 years.
3. May ask the management of sick units to report to BIFR
4. To conduct necessary inquiries to determine whether or not a company is sick.

IRCI ( Industrial Reconstruction Corporation of India )

The central Government in the year 1971 has established IRCI with the specific
objective of dealing with the problem of industrial sickness.
IRBI
1. The IRCI ceased to exist when the industrial Reconstruction Bank of India
was established in 1985.
2. The assets and liabilities were taken over by IRBI.
3. The IRBI identifies the sick units in the initial stage and corrects the
imbalances of the long term and shout term funds, replacement of balancing
equipment and modernization of obsolete plant and machinery.
4. IRBI also provides finance for expansion, diversification, Modernization etc.

EXPORT FINANCING

Import LC
Applicant/importer --->Issuing Bank---> Advising Bank--->Beneficiary/exporter.

Payment
Applicant--->Issuing Bank--->Negotiating bank--->Beneficiary.

Modes
1. letter of credit
2. Payment in advance
3. Documentary collection

Payment in Advance.
Exporter risk is low
Importer risk is high
Exporter may dispatch goods not in accordance with specification
Exporter may not dispatch goods or dispatch late.
Loss of profit
Documentary collection
The collectin by banks of a sum of money ofn behalf of an exporters (the
principal) due from an importer (the Drawee).

Parties to collection
Principle Seller/ Exporter
Remitting Bank Principle Bank
Collecting Bank Remitting Banks agent in importing company.
Presenting Bank Collecting Bank in importing country which presents the
documents to the drawee.
Drawee Buyer / Importer.

Payment on two conditions

1. Sight
2. Vsance – Maturity period
D/P- Documents against Payment
Documents released only after payment.
Documents released after acceptance.
Risks
Exporter
i. credit risk on the importer
ii. No guarantee that documents will be accepted upon presentation.
Importer
Goods may not be as specified after payment or acceptance.

Letters of credit:
A conditional undertaking given by a bank (issuing bank) at the request of the
customer (applicant) to pay a seller (beneficiary) against stipulated documents, provided
all terms of conditions are compiled.

Parties to a letter of Credit.

Applicant – Buyer importer
Beneficiary – seller / exporter
Issuing Bank – Applicant Bank
Advising Bank – Issuing banks agent in Beneficiary’s country
Reimbursing Bank – Bank authorized by issuing bakk to reimburse in bank making
payment.

Forms of shout term Export finance.

Non LC related
1. Pre export finance.
i. Bank provides finance available to exporter can be non specific such
as loan or overdraft or specific such as packing credit
ii. Beneficiary receives letter of credit but requires accommodation
finance in advance of presenting shipping documentation.
iii. Bank retains original LC and makes advance against LC.

2. Post Export finance.

i. Bank finances value of export from time to time of goods dispatch to
date of receipt of proceeds from importer.
ii. Finance with or without recourse.
With recourse bank can get the payment if importer fails
Without recourse the Bank can’t obtain repayment form exporter if
importer fails to pay.
LC related

Pre Export finance.

Red clause LC
1. a form of pre shipment finance arranged for the exporter by the
importer.
2. LC permits ‘clean’ drawing by beneficiary as a percentage of value
prior to shipment
3. Beneficiary claims balance of money on presentation of shipping
documents.
Green clause LC
Finance to exporter by importer for protection of goods in warehouse,
pending shipment of goods etc.

Post Export finance – LC related

1. Letter of credit discounting
2. Transfer of LC

Non LC related Post Export finance

1. Financed Bill collection
- Finances exporters on documentary collection terms
- Enables the exporter to obtain funds before the importer
pays.
2. Factoring
- Factor advance money against trade debts to seller.
- The advance can be with or without recourse.
- The seller assigns the proceeds to the factor
- The debtors pay directly to the factor in maturity date.
- The factor also manages the collection procedures.
- 90% financing, credit terms up to 120 days
- Controlled invoice / receivable collection
- Both domestic sales and explain can be financed.
3. Invoice discounting:
- The bank advances against invoices presented by the
exporter.
- Assignment of proceeds from the trade debtors is not
required.
- The importer pays directly to the exporter.

Procedure for invoice documenting:

1. Exporter sends copy invoice to bank (factor) and also will advance a
percentage of the invoice value.
2. Exporter collects debt himself.
3. Exporter repays bank.
4. Confidential not disclosed to the importer.
Long term Export finance:
1. counter trade:
Reciprocal trade agreements made between two countries.
Lack of foreign exchange.
Forms of counter trade:
2. Barter system – without utilization of currency.
3. Counter purchase – exporter agrees to purchase goods.
4. Advance purchase – purchase some goods before exporting.
5. Buy-back – purchase after exporting.

Export credit Agencies support finance (ECA) (Forfeiting):

For capital goods / services company
Project financing

1. ECA support:
Mitigation of payment related risk.
Credit interest rate support
Guarantee.
2. Forfaiting:
- Exporter draws bill of exchange on importer covering supply of capital
goods.
- Importer accepts bill for payment in say 1 to 7 years time.
- Importers bank guarantee.
- Forfaiter ( a financial institution) discounts bill and pays proceeds to
exporter on a without recourse basis.
Benefits of forfeiting to the exporter:
i. Minimal documentation.
ii. Fixed discount rate.
iii. Without recourse off balance sheet finance.
iv. Exchange, buyer and country risks renounced.
v. Finance costs can be passed to buyer.
vi. Administration and collection problem eliminated.
vii. But it is available to only to certain developed countries.
Project finance:
Project finance is simple in concept, in that lenders will be reimbursed from the
income earned by the completed project.
Features of project finance:
- long term finance.
- Highly complex arrangements.
- Project viability
- No or limited recourse.
- Security required overdraft.
NBFC (Non Banking Financial Corporation)

The RBI (amendment) Act 1997.

NBFC is an institution or company whose principal business is to accept deposits
under any scheme or arrangement or in any other manner and to lend in any manner.

The categories of NBFCs

1. Equipment leasing company (ELC)

It means any company which is carrying on as its principal activity of
leasing of equipment or the financing of such activity.
2. Hire Purchase Finance Company ( HPFC)
It means any company which is carrying on as its principal business, hire
purchase transactions or the financing of such transactions.
3. Housing Financing Company (HFC)
It means any company which is carrying on as its principal business, the
financing of the acquisition or construction of houses including to
acquisition or development of plots of land in connection of securities.
4. Investment Company (IC)
It means any company which is carrying on as its principal business the
acquisition of securities.
5. Loan Company (LC)
It means any company which is carrying on as its principal business, the
providing of finance whether by making loans/ advances or otherwise for
any activity other than its own. This is not ELC,HPFC, or HFC
6. Mutual Benefit financial Company (MBFC)
It means any company which is notified by the central government under
sec. 620 A of the Companies Act 1956.
7. Miscellaneous Non-Banking Company (MNBC)
It means a company carrying on all or any of the following types of
business.
- Managing, conducting, supervising, as promoter.
- Agent.
- Conducting unit.
8. Residuary Non-Banking company (RNBC)
It means a company which receives any deposit under any scheme or
arrangement, by what ever name called in one lump sum or installments
by way subscription or by sale of his certificates or which according to the
RBI regulations.
 Who accepts public Deposits?
1. Public and private limited non banking non financial companies of
varying sizes.
2. Public and private limited non banking financial companies
3. Government companies since 1980.
4. Branches of foreign companies.
5. Partnership terms.
6. Proprietary concerns.

Types of deposits:
Regular deposits includes
1. Loans guaranteed by former managing agents or secretaries and
treasures.
2. Unsecured debentures.
3. Deposits and unsecured loans form shareholders of the company.
4. Deposits and unsecured loans guaranteed by directors in their personal
capacity.
5. Fixed deposits.
6. Deposits from associate members in the case of mutual benefit from
financial companies.
7. Other deposits.

Exempted Borrowings
1. Borrowings from former managing agents, Secretaries and treasures.
2. Money received from directors.
3. Money from shareholders in the case of private limited companies
4. Security deposits from employees.
5. Money received from purchasing, selling and other agents.
6. Loans from the Govt., and security deposits from customers
7. Inter Corporate deposits
8. Borrowings from bonus and financial institutions
Maturity
Minimum Maturity period 3 months to 6 months maximum period – 5 years
Interests rates on push to deposits
Interest rates on public deposits in the companies are higher than those on bank
deposits and deposits with post office. The level of rates offered by different companies
depends on.
1. Financial position
2. Reputation
3. Management
4. Size
5. Overall profitability
6. dividend rate of the company
Reasons for given of PDS
 Yield differences
 Risk factor
 Limited Banking facilities
Companies preference for PDS
 Cost of deposits
 Availability of alternative sources of funds
 Convenience on raising capital
Maximum Limit
The leasing companies or Investment companies can accept deposits not
exceeding 1.5 times of their net opening fund. AAA credit rating is required.
Procedure for Acceptance of deposits
1. Proper application form
2. Advertisement
- Actual contents of return
- Mode of repayment
- Maturity period
- Interest rate payable
 - Rate interest payable on preamble
- terms and conditions for deposits renewal of deposits
- Any special features
3. Deposits Receipts
- Date, Name, Amount (figure and words)
- Rate of Interest
- Date of Maturity
Must be signed by an officer who can act on behalf of the company in times
regard.
4. Register of Deposits
A seperat4e register has to be maintained.
 EXPORT-IMPORT BANK OF INDIA (EXIM BANK)
-Established on 1st Jan 1982.
Authorized capital Rs. 200 Crores. Central government of India has contributed
Rs.50 crores.
Management of EXIM Bank
Managed by CMD and 17 directors and board constituted by the secretaries of
various government departments like Industry, Commerce, Finance, Banking & financial
institution like IDBI, ECGC, RBI & Other commercial Banks etc.,
Functions
 Planning, promoting, developing and financing export oriented units.
 Underwriting the issue of shares for the export oriented companies
 Financing export or import of machinery or lease basis.
 Granting loans and advances for joint ventures.
 Accepting, discounting bills of exchange relating to export or import.
 Subscribing the shares / securities of EXIM Bank of other countries.
 Providing technical, administrative, financial assistance for the export / import
units.
 Creating data base about exporters.
 Providing re-finance facilities to the commercial banks.
 Providing agency services like
1. Advice on exchange control practices in other countries.
2. Advice and design financial packages for export oriented industries in
India.
3. Exposing Indian exporting companies to Euro Financing
4. Guarding Indian companies on contracts abroad.