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PRODUCTS FOR WORKING CAPITAL FINANCE

The Cycle
Cash Cash Raw materials purchased Finished Goods sold Bills receivable Bills Payable

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Work in process Value added Finished Goods Expenses Incurred

Working Capital Cycle

Raw Material Work in Process Finished Goods Receivables Cash Payables Bank funding is available at every stage (except of course cash!)
Inventories Receivables Other Current Assets Cash & Bank Balance Total Current assets 9436 7414 679 3252 20781

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Sundry Creditors/ Bills Payables/ Acceptances Other current liabilities Bank borrowings for working capital

5387 9397 5344

Trade transaction analysed

Enquiry/negotiation/Order Goods/Service Delivery

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Seller

Buyer
Payment immediate/delayed

Will buyer refuse to take delivery? Will buyer pay on time/at all? Will buyers country run into problems?

Will seller deliver at all? Will seller deliver on time ? Will quality be as agreed?

Financing Purchases
Letters of Credits Facilitate transaction and/or finance transaction Discounting of suppliers Bills

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Financing Inventory
Cash Credit / Overdraft Short Term Loans Commercial Papers Pre shipment Credit

Cash Credit/ Working Capital Demand Loan

Most Prevalent in the country Unique to Indian Conditions Various methods of assessment Primarily against hypothecation of Inventory and receivables Working Capital Demand Loan

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Financing Sales
Sales Bills / Supply Bills Discounting Overdraft against Collection Bills Invoice Financing Factoring Similar Products for export sales

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Structure of Limits CC against Stocks, Purchase bills etc CC against book debts, sales bills LC for Raw materials Packing Credit Foreign Bills Stock Level Receivables Level Level of purchases through LC, Lead period, Usance period Stock level for Exports Export receivable Level

Term Loan To Augment Net working Capital

Low net working capital Good asset coverage Good DSCR Medium Term Loans Security Second Charge on Fixed Assets

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Adhoc Short Term Loans

Unforeseen requirements Temporary Cash flow requirements Importance of Takeout

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Commercial Papers
Eligibility Terms Mode of Issue Eligible Investors

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Bills Discounting
Negotiable Instruments Clean and Documentary Bills Supply Bills Invoice Financing Why Banks prefers Bills

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Bill of Exchange
Mumbai, 30th June, 2011 At 60 days after sight Amount Rs. 100,00,000 pay against this sole bill of exchange

To the order of ourselves the sum of Rupees one crore only For value received

To:
M/s Atharva Steel Limited Palacia, Indore, MP

For and on behalf of Steel Authority of India Finance Director/Manager

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Factoring
Extensions of Invoice discounting Assignment of receivables With / Without / Partial Recourse Balance sheet management

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Export Finance
Facilitating production for exports at mandated interest rates and tenors. Pre Shipment Post Shipment

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Pre shipment : Packing Credit

Against firms orders / Letter of Credit In Rupees or Dollars Interest concessions? Up to 180 days/270 days To be converted into Post Shipment finance ECGC cover

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Post Shipment Finance

Bill Discounting under L/c or Otherwise C/C against collection Bills Facility in Rupee / Foreign Currency Concessional Interest Rate ECGC cover

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Suppliers Credit / Buyers Credit

Arranged for importers by exporters bank abroad Or arranged by Importers Banks abroad with their foreign Correspondent Bank Against Letter of credit of Importers Bank Low Finance Cost Can be done synthetically

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Factoring & Forfaiting of Export Receivables

Short Term Receivables: Factoring Medium Term Receivables: Forfaiting Bank abroad takes credit risk on the Importers by Co-accepting Export Bills Bank in India take performance risk on exporters Discounts Co- accepted Bills Similar process of forfaiting

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Cash flow/ Receivable Buyout

Discounting of certain or near certain cash flows Similar to securitisation of future receivables, involves Performance & Credit risk Credit risk transfer to buyers if without recourse

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Balance sheet Impact

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Balance Sheet of ABC Ltd. Liabilities

Networth Term borrowings Current Liabilities Creditors for supplies Peovisions Bank Borrowings Total CL Total liabilities

Rs

After buy-out Assets 100 100 Fixed Assets 200 200 Current Assets Inventory Receivables Cash Other Current Assets Total CA

Rs

After buy-out 290 290

30 20 50 100 400

30 20 20 70

50 40 10 10 110 400

50 10 10 10 80 370

370 Total Assets

Tol/TNW Current Ratio

3 1.10

2.7 Improved by 10% 1.14

Credit Enhancement Mechanism

Cash Collateralisation Over Collateralisation Cherry Picking Buyback of delinquent portion Credit Support of a Bank Use of Escrow accounts

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Securitisation
The process of conversion of illiquid loans into tradable, Bankruptcyremote securities An issue of securities backed by specific assets

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Transaction
Trustee 1 2 3 4 5 n Originator Sources the assets Bank NBFC etc. Consideration Pooled Assets SPV buys assets and Issues Securities Backed by The pool
Rating

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Rating Agency Obligors

Tiered Securities

Consideration

Investors Class I

Investors Class II

Investors Class III

Structured Finance

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Why Structured Finance?

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Progressive Structure Development

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Key Success Factors

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Change of Picture.

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Up to early 90s corporates pursued aggressive capacity expansion & diversification Everything produced was sold irrespective of quality/costs. Speculative gains were driving use of working capital. This stopped after liberalisation made cost competitiveness critical and so the demand for Term loans and working capital declined. Five years from 2002 saw up-turn in trade cycle but from second half of year 2008 recession took a grip. Through fiscal means Govt. has ensured soft landing but groth has suffered. Real estate and export led bubble has burst Regulator is forced to prefer recession stimulus over inflation A conflict is clearly seen in regulators twin role as monetary authority and Govt. debt manager

Current trends.
Efficiency in use of working capital is increasing significantly with use of technology and better practices. Banks are moving money faster. Banks IT systems are talking to customers ERP systems. Outsourcing is used increasingly to gain cost competitiveness - Banks are managing receivables /payables of clients. With rise in inflation, inventory and receivable levels are going up and so also the need for bank finance. Suppliers supply goods not credit. Banks prefer to provide cash-flow based structured rather than vanila finance against current assets.

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Current trends.
Risk unbundling and risk pricing is the KEY channel financing is the buzz word after Retail Financing.. For a large manufacturing company, banks finance suppliers on one hand and dealers on the other. Various kind of comforts offered to the bankers in place of security through transaction based structuring. Transaction history is an important guide.

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Letters of Credit

Bill of Lading

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Request for L/c

s en Op

an

C L/

Letter of Credit

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Letter of credit is an arrangement whereby a bank (Issuing Bank) acting at the request and in accordance with the instructions of a customer(applicant) is to make payment to or to the order of a third party (beneficiary) or is to pay, accept or negotiate bills of exchange drawn by the beneficiary or authorises such payments to be made or such drafts to be paid, accepted or negotiated by another bank against stipulated documents, provided that the terms and conditions of the LC are complied with.

PARTIES TO A LETTER OF CREDIT

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A. Applicant - Applicant is normally the buyer of the goods who has to make payment to the seller - beneficiary. B. Issuing Bank - Issuing bank is one which issues the credit i.e. it is the bank which undertakes to make the payment to seller against documents. C. Beneficiary - He is normally the seller of the goods who has to receive payment from the Applicant. He gets payment on presentation of stipulated documents complying with the terms and conditions of the LC.

D. Advising Bank - Advising bank advises the credit to thede-Risk de- -Risk dede beneficiary, thereby assuring the genuineness of the credit. It is normally located in beneficiary's territory. E. Confirming Bank - Confirming bank adds its guarantee to the credit opened by another bank, thereby,undertaking the responsibility of payment / negotiation / acceptance under the credit, in addition to that of the issuing bank. F. Nominated Bank - The bank which is nominated and authorised by the Issuing bank to pay, to incur a deferred payment undertaking, to accept draft (s) or to negotiate. In a freely negotiable credit any bank is a nominated bank. F. Reimbursing Bank - It is the bank, authorised to honour the reimbursement claim in settlement of negotiation acceptance / payment lodged with it by the paying , negotiating or accepting bank.

TYPES OF LETTER OF CREDIT

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A. Revocable / Irrevocable Letter of Credit LC which can/can not be amended or canceled by the issuing bank at any time prior to its expiry without notice to the beneficiary. B. Confirmed Letter of Credit - A confirmed letter of credit is an irrevocable LC to which another bank (usually the advising bank) has, at the issuing bank's request, added its confirmation constituting a definite undertaking of the former.

D. Revolving Letter of Credit L/c providing for an automatic renewal of the amount for which the credit is opened. E. Transferable Letter of Credit - A transferable LC is a credit which the beneficiary has the right to give instructions to the negotiating bank to make the credit available in whole or in part to one or more third parties. F. Back-to-back Credit - A Back-to-back credit is an ancillary letter of credit which the beneficiary uses to support another LC opened by the seller's bank, favouring his supplier.

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Standby Letter Of Credit

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Another Classification of Letters Of Credit

G. Sight Credit - It is a credit payable against presentation of requisite documents to the designated paying bank. H. Usance Credit - It calls for drawing of drafts at stated usance period requiring acceptance and/or payment by drawee at the end of the usance period I. Acceptance Credit - It is similar to deferred credit except for the fact that in this credit drawing of a usance draft is a must. J. Deferred Payment Credit - It is a usance credit where payment will be made by designated bank, on respective due dates, as per stipulations of the credit, without the drawing of drafts.

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Guarantees

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Guarantee is an abstract promise to perform, independent of the underlying transaction. The guarantee is used to secure the performance of a specific obligation, irrespective of whether the performance is owed or not. Performance / Bid Guarantees Financial Guarantees Shipping Guarantees Guarantees under EPCG scheme Deferred Payment Guarantees Standby Letter Of credit.

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Structure of Limits cont.. Bid Bond Guarantee Number & amount of tenders expected to be participated, normally 5% of contract vale Number & value of contracts. Normally 10% of value of contracts

Financial/Performance BG

Credit decision framework

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Finance analysis Financial statements Business information Risk rating Portfolio Credit Risk management Business plans & forecasts

Covenants
Qualitative : an undertaking of a non quantitative nature designed to protect the lender against loss. Restriction on investment in subsidiaries Quantitative is a measurable benchmark standard of performance typically financial performance or constraint to which borrower agrees to be bound. Restrictions on fresh secured borrowings from other sources Minimum current ratio requirement Minimum net-worth requirement/Max TOL-TNW ratio

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Restrictive/Negative : Negative pledge Cross default a material adverse change clause.

Events of Default
Failure to pay interest when due, Insolvency of borrower Cross default by borrower

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Material adverse change in borrowers business like a founder promoter selling out partially/fully Breach of warranty/conditions of contract If a warranty in agreement of a revolving credit arrangement like cash credit is found to be false, further drawings can be stopped by the lender. Breach of warranties may give the bank a legal remedy for damages too.

A Public Limited Company

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Members (share holders) M.A & A.A. Chairman & MD Board of Directors Top Management
Other levels of management and others

Legal Issues and Documentation

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Memorandum & Articles of Association Doctrine of Constructive Notice Doctrine of Indoor Management Borrowing Powers Charge Creation & Registration Board Resolution Power of Attorney Holders

Credit Administration
Independent Function- Separate from Business Documentation and security creation Preparation and dissemination of periodic management reports to Credit committee Regulatory MIS Events of Default tracking and reporting to Corporate Office Audit compliance and timely disposal of reports

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Remedial Management
Early warning signals Better immediately than later Need to take decision away from relationship manager Loan Review Mechanism Remedial management Group