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

Fixed Capital: Cash purchasing /stocking for raw
required for acquiring fixed materials, payment of operational
assets such as land, expenses; for financing the interval
equipments building, etc. between the supply of goods and
receipt of payment post sales i.e.
during the operating cycle
V.A. Product and Services Bouquet

The products offered can be broadly classified into Fund based and Non-Fund based

V.A.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 .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, 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
.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 .

V.A.1.1) Overdraft:

When a customer maintaining a current account is allowed by the bank to draw more than the credit
balance in the account, such a facility is called an “overdraft “facility .At the request and the
requirement of customers temporary overdrafts are also allowed .However, against certain securities,
regular overdraft limits are sanctioned .Salient features of this type of account are as follows.
• 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.

• Overdrafts are generally granted against the security of government securities, shares &
debentures, LIC policies and bank’s own deposits etc and also on unsecured basis.

• Temporary overdrafts should be allowed only on written request of the customer. A letter of
recording should be obtained from a customer when a temporary overdraft is granted to him.
However, 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.A.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 .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.e. stocks, book debts etc .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. , into the account. Besides this,
the facility of frequent and unrestricted transactions is available .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. 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.

• Running Account: A Cash-Credit account is an active running account. There are no restrictions
as regards number of debit and / or credit transactions in the account. It is expected that all the
sales /purchase /other transactions of the borrower should be routed through this account. In fact
a healthy churn rate in the account to be encouraged, the account may move freely between
debit and credit balances as well.

• Repayment: Cash-Credit facility is technically repayable on demand and there is no specific

date of repayment. Quarterly behaviour scoring shall indicate the health of the account and an
annual review to be conducted to decide on account renewal.

• Application of interest and service charges :

1. Interest is calculated on daily product basis, applied on calendar monthly basis

2. For credit balance lying in cash-credit account, no interest is payable as cash-credit is in the
nature of current account.
 3. Service charges as per current account rules are to be levied.

V.A.1.3) Demand Loan:

A demand loan is a loan sanctioned for a period upto 35 months repayable on demand. The loan is
disbursed by way of single debit to the account. The amount needs to be repaid in instalments, as per
terms of sanction.
• 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, cheque bounce and other
sundry /incidental charges.

• Further Credits: No restrictions on credits in the account as they would go towards repayment
of the demand loan outstanding.

• Repayment: Although all demand loans are payable on demand, repayment schedule is fixed by
way of Equated Monthly Instalments. Lump sum payments also to be allowed.

• Interest: Interest is calculated on debit products on daily products basis and applied on calendar
month basis.

• Granting of additional loan : A fresh loan account should be opened for every new advance
sanctioned and a new DP Note be taken .When a further loan/facility is proposed to be
sanctioned against the same security or to the same borrower , the existing facility nature and
the behaviour thereof must be documented in the CAM .

V.A.1.4) 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 .
• Period: A term loan is granted for a period exceeding 3 years but not exceeding 5 years.

• Purpose: Term loans are generally granted to meet the need of capital expenditure i.e. acquiring
of fixed assets like land, building , plant & machinery etc for the purpose of setting up of new
units or expansion , modernisation ,renovation ,replacement of existing units , adding more bays
 in the service station , more floors in a departmental store etc.

• Repayment: A monthly repayment schedule is fixed and accordingly loan is repaid in

instalments.

• Interest: Interest is as per the EMI schedule calculations.

• Security: Term Loans are granted against the security of immovable property, plants &
machinery, vehicles, acceptable liquid securities, etc.

V.A.1.5) Bills purchase/Discounting:

These represent advances against bills of exchange drawn by the customers on their clients .Bills are
either purchased or discounted .Demand bills are purchased and usance bills are discounted .Bills may
be either clean or documentary . Bills accompanied by title to goods i.e. R/R, MTR, etc are
documentary bills. Bills without such documents are known as clean bills. Documents under bills are
either deliverable against acceptance or against payment.

A seller of goods draws a bill of exchange (draft) on buyer (drawer), as per terms for the supplied. Such
bills can be routed through the banker of the seller to the banker of the buyer for effective control.
1) Clean & Documentary bill:
• When documents to title to goods are not enclosed with the bill, such a bill is called a
“Clean Bill “. When documents to the title to goods along with other documents are
attached to the bill , such a bill is called “Documentary Bill “

• Documents, the due possession of which give the title to the goods covered by them such as
RR/MTR, bill of lading, delivery orders etc. are called documents to title to goods.

• Cheques and drafts are also examples of Clean Bills.

2) Demand & Usance Bill

When the bill of exchange either clean or documentary is made payable on demand or sight, such a
bill is called Demand Bill. The buyer is expected to pay the amount of such bill immediately at
sight .If such a demand bill is a documentary bill, then the documents including documents title to
goods are delivered to the buyer only against payment of the bill.(Documents against payment –DP
 Bills)
When a bill, either clean or documentary is drawn payable after certain period or on a specific date,
the bill is called Usance Bill. Such bill is presented to the buyer one for Acceptance, when he
accepts to pay the bill on due date and on due date the bill is presented again for Payment. In case
of documentary usance bill, 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.
A) Bill Purchase facility is extended against clean demand bills like cheques /drafts/bills of
exchange/hundis and demand documentary bills, 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. The bank in turn sends the bills for collection, preferably to its
own branch at the place of drawee or to its correspondent bank or to the buyers (drawee’s)
bank.

B) Bills discounting facility is extended against usance bills. In such cases, the seller tenders the
usance bill drawn by him usually along with documents to title to goods; to his banker who
discounts the bill i.e. levies discount charges for the unexpired portion of the duration of the
bill and credit the balance amount to the seller’s account. 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 ,
with instructions to release the documents to title against acceptance and thereafter ,to recover
the bill amount on due date . Sometimes the accepted usance bills are also tendered and
discounted by the bank.

V.A.1.6) Export Finance:

Export Finance is broadly classified into:
A. Pre-shipment finance

B. Post-shipment finance

Financial assistance extended prior to the shipment of goods shall fall under pre-shipment finance
whereas; financial assistance extended subsequent to the shipment of goods shall fall under the preview
of Post-shipment Finance.
Export finance is governed , by and large by RBI directives, Exim –Policy etc. and , therefore ,
knowledge of the Exchange Control, Trade Policy procedures and directives of trade control authorities
, international trade practices , particularly those of International Chamber Of Commerce (ICC), Paris ,
etc. is very much essential .It is an additional responsibility on the part of lending banker to keep in
mind all such rules and regulations , over and above usual practices , procedures and principles of
lending .
V.A.2 Non-Fund Based

There are certain types of advances which do not involve deployment of funds at least in the initial
stage. These are called Non-Fund Based Credit. A performance Guarantee issued by the bank on behalf
of a customer to third party for fulfillment of terms of contract, 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. Even though funds are not involved at the initial stage, bank is taking risk, and on failure of its
client to fulfill terms of guarantee or letter of credit, we will have to pay out funds to the beneficiary on
behalf of the customer and recover it later from him.

V.A.2.1) 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. A Contract of Guarantee should be
distinguished from Contract of Indemnity in the latter case, party promises to save another person from
loss caused to him by the conduct of the promissory or by any other person.

We come across a Guarantee in two capacities .One as a beneficiary when somebody guarantees the
payment of debt of bank‘s borrower in case of default. The other as a guarantor; when the bank itself
promises to pay the dues or discharge the liabilities of its customers in favour of a third party. While in
the former case, the Bank is the creditor, in the latter case, Bank’s liability is co-extensive with that of
the debtor.

The need for such guarantees to be issued by banks arises due to the business and financial requirement
of Bank’s constituents. There are many situations wherein, 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. Thus, the
bank by issuing such guarantees steps into the shoes of the constituent and assumes the financial risk
and responsibility attached to it.

Typically, the beneficiaries of Guarantee are generally Statutory /Government authorities, Public Sector
Undertakings, Overseas suppliers of goods /machinery on differed payment terms, Reputed institutions /limited
companies /firms.

Types of Guarantees: Guarantees issued are broadly classified into 3 categories Financial,
Performance and Deferred Payment Guarantees.

Financial Guarantees:
In case of financial guarantees, the bank guarantees the customer’s financial worth, credit worthiness
and his capacity to take up financial crisis. Therefore, guarantee issued in respect of constituents
liability, such as guarantees favouring tax/customs/excise/court authorities in respect of disputed
claims, payment of taxes, customs and excise etc .will come under the classification of financial
guarantees. While issuing such guarantees one needs to be sure about the financial strength /liquidity of
the party.
Guarantees covering security deposit/earnest money/advance payment /mobilisation advance etc.
would come under this category .Similarly, guarantees covering payment for supplies to be lifted by
parties will also be treated as financial guarantees.

Performance Guarantees:
Performance guarantees are issued on behalf of constituents guaranteeing their performance as per the
contracts entered into, performance of machineries supplied, due discharge of other contractual
obligations undertaken etching such guarantees, Bank does not undertake to perform the obligations
undertaken by the customer under the contract, 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. Hence, in the event of default of the customer and on being notified to that effect,
the Bank will make payment under the guarantee.
Deferred payment Guarantees:

Deferred Payment Guarantee, which is a financial guarantee, 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. This also helps the supplier to improve
his cash flow by discounting these bills from his bankers.

In case of capital goods / machinery /heavy vehicles/tractors/trailers, the purchaser has to raise large
amount of resources to but these items. For this the intending purchaser may approach his bank for
term loan repayable over a medium/long term in instalments. It is possible that due to various
constraints like mismatch in resources /deployment period, funds crunch etc.bank may not be able to
sanction term loans.

Under such circumstances, the borrower /intending partner may request the supplier to extend him long
term credit. 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. The supplier will also change interest on the credit
extended and such interest may also be recovered in instalments along with principal.

However, the supplier may not agree to extend such credit, unless he is satisfied about the capacity of
the purchaser to pay the instalments on due date. For this, he may insist on the purchaser’s bank
guaranteeing the repayments.

The purchaser may then approach his bankers to guarantee the repayment on due dates. 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 .Here such a guarantee is
called Deferred Payment Guarantee.

Bid Bond Guarantees:

Whenever a constituent participates in an international tender/bid, he would be required to furnish a bid
bond guarantee. Such tenders would be of large magnitude and the completion may involve
considerable time. Therefore requests for bid bond should be examined in totality as in the case of
financing of large projects/contracts. Besides the viability of the project/contract, 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.

It should be noted that once the bid is accepted, the party would require various facilities such as
performance guarantee for earnest money deposit, guarantee in respect of advance payment received,
etc. Further, working capital facilities would also be required for completion of the contract/project on
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. 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. Therefore at this stage it is not proposed to issue bid bond guarantee under this
programme

V.A.2.2) Letters of Credit :

Ideally any seller of goods/services would like to receive payment before the delivery of goods/services
to buyer. Similarly the buyer would also like to ensure that the goods/services bought are as per his
specifications and deliveries are effected in time, before parting with the money .If the buyer and the
seller are two different , far away stations ,both the factors cannot be satisfied simultaneously.

As compromise services of third party as an intermediary are utilised .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 .Such an assurance letter of credit.

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.

Thus the credit is made available to the seller against delivery of certain specified documents. When
the credit stipulates payment of money when the documents are presented to the paying bank, the L/C
is called a Document against payment .If the credit stipulates the delivery of documents by the seller
against acceptance and that payment will made on the due date , the L/C is called usance L/C or D/A
L/C .
Parties to a letter of credit:

Following are the parties to a letter of credit.

• 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.

• Seller/Beneficiary: The party to whom the credit is addressed (seller or supplier of the
goods/services).

• Negotiating Bank: Opening bank’s branch or another bank that negotiates the documents.

• Conforming Bank: The bank adding conformation to the 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.

• 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.

• Revocable Credit: A credit that can be cancelled or amended at any time without the prior
knowledge of the beneficiary.

• 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 .In practice ,LC are
almost always irrevocable .

• Confirmed Credits: Where credits carry the confirmation of the advising bank. It constitutes a
definite undertaking of such conforming bank in addition to that of the opening bank.
 • Transferable Credits :A transferable Credit is a credit under which the beneficiary (1 st
beneficiary)may request the bank authorised to pay, incur a deferred payment undertaking
,accept or negotiate(the transferring bank ) or in the case of a freely negotiable credit , the bank
specifically authorised in the credit as transferring bank , to make the credit available in whole
or in part to beneficiary (is)second beneficiary/beneficiaries.

• Acceptance Credits: Where the payment is to be made on the maturity date in terms of the
credit.

• 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, 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, and that it is
anything but “small” and as demanding as ever, and the needs are constantly evolving. In keeping with
this requirement, Business Banking offers a bouquet of financial services to meet the clients’
customized financial requirements. The Business Banking division vertical was set up to cater to the
growing demands of capital or working capital requirements of SMEs. The business banking division
of the bank is mainly engaged in sourcing the assets for the bank. 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, particularly in SMEs and Micro Enterprises, 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. 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, financial consultants and DSAs having SME clients. This channel would help the bank to
reach out directly to the prospective customers. Such connectors shall refer HDFC bank’s products to
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, Business Banking division devised a team of Management
trainees to initiate discussions with such financial advisors / consultants / potential clients. In
order to develop CONNECTORS’ knowledge and confidence in HDFC’s products and services,
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.

To implement the aforesaid thought process, our special purpose team of management trainees
was appointed for a stipulated period of two months. The execution stages can be outlined
hereafter.
 Declaration

I, Ritesh Dineshbhai Parikh, student of Welingkar Institute of Management Studies, roll no.
DPGD/JL08/1046, PGDBA(DLP) – Marketing (2009-10), 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.

Ritesh Dineshbhai Parikh