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    Types of Bank Finance in India

    ?CashCredit:

     

    Banks 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. Interest is charged not on the sanctioned amount but on the utilized amount.

     

    ?Corporate Term Loan:

     

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always mature between one and 10 years.

     

    Banks tend to classify into two:

     

    ?Intermediaries

     

    ?Longterms

     

    ?Intermediate-term loans usually run less than three years, and are generally repaid in monthly instalments from a business's cash flow.

     

    ?Long-termloans can run for as long as 10 or 20 years and include additional requirements such as collateral and limits on the amount of additional financial commitments the business may take on.

     

    This helps the company in funding

     

    ?Ongoingbusiness expansion,

     

    ?Repayinghigh cost debt,

    ?Technology up gradation,

    ?R&Dexpenditure

    ?Implementing early Retirement Scheme

    ?Supplementing working capital

     

    The Corporate term loan has also structured under FCNR(B) scheme as well, with the option of switching the currency denomination at the end of the interest periods.

     

    Advantages:

     

    ?Ofglobalinterest rates trends vis-à-vis domestic rates to minimize the debt cost.

     

    ?Maycarryfixed/floating rates

     

     

     

     

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    ?TradeFinance:

     

    Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks or financial institutions can facilitate these transactions by financing the trade.

     

    Facilities provided by Bank:

     

    ?Intermediaries – banks can act as intermediaries for documents & funds flow in international transactions as transfer through banks is more secure.

     

    ?Pre-shipment loans – this is working capital for purchasing raw materials, processing & packaging of export commodities. Most common form is packing credit where the exporter gets concessional interest rates.

     

    ?Post-shipment loans – these loans help exporters bridge their funding requirements when they export on deferred payment basis i.e. credit.

     

    Examples:

     

    • Bill Discounting o Forfaiting

     

    o Factoring

    o Bill discounting & factoring can also happen for domestic transactions.

    o Bank has recourse to the seller since in case of non-payment by the buyer after credit period expiration; the seller must compensate the bank.

     

    o Bill discounting is always with recourse.

    o In factoring, a bank can discount bills with/without recourse & even with partial recourse. This is called Assignment of Receivables.

     

    ?International trade payment mechanisms:

     

    o Letter of credit

     

    o Cash in advance – buyer pays seller before shipment of goods.

    • Open account or credit – this means that payment is made on an agreed upon future date. This is very risky for a seller unless he has very strong relationship with the buyer or the buyer has excellent credit rating. There are no guarantees & collecting payment often becomes a tedious

     

    affair.

    • Cash Management Services (CMS) – It has no credit risk for the bank. It is a pure administrative service for the corporate. The client maintains only one account with the bank. Cash management encompasses receivables management, payables management & liquidity management. Banks are using better technologies for cash management by connecting to ERP systems.

     

     

     

     

     

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    Types of Bank Finance in India

     

     

    SBS Interns' Digest                                                                                                                          www.sbsandco.com/digest

     

    ?Letterof Credit:

     

    A letter of credit is an also called Documentary Credit (DC). The bank lends its guarantee of payment to the buyer. The bank also guarantees payment to the seller provided he ships the goods & complies with the terms of agreement. Here seller takes credit risk on the bank instead of buyer.

     

    Types of Letter of Credit:

     

    ?Firststage-

     

    • Recoverable letter of credit o Standby Letter of credit

     

    o Irrecoverable letter of credit

     

    ?Secondstage-

     

    • Confirmed letter of credit o Unconfirmed letter of credit o Back-to-Back letter of credit o Clean letter of credit

     

    ?Structured Finance:

     

    The Financing techniques tailored to special needs or constraints of issuers or investors& Solving problems that are not easily solved by conventional financing techniques.

     

    It is a sector of finance to transfer risk by using complex legal and corporate entities.

     

    The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools.

     

    Examples:

     

    ?ProjectAppraisals

     

    ?Underwriting/Syndication of corporate loans & project loans ?Secondarypurchase and sale of loan products ?Mergers

     

    ?Hedgingofcurrency & interest rate exposures

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