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What are the sources of Working Capital

Own Funds
Bank Borrowings
Sundry Creditors
Advances from Customers
Deposits due in a year
Other Current Liabilities

Methods for calculating Working Capital Finance
Refer PPT of How to Assess Working Capital Finance


Equitable & Registered Mortgage
Equitable mortgage means a mortgage which does not satisfy the all the requirements of legal
mortgage as per the law in force but is nevertheless entered into as per agreement. It gives the
necessary right to the mortgagee to file suit for non-payment. Equitable mortgage means
mortgage by deposit of title deeds. Such mortgage had been customary in India for hundreds of
years. English jurisprudence does not recognize this mortgage but English judges sitting in
Indian courts recognised it under the principle of equity. Hence the name equitable mortgage.
It appears in Transfer of Properties Act as mortgage by deposit of title deeds. It is now actually
legal mortgage but such is the force of habit / custom etc that it is still called equitable
mortgage. It is as legal as any other mortgage described in TPA. In English mortgage the
mortgagor sells the property to the mortgagee but mortgagee has the obligation to sell the
property back to the mortgagor if the debt secured by the morttgage is discharged as per its
terms. In equitable mortgage ownership is not transferred but just a property interest is
transferred to the mortgagor and hence the mortgagee cannot sell the property for realization
of unpaid dues without obtaining court's order.
For creating Equitable mortgage, 0.2% is charged by government whereas for creating
Registered Mortgage 0.5% is charged by government. Equitable mortgage is enough while
charge creation however banks insists on registered mortgage in special circumstances like
when there is a problem in chain documents, property is located in another state or land is
given as collateral, etc.

Sensitivity Analysis

A technique used to determine how different values of an independent variable will impact a
particular dependent variable under a given set of assumptions. This technique is used within
specific boundaries that will depend on one or more input variables, such as the effect that
changes in interest rates will have on a bond's price.

Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be
different compared to the key prediction(s).
Sensitivity analysis is very useful when attempting to determine the impact the actual outcome
of a particular variable will have if it differs from what was previously assumed. By creating a
given set of scenarios, the analyst can determine how changes in one variable(s) will impact the
target variable.

For example, an analyst might create a financial model that will value a company's equity (the
dependent variable) given the amount of earnings per share (an independent variable) the
company reports at the end of the year and the company's price-to-earnings multiple (another
independent variable) at that time. The analyst can create a table of predicted price-to-earnings
multiples and a corresponding value of the company's equity based on different values for each
of the independent variables.

Export Credit Agency
A financial institution or agency that provides trade financing to domestic companies for their
international acitivites. Export credit agencies (ECAs) provide financing services such as
guarantees, loans and insurance to these companies in order to promote exports in the
domestic country. The primary objective of ECAs is to remove the risk and uncertainty of
payments to exporters when exporting outside their country. ECAs take the risk away from the
exporter and shift it to themselves, for a premium. ECAs also underwrite the commercial and
political risks of investments in overseas markets that are typically deemed to be high risk.
There is no such thing as a typical export credit agency (ECA). ECAs come in a variety of forms;
some are part of government departments and others are private companies. There are ECAs
that only specialize in short-term credit business and others that only do long-term or medium-
term business.



ECGC Cover
Introduction
The Export Credit Guarantee Corporation of India Limited (ECGC) was established on 30 July
1957 with an objective to provide insurance cover in respect of risks in export trade. These risk
may include loss of money on account of foreign buyer becoming bankrupt or sudden import or
exchange restrictions resulting in stopping of payments etc.
[1]
The Export Credit Guarantee
Corporation of India Limited is a company wholly owned by the Government of Indiabased
in Mumbai, Maharashtra.
[2]
It provides export credit insurance support to Indian exporters and
is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks
Insurance Corporation (ERIC) in July 1957. It was transformed into Export Credit and Guarantee
Corporation Limited (ECGC) in 1957 and to Export Credit Guarantee Corporation of India in
1983.

History
ECGC of India Ltd, was established in July, 1957 to strengthen the export promotion by covering
the risk of exporting on credit.
[3]
It functions under the administrative control of the Ministry of
Commerce & Industry, Department of Commerce, Government of India. It is managed by a
Board of Directors comprising representatives of the Government, Reserve Bank of India,
banking, insurance and exporting community.
[4]

ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The
present paid-up capital of the company is Rs.900 crores and authorized capital Rs.1000
crores.
[5]
Shri Anand Sharma, Minister of Commerce & Industry, Government of India,
inaugurated the first overseas office of ECGC in London on September 17, 2013.

What does ECGC do?
Provides a range of credit risk insurance covers to exporters against loss in export of goods
and services.
Offers Export Credit Insurance for Bankers and financial institutions to enable exporters to
obtain better facilities from them.
Provides Overseas Investment Insurance to Indian companies investing in joint ventures
abroad in the form of equity or loan.

How does ECGC help exporters?
Offers insurance protection to exporters against payment risks
Provides guidance in export-related activities
Makes available information on different countries with its own credit ratings
Makes it easy to obtain export finance from banks/financial institutions
Assists exporters in recovering bad debts
Provides information on credit-worthiness of overseas buyers

Need for Export Credit Insurance
Payments for exports are open to risks even at the best of times. The risks have assumed large
proportions today due to the far-reaching political and economic changes that are sweeping the
world. An outbreak of war or civil war may block or delay payment for goods exported.
A coup or an insurrection may also bring about the same result. Economic difficulties or balance
of payment problems may lead a country to impose restrictions on either import of certain
goods or on transfer of payments for goods imported. In addition, the exporters have to face
commercial risks of insolvency or protracted default of buyers. The commercial risks of a
foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political
and economic uncertainties. Export credit insurance is designed to protect exporters from the
consequences of the payment risks, both political and commercial, and to enable them to
expand their overseas business without fear of loss.
Cooperation agreement with MIGA (Multilateral Investment Guarantee Agency) an arm
of World Bank. MIGA provides:
1. Political insurance for foreign investment in developing countries.
2. Technical assistance to improve investment climate.
3. Dispute mediation service.
Under this agreement protection is available against political and economic risks such as
transfer restriction, expropriation, war, terrorism and civil disturbances etc...

Notable Records
Largest Policy short term Rs.450 crores
Largest database on buyers 8 lakhs
Largest credit limit Rs.80 Crores
Largest claim paid Rs.120 crores
Quickest claim paid 2 days
Highest compensation-Iraq Rs 788 Crores
on 31.3.2012 ECGC has achieved a magical milestone of Rs.1000 Crores of premium
income......well deserved achievement by the efforts put in by All the officers of the
Corporation. Thanks are due to the parent ministry officials, Export Customers and all
Nationalised and other private Banks.....
ECGC now offers various products for the exporters and bankers. If readymade products are
NOT suited to an exporter/banker then ECGC designs tailor made products.
Banks generally ask for exporting companies to go for ECGC cover while doing exports. In many
cases banks may waive such condition. Generally if exports are done to reputed MNCs or
reputed countries like US, Dubai, etc then banks dont insist on ECGC cover. Company should
prove that why ECGC is not required otherwise banks will generally insist on such cover.

Letter of Comfort
A letter issued to a lending institution by a parent company acknowledging support of a
subsidiary company's attempt for financing. A letter of comfort does not imply that the parent
company guarantees repayment of the loan being sought by the subsidiary company. It merely
gives reassurance to the lending institution that the parent company is aware of the credit
facility being sought by the subsidiary company, and supports its decision.
A letter of comfort is typically couched in vague wording, in order to prevent the parent
company from being saddled with a legally enforceable obligation. As such, a letter of comfort
creates a moral obligation for the parent company rather than a legal one. Companies generally
do not furnish letters of comfort unless absolutely necessary. This is because in the worst-case
scenario, where the subsidiary is unable to repay the debt, the parent company may either be
on the hook for the full amount if the letter of comfort was poorly worded, or may have to
incur expensive legal fees to prove that its letter of comfort was not a tacit guarantee of its
subsidiary's loan.

IOUs
An informal document that acknowledges a debt owed. IOU is an abbreviation, in phonetic
terms, of "I owe you." The debt owed does not necessarily involve a monetary value but can
also involve other products. With IOUs being informal, those issuing the IOU are given free
reign when writing and issuing an IOU. Things like time, date, interest, and payment type are
not mandatory but may be implied.
The informal nature of an IOU means that there may be some uncertainty about whether it is a
binding contract, and the legal remedies available to the lender, as opposed to formal contracts
like a promissory note or bond indenture. Because of this uncertainty, an IOU is generally not a
negotiable instrument.
Non-negotiable debt instrument addressed to a creditor, dated, and signed by the borrower.
It serves as an informal acknowledgment of a debt of a specified sum but (depending on the
terminology used) may or may not serve as an evidence of debt in a court.


Asset Backed Securities
Asset backed securities, also called ABS, are pools of loans that are packaged and sold as
securities a process known as securitization. The type of loans that are typically securitized
are credit card receivables, auto loans, home equity loans, student loans, and even loans for
boats or recreational vehicles.
Heres how it works: when a consumer takes out a loan, their debt becomes an asset on the
balance sheet of the lender. The lender, in turn, can sell these assets to a trust or special
purpose vehicle, which packages them into an asset backed security that can be sold in the
public market. The interest and principal payments made by consumers pass through to the
investors that own the asset backed securities. Typically, individual securities will represent
loans with similar maturities and delinquency risk.
The benefit for the issuer of an ABS is that the issuer removes these items from its balance
sheet, thereby gaining both a source of new funds as well as greater flexibility to pursue new
business. The benefit to the buyer usually institutional investors is that they can pick up
additional yield relative to government bonds and augment their portfolio diversification.

Only the most sophisticated individual investor would buy individual asset backed securities
directly, since a great deal of research is necessary to evaluate the underlying loans. However, if
you own a bond mutual fund, particular an index fund, theres a good chance that the portfolio
has a modest weighting in ABS. Currently, no exchange-traded funds are dedicated solely to
asset backed securities.

The maturity of the loans represented in asset backed securities is relatively short, so ABS
typically are less affected by interest rate movements than other bonds with similar maturities.
ABS does carry prepayment risk, which is the chance that investors will experience reduced
cash flows caused by borrowers paying back their loans early. This, in turn, would reduce the
cash flow to the owner of the ABS. Asset backed securities typically carry high credit ratings due
to legal protection set up around the issuing entity, which helps shield investors
from defaults among the original borrowers of the underlying loans or the failure of the issuing
corporations. As a result, the ABS market held up very well during the financial crisis of 2008.


Commercial Paper

Introduction
Commercial paper, in the global financial market, is anunsecured promissory note with a
fixed maturity of no more than 270 days.
Commercial paper is a money-market security issued (sold) by large corporations to
get money to meet short-term debt obligations (for example, payroll), and is backed only by an
issuing bank or corporation's promised to pay the face amount on the maturity date specified
on the note. Since it is not backed by collateral, only firms with excellent credit ratings from a
recognized credit rating agency will be able to sell their commercial paper at a reasonable price.
Commercial paper is usually sold at a discount from face value, and carries higher interest
repayment rates than bonds. Typically, the longer the maturity on a note, the higher
the interest rate the issuing institution pays. Interest rates fluctuate with market conditions,
but are typically lower than banks' rates.

Issuance
Commercial paper though a short-term obligation is issued as part of a continuous
significantly longer rolling program, which is either a number of years long (as in Europe), or
open-ended (as in the U.S.).[1][5] Because the continuous commercial paper program is much
longer than the individual commercial paper in the program (which cannot be longer than 270
days), as commercial paper matures and is paid down the proceeds from the pay-down are
used to buy new commercial paper in the same program the process is referred to as "rolling"
the commercial paper.[6][7][8] Because the program is a continuous rolling one that runs for
many years, it can be viewed as a source for long-term funds for issuers, even though
composed of shorter-term obligations.[7] By having the constituent parts of the Program be no
longer than 270 days, the issuer avoids the cost, delays, and complications of being required to
file a registrations statement.[9]
There are two methods of issuing credit. The issuer can market the securities directly to a buy
and hold investor such as most money market funds. Alternatively, it can sell the paper to a
dealer, who then sells the paper in the market. The dealer market for commercial paper
involves large securities firms and subsidiaries of bank holding companies. Direct issuers of
commercial paper usually are financial companies that have frequent and sizable borrowing
needs and find it more economical to sell paper without the use of an intermediary.
Commercial Paper Line of Credit
Commercial paper is a lower-cost alternative to a line of credit with a bank. Once a business
becomes established, and builds a high credit rating, it is often cheaper to draw on a
commercial paper than on a bank line of credit. Nevertheless, many companies still maintain
bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the
credit that does not have a balance. While these fees may seem like pure profit for banks, in
some cases companies in serious trouble may not be able to repay the loan resulting in a loss
for the banks.
Advantage of commercial paper:
High credit ratings fetch a lower cost of capital.
Wide range of maturity provide more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors with exit options.
Disadvantages of commercial paper:
Its usage is limited to only blue chip companies.
Issuances of commercial paper bring down the bank credit limits.
A high degree of control is exercised on issue of Commercial Paper.
Stand-by credit may become necessary

Commercial Paper Yields
Like treasury bills, yields on commercial paper are quoted on a discount basisthe discount
return to commercial paper holders is the annualized percentage difference between the price
paid for the paper and the par value using a 360-day year. Specifically:
icp(dy) = [Pf P0Pf] 360h
and when converted to a bond equivalent yield:
icp(bey) = [Pf P0P0] 365h

Defaults
Defaults on high quality commercial paper are rare, and cause concern when they occur.

Line of Credit

An arrangement between a financial institution, usually a bank, and a customer that establishes
a maximum loan balance that the bank will permit the borrower to maintain. The borrower can
draw down on the line of credit at any time, as long as he or she does not exceed the maximum
set in the agreement.

The advantage of a line of credit over a regular loan is that interest is not usually charged on the
part of the line of credit that is unused, and the borrower can draw on the line of credit at any
time that he or she needs to. Depending on the agreement with the financial institution, the
line of credit may be classified as a demand loan, which means that any outstanding balance
will have to be paid immediately at the financial institution's request.


Syndicated Loan

A loan offered by a group of lenders (called a syndicate) who work together to provide funds for
a single borrower. The borrower could be a corporation, a large project, or a sovereignty (such
as a government). The loan may involve fixed amounts, a credit line, or a combination of the
two. Interest rates can be fixed for the term of the loan or floating based on a benchmark rate
such as the London Interbank Offered Rate (LIBOR).

Typically there is a lead bank or underwriter of the loan, known as the "arranger", "agent", or
"lead lender". This lender may be putting up a proportionally bigger share of the loan, or
perform duties like dispersing cash flows amongst the other syndicate members and
administrative tasks.

Also known as a "syndicated bank facility".

The main goal of syndicated lending is to spread the risk of a borrower default across multiple
lenders (such as banks) or institutional investors like pensions funds and hedge funds. Because
syndicated loans tend to be much larger than standard bank loans, the risk of even one
borrower defaulting could cripple a single lender. Syndicated loans are also used in the
leveraged buyout community to fund large corporate takeovers with primarily debt funding.

Syndicated loans can be made on a "best efforts" basis, which means that if enough investors
can't be found, the amount the borrower receives will be lower than originally anticipated.
These loans can also be split into dual tranches for banks (who fund standard revolvers or lines
of credit) and institutional investors (who fund fixed-rate term loans).


Escrow Account

An escrow account is a temporary pass through account held by a third party during the
process of a transaction between two parties. This is a temporary account as it operates until
the completion of a transaction process, which is implemented after all the conditions between
the buyer and the seller are settled.

Example 1: In real estate, the fund flows for the development of the project from any source is
kept in the escrow account and the funds utilised for the same are also generated from the
escrow account. Even the buyers of the housing units in a project transfer the home price to
the escrow account and the amount is not transferred to the seller until the project is
completed.

Sometimes the construction linked payments are disbursed to the seller from the escrow
account so that the builder has sufficient funds for completion of the project. Sellers also
benefit from the prioritization mechanism, also called waterfall mechanism, wherein the
priority based payments are made to the concerned parties.

Example 2: In case of Lease Rental Discounting, banks insist the company to open a separate
account called escrow account. The rent received by the company is directly deposited into this
account and banks withdraw the money from this account to the extent of EMI. Note that
company can withdraw only the excess amount after EMI amount is deducted by bank. This
provides banks with additional security.

Corporate Finance

Example 3: In case of BOT projects, an escrow account is to be opened by the company &
whatever revenues are collected by the company from such project are deposited into this
account and banks EMI is first deducted, which provides additional safety for the banks.

Note that peculiar feature of Escrow account is that though the account is in the name of the
company still the banks can deduct their EMIs on their own from this account. Also note that
terms and conditions initially agreed upon while opening the account cannot be changed even
by the bank, company or any other party involved. Terms and conditions can be changed only if
all parties to such account come together and agrees to change such terms & conditions.


Nostro Account

A bank account held in a foreign country by a domestic bank, denominated in the currency of
that country.
A Vostro account is one in which the domestic bank (from the point of view of the currency in
which the account is held) acts as custodian or manages the account of a foreign counterpart.

A Nostro is our account of our money, held by you.

A Vostro is your account of your money, held by us.


Earners Foreign currency account (EEFC account)

Exchange Earners' Foreign Currency Account (EEFC) is an account maintained in foreign
currency with an Authorised Dealer i.e. a bank dealing in foreign exchange. It is a facility
provided to the foreign exchange earners, including exporters, to credit 100 per cent of their
foreign exchange earnings to the account, so that the account holders do not have to convert
foreign exchange into Rupees and vice versa, thereby minimizing the transaction costs. All
categories of foreign exchange earners, such as individuals, companies, etc. who are resident in
India, may open EEFC accounts. An EEFC account can be held only in the form of a current
account. No interest is payable on EEFC accounts.


Cash Reserve Ratio (CRR)

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers,
which commercial banks have to hold as reserves either in cash or as deposits with the central
bank. CRR is set according to the guidelines of the central bank of a country.

The amount specified as the CRR is held in cash and cash equivalents, is stored in bank vaults or
parked with the Reserve Bank of India. The aim here is to ensure that banks do not run out of
cash to meet the payment demands of their depositors. CRR is a crucial monetary policy tool
and is used for controlling money supply in an economy.

CRR specifications give greater control to the central bank over money supply. Commercial
banks have to hold only some specified part of the total deposits as reserves. This is called
fractional reserve banking.


Statutory Liquidity Ratio (SLR)
Statutory Liquidity Ratio refers amount that the commercial banks require to maintain in the
form of gold or govt. approved securities before providing credit to the customers. Here by
approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio
is determined and maintained by the Reserve Bank of India in order to control the expansion of
bank credit. It is determined as percentage of total demand and time liabilities. Time Liabilities
refer to the liabilities, which the commercial banks are liable to pay to the customers after a
certain period mutually agreed upon and demand liabilities are such deposits of the customers
which are payable on demand. Example of time liability is a fixed deposits for 6 months, which
is not payable on demand but after six months. Example of demand liability is deposit
maintained in saving account or current account, which are payable on demand through a
withdrawal form of a cheque. SLR is used by bankers and indicates the minimum percentage of
deposits that the bank has to maintain in form of gold, cash or other approved securities. Thus,
we can say that it is ratio of cash and some other approved liabilities(deposits). It regulates the
credit growth in India
The liabilities that the banks are liable to pay within one month's time, due to completion of
maturity period, are also considered as time liabilities. The maximum limit of SLR is 40% and
minimum limit of SLR is 23% In India, Reserve Bank of India always determines the percentage
of SLR. There are some statutory requirements for temporarily placing the money in
government bonds. Following this requirement, Reserve Bank of India fixes the level of SLR. At
present, the minimum limit of SLO that can be set by the Reserve Bank is 23% AS ON January
2014. A reduction of SLR rate looks eminent to support the credit growth in India.
The main objectives for maintaining the SLR ratio are the following:
To control the expansion of bank credit. By changing the level of SLR, the Reserve Bank of
India can increase or decrease bank credit expansion.
To ensure the solvency of commercial banks.
To compel the commercial banks to invest in government securities like government bonds.

If any Indian bank fails to maintain the required level of Statutory Liquidity Ratio, then it
becomes liable to pay penalty to Reserve Bank of India. The defaulter bank pays penal
interest at the rate of 3% per annum above the Bank Rate, on the shortfall amount for that
particular day. But, according to the Circular, released by the Department of Banking
Operations and Development, Reserve Bank of India; if the defaulter bank continues to default
on the next working day, then the rate of penal interest can be increased to 5% per annum
above the Bank Rate. This restriction is imposed by RBI on banks to make funds available to
customers on demand as soon as possible. Gold and government securities (or gilts) are
included along with cash because they are highly liquid and safe assets.
The RBI can increase the SLR to contain inflation, suck liquidity in the market, to tighten the
measure to safeguard the customers money. In a growing economy banks would like to invest
in stock market, not in government securities or gold as the latter would yield less returns. One
more reason is long term government securities (or any bond) are sensitive to interest rate
changes. But in an emerging economy interest rate change is a common activity.
The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the
liabilities of the bank which are payable on demand anytime, and those liabilities which are
accruing in one months time due to maturity) of a bank.
SLR rate = (liquid assets / (demand + time liabilities)) 100%
This percentage is fixed by the central bank. The maximum and minimum limits for the SLR are
40% and 23% respectively in India.
Difference between CRR & SLR
Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of
banks that they can pump in economy
SLR restricts the banks leverage in pumping more money into the economy. On the other hand,
CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the
Central Bank to reduce liquidity in banking system. Thus CRR controls liquidity in banking
system while SLR regulates credit growth in the country.
The other difference is that to meet SLR, banks can use cash, gold or approved securities
whereas with CRR it has to be only cash. CRR is maintained in cash form with central bank,
whereas SLR is money deposited in govt. securities. CRR is used to control inflation.

Corporate Finance

Definition
1) The financial activities related to running a corporation.

2) A division or department that oversees the financial activities of a company. Corporate
finance is primarily concerned with maximizing shareholder value through long-term and short-
term financial planning and the implementation of various strategies. Everything from capital
investment decisions to investment banking falls under the domain of corporate finance.
Description
Among the financial activities that a corporate finance department is involved with are capital
investment decisions. Should a proposed investment be made? How should the company pay
for it; with equity or with debt, or combination of both? Should shareholders be offered
dividends on their investment in the company? These are just some of the questions a
corporate financial officer attempts to answer on a consistent basis. Short-term issues include
the management of current assets and current liabilities, inventory control, investments and
other short-term financial issues. Long-term issues include new capital purchases and
investments.


Asset Finance
Asset finance is a loan that is used to obtain equipment.
Whenever organisations invest in tangible assets - anything from office equipment to
manufacturing plants, from cars to a fleet of aircraft - they usually need an affordable, secure
means of finance.
Thats exactly what the asset finance sector is all about. In fact, Asset Finance is the third most
common source of finance for businesses, after bank overdrafts and loans. It is also of growing
importance in the public sector.

Mandated Lead Arranger (MLA)
Financing for a major financed project will be arranged by a bank or group of banks termed the
lead arranger(s).
The mandated lead arranger (MLA) generally has the leading role in this financing stage of a
project. He often underwrites the financing, then handles syndication or builds up a group to
underwrite the full amount and syndicate. As a requirement of its mandate from the project
sponsor, the MLA will be committed to raise the complete debt financing, which for a major
project could be many hundreds of millions of dollars. But, commercial lenders typically do not
want to take say more than about US$50 million of debt for a particular project and will want to
pass some of the debt, and hence some of the risk, to other lenders. The process of selling the
debt is called syndication.
In large deals with multiple tranches, there may be an arranger for all, or there may be a
separate arranger for each tranche. During the syndication process one of the banks may fulfill
the role of book runner. This role of the book runner is simply to keep a record of how much
debt each of the potential syndication banks wants to take.
The MLA is paid either through an arranger fee, through skimming or through structuring fees.

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