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MODULE A: CORPORATE BANKING AND FINANCE

A.1 Objectives

A.2 Introduction

A.3 Corporate Banking

1. Meaning and Importance

2. Various Services

A.4 Corporate Deposits

A.5 Corporate Finance

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A.1 OBJECTIVES

A) The objectives of this Module are to understand the meaning and importance of corporate
banking and the various services offered by banks to corporate, such as:

Cash Management

Salary Payment

Debtors Management

Factoring & Forfaiting

Trusteeship

Custodial Services

Business Advisory

Off Shore Services

Forex Management

B) Corporate Deposits and the importance of institutional vis-à-vis retail deposits

C) Corporate Finance extended by means of:

Working Capital Finance

Fund and Non-Fund Based Limits

Export Finance

Corporate Debt Restructuring

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A.2 INTRODUCTION

Banks offer various products to business organizations to help them manage their finances on
both the assets and liabilities sides, as also in off balance sheet items.

On the assets side they provide deposit accounts of various maturities to suit the cash flow
requirement of the business unit, cash management product for managing the cash inflows and
outflows across different locations.

On the liabilities side banks provide services such as working capital finance, discounting of
bills, export credit, short term finance, and structured finance and term loans.

In off-balance sheet services banks provide non-funded services such as letters of credit, banks
guarantees and collection of documents.

Banks are also offering value added services to corporates, such as syndication of loans, real
time gross settlement, channel financing, corporate salary accounts, bankers to rights/public
issues, corporate internet banking, forex desk, money market desk, derivatives desk, employees’
trust, tax collection, payment gateway services. The range of services, especially the ITES
(Information Technology Enabled Services) such as the internet based services are made possible
and offered by banks as the competition between them increases.

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A.3 CORPORATE BANKING

1. Meaning and Importance

Corporate banking encompasses services that banks provide to companies a wide range of
banking and financial services provided to domestic and international operations of large local
corporates and local operations of multinationals corporations. Services include access to
commercial banking products, including working capital facilities such as domestic and
international trade operations and funding, channel financing, and overdrafts, as well as domestic
and international payments, Indian Rupee term loans -including external commercial borrowings
in foreign currency, letters of guarantee etc.

Investment Banking provides advisory and financing, equity securities, asset management,
treasury and capital markets, and private equity activities.

Banks usually service their clients by sector based client service teams that combine relationship
managers, product specialists and industry specialists to develop customised financial solutions.

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2. CORPORATE BANKING SERVICES

CASH MANAGEMENT

Cash management services offered by banks enable their clients to:

• Boost efficiency and facilitate better decisions by treasurers

• Accurately execute payments and collect receivables with speed

• Manage liquidity in different markets

With the availability of IT enabled service popularly known as Core Banking Solution that links
all branches of a bank real time, all major banks provide platforms to banks to transact online to
manage their cash flow and receive reporting anytime, anywhere through our secure online site
access.

Local and Upcountry Cheque Collections

Banks offer a complete suite of products for managing clients’ cheque and draft collections at
nearly thousands of locations across India. This includes capabilities to locally clear cheques
even at locations where the bank itself does not have a branch presence.

These services also include provision of comprehensive Management Information System, pick
up services and credit as per pre agreed arrangements.

Electronic Collections

Collections through various electronic modes such as:

Real Time Gross Settlement (RTGS)

This system is a funds transfer mechanism where transfer of money takes place from one bank to
another on a 'real time' and on 'gross' basis. This is the fastest possible money transfer system
through the banking channel. Settlement in 'real time' means payment transaction is not subjected
to any waiting period. The transactions are settled as soon as they are processed. 'Gross
settlement' means the transaction is settled on one to one basis without bunching with any other
transaction. Considering that money transfer takes place in the books of the Reserve Bank of
India, the payment is taken as final and irrevocable.

RTGS is different from Electronic Fund Transfer System (EFT) or National Electronics
Funds Transfer System (NEFT)
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EFT and NEFT are electronic fund transfer modes that operate on a deferred net settlement
(DNS) basis which settles transactions in batches. In DNS, the settlement takes place at a
particular point of time. All transactions are held up till that time. For example, NEFT settlement
takes place 6 times a day during the week days (9.00 am, 11.00 am, 12.00 noon. 13.00 hours,
15.00 hours and 17.00 hours) and 3 times during Saturdays (9.00 am, 11.00 am and 12.00 noon).
Any transaction initiated after a designated settlement time would have to wait till the next
designated settlement time. Contrary to this, in RTGS, transactions are processed continuously
throughout the RTGS business hours.

RTGS system is primarily for large value transactions. The minimum amount to be remitted
through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. No minimum or
maximum stipulation has been fixed for EFT and NEFT transactions.

Under normal circumstances the beneficiary branches are expected to receive the funds in real
time as soon as funds are transferred by the remitting bank. The beneficiary bank has to credit
the beneficiary's account within two hours of receiving the funds transfer message.

The remitting bank receives a message from the Reserve Bank that money has been credited to
the receiving bank. Based on this the remitting bank can advise the remitting customer that
money has been delivered to the receiving bank.

It is expected that the receiving bank will credit the account of the beneficiary instantly. If the
money cannot be credited for any reason, the receiving bank would have to return the money to
the remitting bank within 2 hours. Once the money is received back by the remitting bank, the
original debit entry in the customer's account is reversed.

National Electronic Funds Transfer (NEFT)

National Electronic Funds Transfer (NEFT) system is a nationwide funds transfer system to
facilitate transfer of funds from any bank branch to any other bank branch.

As on December 31, 2009, 52427 branches of 89 banks are participating. Steps are being taken
by RBI to widen the coverage both in terms of banks and branches.

There is no restriction of centres or of any geographical area inside the country. The system uses
the concept of centralised accounting system and the bank's account that is sending or receiving
the funds transfer instructions, gets operated at one centre, i.e., only at Mumbai. The individual
branches participating in NEFT could be located anywhere across the country, as detailed in the
list provided on our website.

The beneficiary gets the credit on the same day or the next day depending on the time of
settlement.

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How is this NEFT System an improvement over the existing RBI-EFT System? The RBI-
EFT system is confined to the 15 centres where RBI is providing the facility, where as there is no
such restriction in NEFT as it is based on the centralised concept. The detailed list of branches of
various banks participating in NEFT system is available on our website. The system also uses the
state-of-the-art technology for the communication, security etc, and thereby offers better
customer service.

How is it different from RTGS and EFT? NEFT is an electronic payment system to transfer
funds from any part of country to any other part of the country and works on Net settlement,
unlike RTGS that works on gross settlement and EFT which is restricted to the fifteen centers
only where RBI offices are located.

There is no value limit for individual transactions.

Electronic Clearing System (ECS) are offered by banks

ECS is a mode of electronic funds transfer from one bank account to another bank account using
the services of a Clearing House. This is normally for bulk transfers from one account to many
accounts or vice-versa. This can be used both for making payments like distribution of dividend,
interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as
payments to utility companies like telephone, electricity, or charges such as house tax, water tax,
etc or for loan installments of financial institutions/banks or regular investments of persons.

What are the types of ECS? In what way they are different from each other?

There are two types of ECS called ECS (Credit) and ECS (Debit).

ECS (Credit) is used for affording credit to a large number of beneficiaries by raising a single
debit to an account, such as dividend, interest or salary payment.

ECS (Debit) is used for raising debits to a number of accounts of consumers/ account holders for
crediting a particular institution.

Working of ECS Credit System

ECS payments can be initiated by any institution (called ECS user) that have to make bulk or
repetitive payments to a number of beneficiaries. They can initiate the transactions after
registering themselves with an approved clearing house. ECS users have also to obtain the
consent as also the account particulars of the beneficiary for participating in the ECS clearings.

The ECS user's bank is called as the sponsor bank under the scheme and the ECS beneficiary
account holder is called the destination account holder. The destination account holder's bank or
the beneficiary's bank is called the destination bank.

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The beneficiaries of the regular or repetitive payments can also request the paying institution to
make use of the ECS (Credit) mechanism for effecting payment.

The ECS users intending to effect payments have to submit the data in a specified format to one
of the approved clearing houses. The list of the approved clearing houses or the list of centres
where the ECS facility has been provided is available at www.rbi.org.in.

The clearing house would debit the account of the ECS user through the account of the sponsor
bank on the appointed day and credit the accounts of the recipient banks, for affording onward
credit to the accounts of the ultimate beneficiaries.

At present ECS facility is available at more than 60 centres and the full list is available at the
web-site of RBI.

Advantages to clients:

The beneficiaries need to maintain an account with one of the banks at these centres in order to
avail of the benefit of ECS.

The end beneficiary need not make frequent visits to his bank for depositing the physical paper
instruments.

He need not apprehend loss of instrument and fraudulent encashment.

Delay is eliminated in realisation of proceeds after receipt of paper instrument.

The ECS user saves on administrative machinery for printing, dispatch and reconciliation.

Chances of loss of instruments in postal transit are eliminated.

Chances of frauds due to fraudulent access to the paper instruments and encashment are
minimised.

Provides the ability to make payment and ensure that the beneficiaries' account gets credited on a
designated date.

Advantage to banks:

Banks handling ECS get freed of paper handling.

Paper handling also creates lot of pressure on banks as they have to encode the instruments,
present them in clearing, monitor their return and follow up with the concerned bank and
customers.

In ECS banks simply get the payment particulars relating to their customers. All they need to do
is to match the account particulars like name, account number and credit the proceeds

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Wherever the details do not match, they have to return it back, as per the procedure

ECS debit system

It is a scheme under which an account holder with a bank can authorise an ECS user to recover
an amount at a prescribed frequency by raising a debit in his account. The ECS user has to
collect an authorisation which is called ECS mandate for raising such debits. These mandates
have to be endorsed by the bank branch maintaining the account.

Any ECS user desirous of participating in the scheme has to register with an approved clearing
house. The list of approved clearing houses is available at RBI web-site www.rbi.org.in. He
should also collect the mandate forms from the participating destination account holders, with
bank's acknowledgement. A copy of the mandate should be available with the drawee bank.

The ECS user has to submit the data in specified form through the sponsor bank to the clearing
house. The clearing house would pass on the debit to the destination account holder through the
clearing system and credit the sponsor bank's account for onward crediting the ECS user. All the
unprocessed debits have to be returned to the sponsor bank within the time frame specified.
Banks will treat the electronic instructions received through the clearing system on par with the
physical cheques.

Advantages to clients

Trouble free- Eliminates the need to go to the collection centres/banks by the customers and no
need to stand in long queues for payment

Peace of mind – Customers also need not track down payments by last dates.

The debits would be monitored by the ECS users.

The ECS user saves on administrative machinery for collecting the cheques, monitoring their
realisation and reconciliation

Better cash management.

Chances of frauds due to fraudulent access to the paper instruments and encashment are avoided.

Realisation of payments on a single date is enabled instead of fractured receipt of payments.

Advantages to banks

Banks handling ECS get freed of paper handling.

Paper handling also creates lot of pressure on banks as they have to encode the instruments,
present them in clearing, monitor their return and follow up with the concerned bank and
customers.
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In ECS banks simply get the mandate particulars relating to their customers. All they need to do
is to match the account particulars like name, a/c number and debit the accounts.

Wherever the details do not match, they have to return it back, as per the procedure.

The mandate given is on par with a cheque issued by a customer. The only stipulation under the
scheme is that the customer has to give prior notice to the ECS user, to ensure that they do not
include the debits.

It is left to the choice of the individual customer and the ECS user to finalise these aspects. The
mandate can contain a maximum ceiling; it can also specify the purpose as also a validity period.

This allows clients to concentrate their receivables through a single account with the bank.

Cash Deposits at any of the branches of almost all large banks are credited instantly through the
Core Banking Solutions.

Other services provided are Foreign Currency Collections through strategically placed
correspondents in major financial centres where the payment advices are received by SWIFT.

Payable at Par Customer Cheques

Banks offer cheques payable at par at all it branches and for customers with bulk cheque writing
requirements. They offer a complete payables outsourcing solution integrated with their state of
the art Delivery Channels.

Banks offer payment outsourcing service that is designed to streamline the cheque payment
process. Through an interface with the bank’s delivery channels (electronic banking platform),
payment data can be taken directly from the client’s accounting system in a single file download
and transmitted to the bank for processing.

Security controls ensure data integrity and confidentiality throughout the import and
transmission process. In addition to this Email payment advices to beneficiaries and
comprehensive MIS are also offered to corporate clients.

Banker's Cheques and Demand Drafts

Payments by Banker's Cheques and demand drafts can be made at the bank’s branch locations
and through their extensive correspondent bank network at non bank branch locations across the
country.

Instructions for Banker's Cheques can also be given through the bank’s internet banking
platform.

Let us sum up

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Cash Management Services enable banks to improve efficiency of operations by minimizing
transit time of cash flows

It facilitates remittances through online real time branch network connectivity and local and
outstation collections

Transfer of funds between different banks is effected electronically through RTGS, NEFT, RBI-
EFT and ECS mechanisms

Key Words

Collection of Cheques: To obtain payment of cheques and drafts submitted by clients drawn on
other banks at different centres

Electronic Collection: Transfer of funds through electronic means

RTGS: Real Time Gross Settlement

NEFT: National Electronic Funds Transfer

RBI-EFT: Reserve Bank of India – Electronic Funds Transfer

ECS: Electronic Clearing System

Check your progress

a) What are RTGS and NEFT?

b) What is the basic difference between RTGS and NEFT?

c) What is ECS?

d) What are Payable at Par customer cheques?

Terminal Questions

a) What are the advantages to clients and banks in RTGS, NEFT and ECS?

b) Write briefly about the various products offered by banks under their Cash Management
System?

Answers to Check your progress

a) RTGS is Real Time Gross Settlement – a mechanism for transfer of funds between
different banks, through the RBI. NEFT is also a similar mechanism for transfer of funds
between different banks, through the RBI.

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b) RTGS is a real time mechanism, meant mainly for high value items, the minimum
amount being Rs. 1 lakh. Whereas, NEFT is handled in batches at fixed intervals during
banking hours. There is no minimum limit for NEFT transfers.

c) ECS is an Electronic Clearing System to handle credits and debits such as dividend and
interest warrants, regular payments to utilities, etc.

d) Payable at Par customer cheques are payable at par at all branches of the bank, provided
to clients as a substitute for drafts. Thus, a customer can issue a cheque to his supplier in
a different city, which can be encashed by the vendor at par at his account with a different
bank, through local clearing at the vendor’s centre.

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SALARY PAYMENT

Banks offer Corporate Salary Payment services designed to offer payroll solutions through in a
24 X 7 environment.

They leverage their extensive network of distribution channels spread across hundreds of centers
through a network of branches and ATMs to provide value to the end user.

Benefits to Corporates

Efficient salary disbursal – the corporate client only needs to give a single instruction, together
with a list showing the name, account number and amount payable to the employee.

Web Upload - Many banks now offer the clients a platform to transfer salaries and
reimbursements directly from their current account with the bank to the employees' accounts
using internet connectivity from their own office.

Benefits to Employees

No minimum balance criteria is insisted upon by the bank.

Unparalleled Access – The employee can draw on his account from an outlet convenient for him
under the anywhere banking facility through the bank’s network of Branches, ATM and Internet
banking facility.

At par cheque books payable locally at all bank locations.

Banks provide to employees International Debit cum ATM cards with enhanced Cash
withdrawal facility and other value add-ons.

Employees can also avail of:

Online Banking with funds transfer, online shopping and bill payment options.

Depository services with free online trading accounts.

Employee Reimbursement accounts as a savings account variant.

Banks also offer preferential pricing on loan products and credit cards and other banking
products and services.

Let us sum up

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Banks offer Salary Payment Services to enable companies to disburse their salaries to their
employees online, directly crediting their accounts

The company gives a single instruction to the bank, together with a list of employees and the
credits to be made, thereby saving time and effort

Employees benefit by not having to be paid either in cash, or, to go their banks with cheques to
be deposited

Employees also benefit by having access to the other deposit, loan and remittance products of the
bank

Key Words

Salary disbursement: Payment of salary by companies to their employees

Web upload: The company uploads the list of employees plus the salary payable to each through
corporate internet banking, from their own offices

Zero balance accounts: Employees need not maintain any minimum balance in their accounts
and are permitted to draw the full amount available

Check your progress

a) What do banks offer in their Salary Payment Service?

Terminal Questions

a) What is the benefit derived by the bank from the Salary Payment Service?

b) What are the benefits derived by employees from the Salary Payment Service

Answers to Check your progress

a) Banks offer the facility to employees to maintain zero balance accounts in which their
salaries are credited at periodic intervals, together with other deposit, loan and remittance
facilities

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DEBTORS MANAGEMENT

Receivables Management

Banks offer receivables management services to their clients to manage their collectable debts.
The features of this product are:

Collection Services: Receivables handling for cheques drawn on both local and outstation
locations; lodgment for clearing, and updating of account receivables.

Receivables Management: Invoice Management and Account Receivable matching solutions.


Other services include collection of receivables through funds transfers and other electronic
modes such as RTGS, NEFT, etc.

Funds can be transferred by banks into their client’s account from identified counter-parties
through hundreds of bank branches across the country.

Benefit to Clients:

• Collection cycle is typically reduced from 7 days to 2 days

• Availability of clear funds in the account at the earliest

• Zero settlement risk

• Elimination of Float, hence reduction of idle time for cash

• Certainty in funds receipt on same day basis

• Enhanced Turnover due to reduction of collection time

• Paperless transactions, electronic reconciliation

• Reduced operational risk of fraud and loss of cheques

• Faster realization of receivables through logistics management and geographic reach of


banks

• Savings in interest costs and bank charges through rationalization of account structure
and local clearing at multiple locations across the country

• Simplification of process through online querying on receivables

• Simplification and automated Bank Reconciliation

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• Outsourcing of debtor's reconciliation

Paper Collection: Banks offer quick realisation of client’s instruments, local or outstation. The
proceeds of all cheques deposited with the bank can be concentrated into a designated central
account at any of our branches. Consequently clients have better control on their cash flows and
the reconciliation and monitoring requirements associated with multiple accounts are eliminated.
Information on these collections is delivered to the client through internet banking.

Banks further deliver a variety of collection reports that can be used for automating the
reconciliation process at the client’s end.

Local Clearing Solutions

Banks have an extensive network of its own branches and correspondent banks that provide
clients with the capability to clear their instruments in local clearing at over hundreds of
locations across India. The funds collected from these instruments can directly be credited to the
client’s centralised collection account. At each of these locations, banks provide clients with the
option of directly picking up the instruments from their customers. Detailed collection reports
provide clients with information on the instruments deposited at each of the locations.

Outstation Clearing Solutions

Banks have correspondent bank relationships with regional banks covering over thousands of
locations across India. This ensures faster realisation of upcountry instruments. Detailed
collection reports and online querying options on internet banking ensure that clients can track
and have complete control over their receivables.

Banks with the help of extensive network of foreign correspondents have a global reach of over
thousands of offices in many countries for efficient collection of foreign currency cheques.

Electronic Collections business process improvement objectives with a comprehensive array of


electronic collections, including:

• Domestic electronic funds transfer such as RTGS, NEFT, and ECS

• International wire transfer, usually by SWIFT

• Direct debit

Receivables data accompanying these transactions is captured and delivered to clients


electronically to support their customer order fulfillment, credit management and reconciliation
process.

Let us sum up

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Receivables Management: Banks offer this product to enable corporate clients to streamline their
collection of debts.

Benefits to clients include reduced collection time leading to lower interest costs.

Local clearing and outstation collections are streamlined and expedited.

Key Words

Receivables (or Debtors) Management: Banks offer this product to enable corporate clients to
streamline their collection of debts

Check your progress

What do banks offer in their Receivables Management Product?

Terminal Questions

What are the benefits derived by corporate clients from the Receivables Management Product?

Answers to Check your progress

Banks offer receivables management services to their clients to manage their collectable debts.
The features of this product are:

Collection Services: Receivables handling for cheques drawn on both local and outstation
locations; lodgment for clearing, and updating of account receivables.

Receivables Management: Invoice Management and Account Receivable matching solutions.


Other services include collection of receivables through funds transfers and other electronic
modes such as RTGS, NEFT, etc.

Funds can be transferred by banks into their client’s account from identified counter-parties
through hundreds of bank branches across the country.

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FACTORING & FORFAITING

Definition

Factoring can be broadly defined as an agreement in which receivables arising out of sale of
goods/services are sold by the firm (client) to a factor (a financial intermediary) as a result of
which the title to the goods/services represented by the receivables passes to the factor.

Henceforth, the factor becomes responsible for all credit control, sales accounting and debt
collection from the buyers. In a full service factoring concept, i.e., without recourse facility, if
any of the debtors fails to pay the dues as a result of his financial inability, insolvency or
bankruptcy, the factor has to absorb the losses.

Mechanism

Credit sales generate the factoring business in the ordinary course of commercial dealings.
Realisation of credit sales is the main function of factoring services. Once a sale transaction is
completed, the factor steps in to realize the sales. Thus the factor intermediates between the
seller and the buyer and sometimes his banker.

A schematic view of the factoring mechanism explaining the interaction between the different
parties and the flow of information between them is summarized below:

The Buyer

Buyer negotiates the terms of purchase with the seller

Buyer receives delivery of goods with invoice and instructions by the seller to make payment to
the factor on the due date

Buyer makes payment to factor in time, or, gets extension of time, or, is subject to legal process
at the hands of the factor

The Seller

Seller enters into a Memorandum of Understanding (MoU) or contract with the Buyer

Sells goods to Buyer according to agreement

Delivers to Buyer copies of invoice, delivery challan, MoU/contract and instructions to pay to
the Factor

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Seller receives from the Factor payment of part (usually 75-80%) payment of invoice value on
selling the receivables from the Buyer to the Factor

Seller receives the balance 20-25% from the Factor after deduction of the latter’s service charges

The Factor

The Factor enters into an agreement with the Seller for rendering factoring services

The Factor makes payment of 75-80% of price of the debt to the Seller on receipt of the sale
documents

The Factor receives payment from the Buyer on due date and remits balance 20-25% money to
the Seller after deducting his service charges

The Factor also ensures that the following conditions are met to give enable the factoring
arrangements:

The invoices, bills and other documents should containing clauses to enable factoring of the
receivables

The Seller should confirm in writing that all payments arising out of these bills are free from all
encumbrances, such as liens, set offs, counter-claims, etc., from any other entity

The Seller should assign the receivables to the Factor to enable him to obtain payment on due
date, or by legal process after default

The Seller confirms in writing to the Factor that all conditions of sale agreed upon with the
Buyer have been complied with, and,

The Seller provides an undertaking from his banker that the latter does not have any charge over
the receivables being factored or the realization proceeds deposited in the Seller’s account with
the bank

Functions of a Factor

Depending on the type or form of factoring, the main functions of a factor can be classified into
5 categories:

Maintenance of Sales Ledger

Collection of Accounts Receivable

Financing facility of trade debts

Assumption of Credit Risk and Credit Protection

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Provision of advisory services

Maintenance of Sales Ledger

The Factor maintains the clients’ sales ledgers. On completion of sale, the client sends an invoice
to the buyer with a copy to the factor. The ledger is usually maintained in the open-item format
in which each receipt is matched against each open invoice.

The factor provides periodic MIS to the client:

Open invoices outstanding as on date

Buyer-wise analysis of outstandings and payment records

Age analysis of receivables

Provision of Collection Facility

The factor collects the receivables from the buyer on behalf of the client (seller), thereby
relieving the latter of problems involved in collection, so that he can concentrate on the core
functional areas of his business.

Factoring also enables the client to reduce the cost of collection by way of savings of manpower,
time and effort.

Factors use trained manpower and sophisticated infrastructure to systematically follow up and
obtain payments from buyers. Debtors are also usually more responsive to demands from factors,
who are FIs, rather than the sellers themselves.

Collection of receivables can be considered as the most important function of a factor. He


generally does not consult clients during the normal course of collection, unless the procedure
involves getting into a legal action.

Financing of Trade Debts

The unique feature of factoring is that the factor purchases the book debts of his client at a price,
and the debts are assigned to the factor, who is willing to pay 75-80% of the value of the
receivables in advance.

Where the debts are factored with recourse, the advance provided by the factor would become
refundable in case of default by the buyer. However, when factoring is done without recourse,
the factor’s obligation to the seller becomes absolute on the due date, whether the buyer makes
payment or not.

Credit Control and Credit Protection

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Assumption of credit risk is one of the important functions of a factor, in cases where it is done
without recourse. The factor, in consultation with the client fixes credit limits for approved
buyers. Within these limits the factor undertakes to purchase the trade debts of the seller, without
recourse. In other words, the factor assumes the risk of default in payment by the buyer.

Two incidental benefits accrue to the client out of factoring:

Firstly, factoring relieves him from the hassles of collection of receivables, and,

Secondly, with the information available with the factor on the credit rating and payment record
of the buyer, the factor is able to provide good advice to the client, leading to better credit
control.

Advisory Services

The services are a spin off benefit of the close relationship between a factor and client. By virtue
of industry wide exposure to credit dealings and corporate behavior, factors can provide valuable
advisory services to clients.

Buyers’ perception of the client’s deliverables, marketing strategies, etc.,

Audit of the procedures followed by the client for invoicing, delivery and dealing with sales
returns, and,

Introduction to banks and FIs dealing with leasing, hire purchase, investment banking, and so on.

Types/Forms of Factoring

The different forms of factoring prevalent in India are:

Recourse and Non-recourse Factoring

Under recourse factoring, the Factor has recourse to the Client (seller) in case the factored debt
turns out to be irrecoverable. In other words, the factor does not assume the credit risk associated
with the receivables. In case the Buyer defaults in payment, the Client has to make good the
amount to the Factor.

In the case of non-recourse factoring, the Factor does not have any recourse to the Client in case
of default. In other words, the Factor takes on the credit risk involved. To compensate the higher
risk involved in this type of exposure, the Factor charges a higher premium, also called a del
credere commission. The Factor grants a line of credit to each buyer, and factoring is done within
such limits.

In both cases, however, the Client pays to the Factor the charges for maintaining his account as
also the interest cost on the advance payment outstanding.

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Advance and Maturity Factoring

In Advance Factoring, the Factor extends credit to his Client up to 75-80% for which the Client
pays interest charges at a predetermined rate. In some cases, the Client’s bank extends further
credit to the Client, usually around 50% of the residual amount. Thus, if the Factor has advanced
75% to the Client of a certain receivable, the bank will lend a further amount of 12.5% of the
receivable, taking the total amount of advance drawn by the Client to 87.5%. This is called Bank
Participation Factoring.

In maturity factoring (also called collection factoring) the Factor does not make any advance
payment to the Client. Payment is made by the Factor on the guaranteed payment date, or on
collection. The guaranteed payment date is usually determined on the basis of past record of
payments made by the Buyer.

Full Factoring (also known as old line factoring)

This is the most comprehensive form of factoring encompassing non-recourse factoring with
collection, sales ledger administration, credit protection, and short term finance.

Disclosed and undisclosed factoring

In disclosed factoring the name of the Factor is mentioned on the invoice directing the Buyer to
make payment to the Factor.

But in case of undisclosed factoring, the name of the Factor is not revealed to the Buyer. The
Factors acts in the name of the Client and maintains his sales ledger and also extends advance to
the Client.

Domestic and Export Factoring

In export factoring 4 parties are involved – (i) the Exporter (Client), (ii) the Importer (Buyer),
(iii) the Export Factor, and, (iv) the Import Factor. Since 2 factors are involved in such
transactions, international factoring is also called the two factor system.

The two factor system results two separate but inter-linked agreements: (i) between the Exporter
(Client) and the Export Factor, and, (ii) between the Export Factor and the Import Factor.
Usually the Export and Import Factors have formal Correspondent Relationships with well
defined rules relating to conduct of business.

The Import Factor provides a link between the Export Factor and the Importer and serves to
resolve formalities such as exchange control, legal formalities, and so on. He also undertakes
credit risk, collects receivables and remits funds to the Export Factor in the designated currency.

The flow of documents and information in such cases is as follows:

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The Exporter informs the Export Factor about his intention to export goods or services to an
importer in a foreign country

The Export Factor contacts the Import Factor in the Importer’s country and ascertains his report
on the credit-worthiness and payments record of the Importer

On receipt of a satisfactory report, the Export Factor gives his green signal to the Exporter who
ships the goods to the Importer and hands over the invoice, bills of lading, etc., to the Export
Factor

The Export Factor advances 75-80% of the invoice value to the Exporter, and sends the
documents to the Import Factor

The Import Factor collects the payment of the bill on its due date and remits the proceeds to the
Export Factor

The Export Factor in turn makes residual payment to the Exporter and the transaction is
complete

Factoring vis-à-vis Bills Discounting

Similarity: Both provide short term finance to the seller against receivables, which the Seller
would have otherwise received on the due date

Differences:

Bills discounting is always with recourse, whereas factoring can be done with or without
recourse

In Bills discounting the seller collects the receivables and pays to the financing entity, whereas in
factoring, the factor takes on the responsibility of collection

Bills discounting envisages only provision of finance, whereas the factor maintains the sales
ledger and also provides advisory services

Bills discounted can be rediscounted several times, but factored debts can only be refinanced

Bills discounted do not represent assignment of debts as is in the case of factoring

FORFAITING

Forfaiting is a form of financing of receivables pertaining to international trade. The salient


features are given below:

Exporter sells goods to an Importer on deferred payments basis

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The Importer draws a series of promissory notes in favour of the Exporter, falling due in a
phased manner, including interest charges, depending upon the tenor of the note. Alternatively,
the Exporter draws a series of bills on the Importer, falling due in a phased manner, which is
accepted by the Importer.

The bills or notes are sent to the Exporter, usually after they are guaranteed by a bank, which is
not necessarily the Importer’s bank. The guarantee by the bank is referred to as an Aval,
evidenced by endorsement by the bank guaranteeing payment by the Importer.

The Exporter enters into a forfaiting arrangement with a bank, under which the Exporter sells the
avalled bills or notes to the forfeiter, without recourse, and at a discount.

The forfaiting arrangement includes the cost of forfeiting, margin to cover risk, commitment
charges, days of grace, etc. The cost of forfeiting depends on the credit rating of the avalling
bank, the country risk of the importer and the terms and conditions of export.

The forfeiter may hold these bills or notes till maturity. Alternatively, he can securitise them and
sell them in the secondary market to refinance his cash flow.

Forfaiting vs Export Factoring

Both mechanisms are similar as they provide advance payment on a non-recourse basis. But they
differ in some important respects:

A forfaiter discounts the entire value of the note/bill, whereas a factor usually advances to the
extent of 75-80%, leaving the balance as a factor reserve.

A forfaiter is protected by an avalling bank, whereas a factor usually takes on the credit risk on
himself.

Forfaiting is a pure finance arrangement, whereas factoring includes ledger maintenance,


collection, etc.

Factoring is essentially short term finance, whereas forfaiting usually extends credit over a
longer period

Forfaiters take on exchange rate risk and charge a premium for the service, whereas factors do
not cover exchange rate risk.

Advantages of Factoring

Impact on the Balance Sheet

Scenario 1 – the Company goes in for plain vanilla working capital loans from bank

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Current Liabilities Current Assets

Bank borrowings Inventory 100

Cash Credit - 70 Receivables 80


Stocks

Cash Credit – 40 110 Other Current 20


Book debts Assets

Other Current 40
Liabilities (OCL)

Net Working 50
Capital

Total Current 200 Total Current 200


Liabilities + Assets
NWC

Current Ratio = (Total Current Assets)/(Bank borrowings + OCL) = 1.33

Scenario 2 – The Company decides to factor its debts

The Factor provides 80% finance against book debts of 80 = 64. The Company uses this cash to
finance his working capital. Thus factoring provides support to him off balance sheet, outside the
purview of the Assessed Bank Finance, and, the Current Ratio improves significantly

Current Liabilities Current Assets

Bank borrowings Inventory 100

Cash Credit - 70 Balance due 16


Stocks from factor

Cash Credit – 0 70 Other Current 20


Book debts Assets

Other Current 16
Liabilities (OCL)

Net Working 50
Capital

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Total Current 136 Total Current 136
Liabilities + Assets
NWC

Current Ratio = (Total Current Assets)/ (Bank borrowings + OCL) = 1.58

Factoring helps companies outsource a large part of the effort required for collection of
receivables and its accounting

Collection is more efficient as the factor is not subject to the coercion exercised by buyers with
the threat of choking off future business

Factoring in India – Kalyansundaram Committee Report

In the late 1980s RBI constituted a study group to recommend the future direction of factoring
business in India.

The study group strongly recommended encouragement of factoring for SME units and
according to its recommendation RBI permitted banks to undertake factoring business
departmentally. It was earlier permissible for banks to engage in factoring only through only
subsidiaries established for the purpose.

Let us Sum Up:

Factoring is the activity of purchase of receivables of a client by a financial intermediary, called


a “factor”.

The factor pays 75-80% upfront to his client, and the balance on realization.

Functions of a factor:

(1) Maintenance of Sales Ledger of the client

(2) Collection of accounts receivable due to client from the buyer

(3) Financing of Trade Debts to the client

(4) Takes over credit risk from the client to the factor’s account

(5) Provides advisory services to the client on the risk aspects in selecting buyers

Factoring takes the following forms:

(1) Recourse factoring – here the factor does not take over the credit risk. In case of default
he recovers advance paid to his client.

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(2) Non-Recourse factoring - here the factor takes over the credit risk. In case of default he
cannot recover advance paid to his client.

(3) Advance factoring – the factor pays a major part to his client in advance, i.e., before the
debt is collected

(4) Maturity factoring – the factors pays his client only on realization of the receivables

(5) Full factoring – this means the entire gamut of factoring services from maintenance of
sales ledger to business advisory

(6) Disclosed & Undisclosed factoring – in the former type the buyer is notified about the
factor’s interest in the transaction, whereas, in the latter, the buyer is not notified about
intermediation by the factor.

(7) Export factoring – in this case the export dues of the client are sold to the factor, who
collects his dues from a factor on the overseas importer’s side.

Forfaiting: this is the activity where a financial intermediary purchases the receivables (usually
long terms, often payable in a deferred, phased manner, over a period of time) from his exporter
client

Aval: An aval is a guaranteeing bank that avalises or guarantees the deferred receivables on
behalf of the overseas importer-buyer

Key Words:

Factor: A financial intermediary who purchases the receivables arising out of sale of goods and
services

Client: The seller of goods and receivables, who sells the receivables to a factor

Buyer: The purchaser of the goods and receivables who ultimately pays to the factor on the due
date

Receivables: the sale price agreed to between the client and buyer

Advance: the portion (usually 75-80%) of the receivable paid by the factor to the client

Margin: the balance portion of the receivables (20-25%) withheld by the factor till realization of
the debt

Credit risk: the risk of default by the buyer, taken on by the factor in case of non-recourse
factoring

Forfaiting: Purchase of export receivables, usually on deferred payment terms

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Check your Progress:

(1) What is meant by Recourse and Non-Recourse factoring?

(2) What is meant by Advance and Maturity factoring?

Terminal Questions:

(1) What are the functions of a factor?

(2) How many different kinds of factoring are there?

(3) How does factoring help in improving the balance sheet of the client?

Answers to Check your Progress:

(1) In Recourse factoring the factor does not take over the credit risk. In case of default he
recovers advance paid to his client. Whereas, in Non-Recourse factoring the factor takes
over the credit risk. In case of default he cannot recover advance paid to his client.

(2) In Advance factoring the factor pays a major part to his client in advance, i.e., before the
debt is collected, whereas in Maturity factoring the factors pays his client only on
realization of the receivables

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TRUSTEESHIP SERVICES

Banks act as Trustees for public, charitable religious and other trusts. They also act as trustees of
a settlement, Trustees of a minor's legacy, custodian trustee of properties held under Trusts of
any description like pension, provident and gratuity fund.

Banks if appointed as Trustees, assist settlers/authors in:

(1) Counseling and drafting of trust deeds.

(2) Safe keeping of trust property and payment of income to beneficiaries on due dates as per
the instructions of the settlers.

Managing Religious and Charitable Trust: The bank undertaking this service makes payments of
income accrued on Trust corpus, for religious and charitable purpose according to the mandate of
the settler.

Banks also undertake Private Settlements where formation of trust is desired for a specific period
for providing assistance and support to mentally retarded/physically handicapped persons or
other similar objectives

DEBENTURE TRUSTEESHIP:

Many banks are SEBI registered Debenture Trustees. They accept debenture trusteeship of
debentures / bonds issued under private placement.

The services rendered are:

Advisory on the Debenture / Bond Issue on the following activities relating to the issue:

• Obtaining a rating from CRISIL, ICRA, etc.

• appointment of arrangers, i.e., a SEBI registered investment bank

• guidance on structured payment mechanism

• clarification on legal / statutory matters in issue of debentures / bonds

• documentation process - preparation of all kinds of related documents

• creation of charge, registration and compliance of legal and statutory requirements in this
aspect

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In order to render these services smoothly, banks have to equip themselves elaborately. The
infrastructure usually consists of:

• Exclusive software package for Debenture Trusteeship

• Team of well trained, informative, efficient, experienced and professional staff to handle
the work

• Expertise in handling rated / unrated debenture / bond issues with/without structured


payment mechanism.

• Panel of approved external professionals to support legal and statutory requirements

Banks offering this product typically has a nationwide network of branches which facilitate the
Companies / Government / Semi Government issuers to have security creation process at the
place of their convenience and choice.

SECURITY TRUSTEESHIP:

Banks also accept Security Trusteeship assignment for the loans / advances granted by any bank
or Financial Institution (including loan granted by the bank) to any corporate body.

Under Security Trusteeship the value addition offered by banks to their clients consists of the
entire procedure of security creation is taken over by the Security Trustee.

Security Trustee ensures execution of documents for creation of security and enforcement of
security in case of default.

Security Trustee is appointed with the consent of all the lenders but at the cost of the borrower.

However, monitoring the servicing of loan and advances is out of Security Trustee purview.

Appointment of a Security Trustee is ideal in case of consortium lending and multiple banking.

Banks add value to such services by providing:

• Availability of standard format of documents.

• Expertise, experience and specialization in handling security related transactions.

• Backup of specialized software.

• Guidance of in-house and assistance of external, legal and other professionals.

• Nationwide network of branches that facilitates lender / borrower to execute document at


the place of their convenience and choice.

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ATTORNEYSHIP:

Banks offer Power of Attorney service. This is a specialized service to help both non-resident
and resident customers, who find it difficult to operate and monitor their accounts and
investments personally. After the bank obtains power of attorney from the customer in their
favour, they execute the clients’ instructions regarding their investments promptly and
meticulously.

Executing a Power of attorney with us for this purpose is a simple and inexpensive process,
which can be completed in no time.

Let us Sum Up:

Banks offer trusteeship services for managing religious, charitable or even personal trusts

Banks provide Debenture Trusteeship services for companies in the process of issuing
debentures by providing support in creation of charge, documentation, advisory, and related
activities

In cases of consortium or multiple banking advances, banks offer Security Trusteeship services.
In this activity the bank concerned holds the securities offered by the borrower on behalf of all
lending banks.

Key Words:

Debenture Trusteeship

Security Trusteeship

Religious or Charitable Trusts

Check your Progress:

(1) What are the services provided by banks undertaking Debenture Trusteeship?

(2) What are the services provided by banks undertaking Security Trusteeship?

Terminal Questions:

(1) How do banks equip themselves to offer Debenture and Security Trusteeship services?

Answers to Check your Progress:

(1) The services provided under Debenture Trusteeship Services are - obtaining a rating from
CRISIL, ICRA, etc; appointment of arrangers, i.e., a SEBI registered investment bank;
Module A: Corporate Banking & Finance Page 31
guidance on structured payment mechanism; clarification on legal / statutory matters in
issue of debentures / bonds; documentation process - preparation of all kinds of related
documents; creation of charge, registration and compliance of legal and statutory
requirements in this aspect.

(2) The services provided under Security Trusteeship Services are consists of the entire
procedure of security creation is taken over by the Security Trustee. Security Trustee
ensures execution of documents for creation of security and enforcement of security in
case of default. Security Trustee is appointed with the consent of all the lenders but at the
cost of the borrower. However, monitoring the servicing of loan and advances is out of
Security Trustee purview. Appointment of a Security Trustee is ideal in case of
consortium lending and multiple banking.

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CUSTODIAL SERVICES

Services Provided by a Custodian

Services provided by a bank custodian are typically the settlement, safekeeping, and reporting of
customers’ marketable securities and cash. A custody relationship is contractual, and services
performed for a customer may vary. Banks provide custody services to a variety of customers,
including mutual funds and investment managers, retirement plans, bank fiduciary and agency
accounts, bank marketable securities accounts, insurance companies, corporations, endowments
and foundations, and private banking clients. Banks that are not major custodians may provide
custody services for their customers through an arrangement with a large custodian bank.

Core Custody Services

A custodian providing core domestic custody services typically settles trades, invests cash
balances as directed, collects income, processes corporate actions, prices securities positions, and
provides recordkeeping and reporting services.

Global Custody Services

A global custodian provides custody services for cross-border securities transactions. In addition
to providing core custody services in a number of foreign markets, a global custodian typically
provides services such as executing foreign exchange transactions and processing tax reclaims. A
global custodian typically has a sub-custodian, or agent bank, in each local market to help
provide custody services in the foreign country. The volume of global assets under custody has
grown rapidly in recent years as investors have looked to foreign countries for additional
investment opportunities.

Securities Lending and Other Value-Added Services

A bank may offer securities lending to its custody customers. Securities lending can allow a
customer to make additional income on its custody assets by loaning its securities to approved
borrowers on a short-term basis. In addition, a custodian may contract to provide its customers
with other value added services such as performance measurement, risk measurement, and
compliance monitoring.

Risks Associated with Custody Services

From a supervisory perspective, risk is the potential that events, expected or unexpected, may
have an adverse impact on a bank’s capital or earnings. There are nine categories of risk for bank
supervision purposes. These categories are not mutually exclusive; any product or service may
expose a bank to multiple risks.

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The primary risks associated with custody services are: transaction, compliance, credit, strategic,
and reputation. These risks are discussed more fully in the following paragraphs:

Credit risk

Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s
failure to meet the terms of any contract with the bank or otherwise to perform as agreed. Credit
risk is found in all activities that depend on counterparty, issuer, or borrower performance. It
arises any time funds are extended, committed, invested, or otherwise exposed through actual or
implied contractual agreements, whether reflected on or off the balance sheet.

Transaction risk

Transaction risk is the current and prospective risk to earnings or capital from fraud, error, and
the inability to deliver products or services, maintain a competitive position, and manage
information. Risk is inherent in efforts to gain strategic advantage, and in the failure to keep pace
with changes in the financial services marketplace. Transaction risk is evident in each product
and service offered. Transaction risk encompasses product development and delivery, transaction
processing, systems development, computing systems, the complexity of products and services,
and the internal control environment.

Compliance risk

Compliance risk is the current and prospective risk to earnings or capital arising from violations
of, or nonconformance with, laws, rules, regulations, prescribed practices, internal policies and
procedures, or ethical standards. Compliance risk also arises in situations where the laws or rules
governing certain bank products or activities of a bank’s clients may be ambiguous or untested.
Compliance risk exposes the institution to fines, civil money penalties, payment of damages, and
the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced
franchise value, limited business opportunities, reduced expansion potential, and an inability to
enforce contracts.

Strategic risk

Strategic risk is the current and prospective risk to earnings or capital arising from adverse
business decisions, improper implementation of decisions, or lack of responsiveness to industry
changes. This risk depends on the compatibility of an organization’s strategic goals, the business
strategies developed to achieve those goals, the resources deployed toward these goals, and the
quality of implementation. The resources needed to carry out business strategies are both
tangible and intangible. They include communication channels, operating systems, delivery
networks, and managerial capacities and capabilities. The organization’s internal characteristics
must be evaluated against the impact of economic, technological, competitive, regulatory, and
other environmental changes.

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Reputation risk

Reputation risk is the current and prospective impact on earnings and capital arising from
negative public opinion. This affects the institution’s ability to establish new relationships or
services or to continue servicing existing relationships. This risk may expose the institution to
litigation, financial loss, or a decline in its customer base. Reputation risk exposure is present
throughout the organization and includes the responsibility to exercise an abundance of caution
in dealing with its customers and community.

The other risks are interest rate risk, liquidity risk, price risk, and, foreign currency translation
risk.

Sensing the growth of inflows in the Indian equity market, overseas and domestic players in the
stock broking business are lining up to offer custodial services. The size of the business in India
is estimated by some analysts to be around Rs 2,000 crore.

Further, opportunities from local mutual funds wanting to outsource their non-core
administrative functions such as fund accounting and growth in the domestic organised pension
sector is expected to take the industry to more than double its current size. Lining up to enter the
fray are French banking major BNP Paribas, SBI-Societe Generale, Hong Kong-based JP
Morgan and domestic players like Religare, Prabhudas Lilladher and Anand Rathi Securities.

The Indian fund industry is moving into its next phase of expansion and change, and the
intensive competition will mean that fund houses focus on their core business of investment
management, and sales and distribution. They will therefore look at partners with strong
technology and in-depth experience to support their operational needs. They are also looking for
partners who can provide them the benefits of economy of scale.

Till recently, only foreign institutional investors, insurance companies and mutual funds were
being serviced by custodians. Now, newer client segments, including high-net worth individuals,
increasingly understand the need and value of engaging a custodian.

The SEBI guideline making it mandatory for portfolio managers with over Rs 500-crore assets to
appoint a custodian has also given a fillip to growth in the industry.

DBS Bank Ltd is striving to become one of the top five custodial service firms in India. At
present there are 16 SEBI-registered custodians operating in India. Dominant among them are
Citicorp, HSBC and Deutsche Bank, catering to FII’s, sub-accounts, MFs and insurance
companies.

Apart from providing custodial services, these institutions also provide other services like fund
accounting, derivative clearing and corporate action reporting. And the entry of global banking
majors is expected to pose fresh challenges to the dominance of existing players. Societe

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Generale has entered into a joint venture with SBI to offer custodial services and will be
aggressively pitching for domestic and overseas.

Let us Sum Up:

Custodial Services: Services provided by a bank custodian are typically the settlement,
safekeeping, and reporting of customers’ marketable securities and cash

Core Custody Services: the bank settles trades, invests cash balances as directed, collects
income, processes corporate actions, prices securities positions, and provides recordkeeping and
reporting services

Global Custody Services: Some banks also provide custody services for cross-border securities
transactions

Securities Lending and Other Value-Added Services: Securities lending can allow a customer
to make additional income on its custody assets by loaning its securities to approved borrowers
on a short-term basis

Risks Associated with Custody Services: primary risks associated with custody services are:
transaction, compliance, credit, strategic, and reputation

Key Words:

Settlement: The bank offering custodial services settles the trades of the clients depositing
securities with them

Safe Custody: The bank offering custodial services provides safe custody of the clients’
securities deposited with them

Reporting: The bank also submits regular MIS to clients on all transactions

Securities lending: Banks also offer securities lending to its custody customers

Check your Progress:

(1) What are custodial services?

(2) What is meant by Securities Lending?

Terminal Questions:

(1) Discuss the various risks associated with banks providing custodial services.

Answers to Check your Progress:

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(1) Custodial Services: Services provided by a bank custodian are typically the settlement,
safekeeping, and reporting of customers’ marketable securities and cash

Core Custody Services: the bank settles trades, invests cash balances as directed,
collects income, processes corporate actions, prices securities positions, and provides
recordkeeping and reporting services

Global Custody Services: Some banks also provide custody services for cross-border
securities transactions

(2) Securities Lending and Other Value-Added Services : Securities lending can allow a
customer to make additional income on its custody assets by loaning its securities to
approved borrowers on a short-term basis

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BUSINESS ADVISORY

The range of services rendered by banks under Business Advisory is covered under the Module
on Investment banking.

Banks offer specialist business advisory services for industry targeted to assist their clients in
strategising for growth and consolidation covering the entire project development cycle and
beyond.

Services are designed to help clients introduce new operational practices and business
approaches that sharpen efficiency, enhance corporate image and improve financial performance.

Banks also assist local and multinational corporate clients in market diversification and planning,
strategies for restructuring and revival, product planning, financial management and business
process restructuring.

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OFF SHORE BANKING SERVICES

Offshore banking refers to the international banking business involving foreign currency-
denominated assets and liabilities. Offshore Banking Units are virtually foreign branches of
Indian banks but located in India. The Reserve Bank of India has given permission to various
banks to set up Offshore Banking Units in the Special Economic Zones. As per the Government's
policy, Special Economic Zone is a specially delineated duty free enclave and deemed to be a
foreign territory for the purpose of trade operations and duties / tariffs so as to usher in export-
led growth of the economy.

Several banks have been granted permission by the Government of India to operate OBU within
the country. This comes in addition to their already existing OBUs in centres such as Singapore,
Bahrai, Mauritius and Bahamas.

Clients get the expert opinions and services of a bank which has an international presence in
several countries through multiple offices.

Special features of the products generally offered by offshore banks

• Security, liquidity and convertibility

• Dealing in major currencies - USD, GBP, EURO and YEN

The various products on offer are:

Interest bearing Foreign Currency Call Deposit Account, with interest indexed to LIBID
(London Inter Bank Bid rate for Deposits)

Foreign Currency Fixed Deposit Account, available for various periods, with interest offered
linked to LIBOR (London Inter Bank Offer Rate for deposits)

Foreign Currency Rolling Deposit Account that provides for automatic renewal of principal and
interest for same period (Rolling Period). The interest rate is indexed on LIBOR

Foreign Currency Switch Deposit Account, that is an extension of Foreign Currency Rolling
Deposit Account, with the added facility to switch deposit from one currency to another
currency. The interest rate indexed on LIBOR

Foreign Currency Trading Deposit Account meant for those who understand the nerves of
foreign exchange market. Banks permit clients to trade in foreign currency a multiple of times
the value of deposit. The interest rate indexed on LIBOR.

Other products

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International Money Transfer with the facility of payments in any convertible currency.

Foreign Exchange and Derivatives Transactions: Derivatives products such as Currency


Swaps, Interest Rate Swaps, Futures etc. available to hedge loan portfolios or cash flow
mismatches. Structured derivatives products available

International Trade Finance and Instruments

Collection of clean or trade bills

Issuance of Letter of credit, various guarantees

Bill discounting or negotiation of documentary collections

Credit Facilities

Finance in all major currencies

Short term / Medium term working capital or assets finance

Long term finance

E.C.B., Syndication of loans or lines of credit

Structured finance

Let us Sum Up:

Offshore banking refers to the international banking business involving foreign currency-
denominated assets and liabilities. Offshore Banking Units are virtually foreign branches of
Indian banks but located in India

The various products on offer are:

Foreign Currency Call Deposit Account

Foreign Currency Fixed Deposit Account

Foreign Currency Rolling Deposit Account

Foreign Currency Switch Deposit Account

Foreign Currency Trading Deposit Account

Banks also offer several facilities for International Trade Finance and Instruments as well
as Credit Facilities

Key Words:
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Offshore banking refers to the international banking business involving foreign currency-
denominated assets and liabilities. Offshore Banking Units are virtually foreign branches of
Indian banks but located in India

Foreign currency accounts

Check your Progress:

What are the services covered under offshore banking?

Terminal Questions:

What are the benefits derived by clients from the offshore banking products of banks?

Answers to Check your Progress:

The various products on offer are various kinds of Foreign Currency Accounts, such as:

• Foreign Currency Call Deposit Account

• Foreign Currency Fixed Deposit Account

• Foreign Currency Rolling Deposit Account

• Foreign Currency Switch Deposit Account

• Foreign Currency Trading Deposit Account

Banks also offer several facilities for International Trade Finance and Instruments as well as
Credit Facilities

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FOREX SERVICES

Foreign Currency Travellers Cheques

Banks offer Foreign Currency Travellers Cheques (FCTCs) that are a safe and easy way to
protect money during foreign travel. FCTCs can be encashed only when needed, and only against
the holder’s signature, unlike cash which can be stolen and misused by anybody, immediately.

Loss of Travellers Cheque can be reported anywhere in the world by making a single phone call
and the pre-fixed amount on the cheques are made refundable.

Travellers Cheques are offered in major currencies like USD, GBP, Euro, CAD, AUD and JPY.
These are available in various denominations to suit clients’ needs. At present many Indian
banks offer American Express Travellers Cheques which are widely accepted at Merchant
Establishments and Financial Institutions across more than 200 countries.

Foreign Currency Cash

Banks sell foreign currency notes to their clients for travel abroad. Foreign Currency Cash is a
convenient way of meeting personal expenses during the journey, paying for taxis / internal
travel, food expenses etc. Normally currencies that are sold are USD, GBP, EURO, AUD and
CAD.

Foreign Currency Demand Drafts

Banks in India offer FC Demand Drafts to their clients for various expenses such as:

• Payment of University fees abroad

• Making a gift remittance to a friend or relative

• Payment of application fees for various exams like TOEFL , GMAT etc.

• Payment for medical treatment abroad

• And all other permitted purposes as per the RBI guidelines.

FC Demand Drafts are normally issued in seven currencies – United States Dollars (USD), Great
Britain Pounds (GBP), EURO, Japanese Yen (JPY), Australian Dollars (AUD), Canadian dollars
(CAD) and New Zealand Dollars (NZD).

Deposit of Foreign Currency Cheques

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Clients can directly deposit their foreign currency cheques, foreign currency demand draft and
Travellers Cheques in to their saving or current accounts.

The bank will then have the cheques sent for collection and the funds will be credited to the
client’s account in Indian Rupees. Banks in India normally accept cheques of various currencies
like USD, GBP, Euro, JPY, Australian Dollars, Canadian Dollars, UAE Dirhams, Hong Kong
Dollars and Swiss Francs.

The collection period varies from 2 international working days for Euro cheques payable in
Frankfurt, to 5 days for USD cheques payable in New York, and on to 10 – 15 working days for
cheques drawn in other currencies at other centres.

Remittances

Banks offer to their clients remittance facilities by which they can send and receive money to and
from friends and relatives abroad.

Most of such remittances are executed through SWIFT, a secure, inter-bank communication
facility.

Cash to Master

Often, foreign ships travel through India and dock their vessels at various ports / harbors in the
country. One of the major requirements during such temporary stays, is that of foreign currency
that has to be made available to the Captain of the Ship for covering crew wages or for other
expenses on board the ship.

These requirements are usually met through a facility called "Cash to Master". To collect this
cash, the master of the ship has to approach the designated branch of an authorized bank with his
passport and a duly filled up application form. This product is available only in United States
Dollars, Pounds Sterling and Euros.

Advance remittance

The client’s overseas exporter may require the client to make full payment in advance for the
goods to be exported to him. The exporter would dispatch the goods to the importer client only
after he receives full payment in advance.

For this purpose, banks will make remittance in foreign currency to the exporter.

Documentation for sending Advance Remittance

• Request Letter cum Debit Authority cum OGL cum FEMA Declaration (Giving all
beneficiary's banking details)

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• IE Code Number Certificate

• Form A1 (Duplicate)

• KYC Report

• Purchase Order / Proforma Invoice accepted by the importer with Advance payment term

• Bill of Entry Declaration with Commercial Invoice

• Original Bank Guarantee from the Exporters Bank if Advance amount is > $ 1,00,000 or
equivalent.

Direct Remittance

An importer client may require the exporter overseas to dispatch the goods first and then remit
the payment for the goods. The exporter would then dispatch the goods to the client. The
overseas exporter will then send the documents directly to the client. When the client approaches
his bank with the documents for sending remittance to the exporter, the bank will effect the
remittance.

Documentation for Direct Remittance

• Request Letter cum Debit Authority cum OGL cum FEMA Declaration. (Giving all
beneficiary's banking details)

• IE Code Number Certificate

• Form A1

• KYC Report

• Transport Docs in original / (copy) - Bill of Lading / Airway Bill

• Invoice

• Bill of Entry (Exchange Control Copy) (Original)

• Original License (Exchange control copy), If applicable

Import Collection

The exporter from overseas exports the goods to the importer client. The overseas exporter /
exporter's bank sends the documents to the client’s bank on collection.

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The bank will then intimate the importer client about the receipt of the documents. Then the
importer will authorize his bank to debit his account and send the remittance to the exporter’s
bank.

If it is a sight bill (Documents against Payment), then the necessary documents and debit
authority is collected from the importer and remittance is paid to the exporters bank and the
documents are released to the importer.

If it is a usance bill (Documents against Acceptance), then the acceptance letter is taken from the
importer and the documents are released. On the due date remittance is made to the exporter’s
bank by debiting the importer’s account.

Documentation for Import Collection

• Request Letter cum Debit Authority cum OGL cum FEMA Declaration

• IE Code Number Certificate

• Form A1

• KYC Report

• Bill of Entry Declaration

• Acceptance Letter with Debit Authority for Usance Bill

Letters of Credit

In a business cycle, an importer will need to pay for his purchases in international and domestic
markets. Letters of credit helps Indian importers to facilitate purchase of goods in international
and domestic trading operations.

Letters of credit issued by major Indian banks are accepted worldwide.

Documentation for Letter of Credits

• L/C Application Form

• General Undertaking / Indemnity on Stamp Paper (value applicable as per the state)

• Recommended Board Resolution for Companies / Partnership Deed for Partnership Firms

• IE Code Number Certificate

• OGL cum FEMA Declaration

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• KYC Report

• Purchase Order / Proforma Invoice (accepted by the applicant)

• Insurance Copy only on FOB Basis

• Annexure to the LC (Mentioning additional conditions to be incorporated in the LC)

• Original License (Exchange control copy), If applicable

Export Collection

When an exporter client sells goods overseas, he needs to receive payment for the goods that has
been exported. Through a network of correspondent banks Indian banks ensure faster collection
process for all export bills provided all the necessary documents are in place, which will be sent
to overseas bank for collection.

Documentation for Export Collection

• Request Letter

• IE Code Number Certificate

• FEMA Declaration

• KYC Report

• SDF (exchange control Copy) / GR Form / PP Form / Softex Form

• Original Transport Documents - Bill of Lading or Airway Bill

• Insurance Copy (if on CIF terms)

• Bill of Exchange (in case of D/A)

• Original L/C in case of L/C Bill

• Clarification letter for delay beyond 21 days of export

• Any other documents as per terms and conditions between Exporter and Importer
Commercial Invoice

Export Advance Payment

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An Indian importer might require the importer overseas to make advance payment for the goods
that he is importing. The exporter can ask his counterparty to send the payment to the exporter’s
bank through their network of correspondents.

Documents for Export Advance Bill

• Request Letter

• IEC Code

• FEMA Declaration

• KYC Report

• SDF (exchange control Copy) / GR Form / PP Form / Softex Form

• Original Transport Documents - Bill of Lading or Airway Bill

• Invoice of Export

• Insurance Copy (if on CIF terms)

• Clarification letter for delay in submission of documents beyond 21 days of export

• Any other documents as per terms and conditions between Exporter and Importer

• Original FIRC

Miscellaneous Outward Remittances

Outward Remittances (Miscellaneous) for other purposes can be remitted quite easily.
Remittances by way of SWIFT can be effected through a network of correspondent banks to any
part of the world. All transactions are subjected to FEMA regulations.

Documents for Outward Remittance

• Request Letter

• Form A2

• Invoice Copy / Agreement Copy

• FEMA Declaration

• Annexure A & B

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Let us Sum Up:

Banks offer several services under foreign currency services, for clients travelling abroad, such
as:

• Foreign Currency (FC) Travelers’ Cheques

• FC Cash

• FC Demand Drafts

• FC Remittances

These instruments are both issued and en-cashed by banks

Other products offered in Foreign Exchange services are:

• Import collection

• Export collection

• Letters of Credit

• Bank Guarantees

Key Words:

Foreign currency travellers’ cheques, drafts – these are travel related products for clients going
abroad

Foreign currency in cash – a portion of the foreign currency is permitted to be carried by


travelers in cash

Import export collections – collection of import payables on behalf of foreign correspondents


abroad

Export collections – collection of export receivables for exporter-clients in India

Letters of Credit – issued on behalf of importer clients to provide assurance to overseas suppliers

Bank Guarantees - issued on behalf of exporter clients to provide assurance to overseas importers

Check your Progress:

What are the various facilities extended by banks under foreign exchange services?

Terminal Questions:

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Describe the various kinds of remittances permitted by RBI, and in brief the formalities needed
to be complied with.

Answers to Check your Progress:

Banks offer several services under foreign currency services, for clients travelling abroad, such
as:

• Foreign Currency (FC) Travelers’ Cheques

• FC Cash

• FC Demand Drafts

• FC Remittances

These instruments are both issued and en-cashed by banks

Other products offered in Foreign Exchange services are:

• Import collection

• Export collection

• Letters of Credit

• Bank Guarantees

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A.4 – CORPORATE DEPOSITS

CORPORATE DEPOSITS

Banks offer a variety of deposit products to corporates so that they may park their temporary
liquidity and meet their day to day expenses. The main ones among them are:

Current Accounts

In today's fast-paced world, businesses regularly require to receive and send funds to various
cities in the country. Banks offer inter-city banking with a single account and access to the entire
network of branches.

The usual facilities that banks offer for such accounts are:

o Payable at par cheque facility

o Sweep-in and sweep-out facility

o Free or concessional rates for RTGS/NEFT/SWIFT remittances and demand


drafts
o Free or concessional rates for collection, both inward and outward

o Corporate internet banking facility

o Facility to upload LCs, salary payment lists, etc., from the clients’ terminal

o Free door step collection and delivery facility

Most companies require maintaining current accounts with designated banks for payment of
Dividend and Interest Warrants. Once the dividend is declared or the interest falls due for
payment, the entire amount is transferred to this current account. Then Dividend or Interest
Warrants are drawn on these accounts by the company.

Fixed Deposits

Corporates normally keep term deposits with banks for fixed short periods in order to meet
anticipated outgoings such as advance tax, tax deducted at source, service tax, etc.

As the amounts are large, many banks vie for these funds to meet their treasury and statutory
obligations. The interest rates on such deposits rise and fall with the demand-supply situation,
and are generally higher than the card rates.

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Certificates of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument and issued in
dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period.
Guidelines for issue of CDs are presently governed by various directives issued by the Reserve
Bank of India.
Eligibility
CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs)
and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
Aggregate Amount
Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs
within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments,
viz., term money, term deposits, commercial papers and inter-corporate deposits should not
exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.
Minimum Size of Issue and Denominations
Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that could be accepted
from a single subscriber should not be less than Rs. 1 lakh and in the multiples of Rs. 1 lakh
thereafter.
Who can Subscribe
CDs can be issued to individuals, corporations, companies, trusts, funds, associations, etc. Non-
Resident Indians (NRIs) may also subscribe to CDs, but only on a non-repatriable basis. Such
CDs cannot be endorsed to another NRI in the secondary market.
Let us Sum Up:

Banks offer deposit products to companies to park their temporary liquidity. Usual products are
current accounts with facilities for payable at-par cheques, sweep in/out facility, linked to short
term deposits, various modes of electronic funds transfer.

Banks also offer corporate internet banking with the facility to upload documents such as LC
applications, etc., from the client’s workplace.

Banks can also offer Certificates of Deposits to corporates, within the framework laid down by
RBI.

Key Words:

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Sweep in/out facility: excess funds at the end of the day are automatically swept out into short
term deposits. In case of necessity, such short term deposits are cancelled and funds there from
swept in to the current account

Corporate Internet Banking: This facilitates the client to directly perform several banking
functions, such as funds transfer, uploading of documents, etc., directly from their own office.

Certificates of Deposit (CD): CD is a negotiable money market instrument and issued in


dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period

Check your Progress:

What are the various deposit products offered by banks to corporates?

Terminal Questions:

Write a paragraph on Certificates of Deposits issued by banks to their clients

Answers to Check your Progress:

The usual facilities that banks offer for such accounts are payable at par cheque facility, sweep-in
and sweep-out facility, free or concessional rates for RTGS/NEFT/SWIFT remittances and
demand drafts, free or concessional rates for collection, both inward and outward, corporate
internet banking facility, facility to upload LCs, salary payment lists, etc., from the clients’
terminal, free door step collection and delivery facility

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A.4 – CORPORATE FINANCE

The aspects of Corporate Finance that we shall see in this Chapter are:

a) Working Capital Finance

i) Fund based facilities

ii) Non-Fund based facilities

iii) Finance of Foreign Trade

b) Corporate Debt Restructuring

Working Capital Finance

A manufacturing unit needs finance as normally the promoter has only a part of the funds
required to establish and operate it.

The funds required are basically of 2 types:

a) Long term funds required for purchase of land, construction of factory and office
building, purchase of plant and machinery, utilities, etc. We shall study about this kind of
requirement in a subsequent chapter.

b) Short term funds required to finance Working Capital, that is, hold inventory and
receivables:-

• purchase raw materials and consumables,

• wait for the entire manufacturing process to be over, till the raw materials are
converted into finished goods,

• wait till the finished goods are sold,

• until finally cash is received from the customer.

This is known as the Process Cycle, depicted graphically in the diagram below.

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Raw
CASH
Materials

Receivabl In Process
es Goods

Finished
Goods

The Working Capital Cycle begins with cash that is used to purchase raw materials and
consumables. These items are put in the process during which other factors of production such
as labour, power, fuel, etc., are used to convert the raw materials into goods in process during
the process cycle, and finally into finished goods at the end of the cycle.

The finished goods are then supplied to the customer on whom a bill is raised. In other words,
the current assets in the shape physical goods are converted into a financial asset, i.e.,
receivables.

These receivables are realized after the due dates, and cash is received.

And so the cycle goes on. The efficiency of the company is inversely proportion to the cycle
time. In other words, the shorter the cycle, the greater the efficiency in Working Capital
Management.

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If we further analyse this cycle, we find the following points:

1 2 5

3 4 6

Operating
Cycle
Cash
Cycle
Point 1: Order placed for purchase of Raw Materials

Point 2: Raw Materials received at factory and are taken into process

Point 3: Invoice received from Raw Materials vendor

Point 4: Raw Materials vendors paid

Point 5: Process completed and finished goods shipped to purchaser with invoice

Point 6: Cash received from purchaser

OPERATING CYCLE: From Points 1 to 6

CASH CYCLE: From Point 4 to 6

Working Capital Finance by way of Short Term funds are also required for other reasons such as:

a) Holding of Safety Stock in order to prevent stock outs in the event of fluctuation in Lead
Time (the time taken from placing an order for Raw Materials till the time it is actually
received at the factory), or, fluctuation in the pattern of consumption of Raw Materials. In
other words, if increased production is required to cater to a sudden increase in demand,
the extra amount of Raw Material required would be met from the Safety Stock.

b) Seasonal nature of availability of an input. Thus, almost all agro-based industry such as
sugar, cotton, jute, oil seeds, etc., need to be procured just after the harvest season, when
the holding of inventory peaks.

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c) Seasonal nature of demand. To take an example, the demand for fans, air conditioners
and coolers would rise with the advent of spring. Hence, additional inventory of finished
goods may be required at this time, so as not to lose market share.

WORKING CAPITAL FINANCE

Before the 1970s banks used to finance on the basis of the security offered. Thus, loans were
granted against the security of pledge of gold or mortgage of real estate.

Loans to industries used to be granted against the security of factory land and buildings, plant
and machinery and stocks stored in warehouses. In the latter case, the storage would be locked
with the bank’s padlock, and the keys of such would be held at the bank. Delivery of stocks from
these godowns would be made against Delivery Orders issued by the bank manager authorizing
the godown keeper (who was an employee of the bank) to deliver the authorised quantity to the
borrower’s representative.

But rapid industrialization, especially in the SME (Small and Medium Enterprises) Sector
needed a different approach:

a) Banks needed to lend against the future cash flows of the borrowing unit

b) Sanction of the bank’s facility had to be made transparent, especially in regard to


appraisal of the quantum of finance that could be granted, requirement of security and
application of interest.

c) Operation of the bank’s facility needed to be user-friendly. For example, the lock & key
system proved to be a major hindrance in operational convenience for the borrower.

Tandon Committee Report

RBI set up a Working Group headed by the then Chairman of Punjab National Bank, was
constituted by the RBI in July 1974 to suggest methods for improving the delivery of industrial
credit based on the performance and projections of the borrower, rather than the security offered.

The study group with eminent personalities drawn from leading banks, financial institutions and
a wide cross-section of the Industry with a view to study the entire gamut of Bank's finance for
working capital and suggest ways for optimum utilisation of Bank credit.

This was the first elaborate attempt by the central bank to organise the Bank credit. The report of
this group is widely known as Tandon Committee report. Most banks in India even today
continue to look at the needs of the corporates in the light of methodology recommended by
the Group.

The Tandon Committee made path-breaking recommendations on the following aspects:

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a) Inventory norms for major industries
b) Quantification of Maximum Permissible Bank Finance (MPBF)
c) Migration from the Cash Credit System to the Loan System, and,
d) Periodic MIS required from borrowing industries to monitor operation of the loan
account.

As per the recommendations of Tandon Committee, the corporates should be discouraged from
accumulating too much of stocks of current assets and should move towards very lean
inventories and receivable levels. The committee even suggested the maximum levels of Raw
Material, Stock-in-process and Finished Goods which a corporate operating in an industry should
be allowed to accumulate These levels were termed as inventory and receivable norms.
Depending on the size of credit required, the funding of these current assets (working capital
needs) of the corporates could be met by one of the following methods:

First Method of Lending:

Banks can work out the working capital gap, i.e., total current assets less current liabilities other
than bank borrowings (called Maximum Permissible Bank Finance or MPBF) and finance a
maximum of 75 per cent of the gap; the balance to come out of long-term funds, i.e., owned
funds and term borrowings. This approach was considered suitable only for very small borrowers
i.e., where the requirements of credit were less than Rs.10 lacs.

MPBF = 75% x (CA – OCL)

Where, CA = Current Assets

OCL = Other Current Liabilities, i.e., Current Liabilities other than bank
borrowings

Second Method of Lending:

Under this method, it was thought that the borrower should provide for a minimum of 25% of
total current assets out of long-term funds i.e., owned funds plus term borrowings. A certain
level of credit for purchases and other current liabilities will be available to fund the buildup of
current assets and the bank will provide the balance (MPBF). Consequently, total current
liabilities inclusive of bank borrowings could not exceed 75% of current assets. RBI stipulated
that the working capital needs of all borrowers enjoying fund based credit facilities of more than
Rs. 10 lacs should be appraised (calculated) under this method.

MPBF = 75% x CA - OCL

Third Method of Lending: Under this method, the borrower's contribution from long term
funds will be to the extent of the entire CORE CURRENT ASSETS, which has been defined by
the Study Group as representing the absolute minimum level of raw materials, process stock,
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finished goods and stores which are in the pipeline to ensure continuity of production and a
minimum of 25% of the balance current assets should be financed out of the long term funds plus
term borrowings.

MPBF = 75% x (CA – CCA) – OCL

Where CCA = Core Current Assets, i.e., the portion of Current Assets that does not fluctuate
over time.

(This method was not accepted for implementation and hence is of only academic interest).
As can be seen above, the basic foundation of all banks' appraisal of the needs of creditors is the
level of current assets. The classification of assets and balance sheet analysis, therefore, assumes
a lot of importance. RBI has mandated a certain way of analysing the balance sheets. The
requirements of this break-up of assets and liabilities differs slightly from that mandated by the
Company Law Board (CLB). The analysis of balance sheet in CMA data is said to give a more
detailed and accurate picture of the affairs of a corporate. The corporates are required by all
banks to analyse their balance sheet in this specific format called CMA data format and submit to
banks. While most qualified accountants working with the firms are aware of the method of
classification in this format, professional help is also available in the form of Chartered
Accountants, Financial Analysts for this analysis.

APPRAISAL OF WORKING CAPITAL REQUIREMENTS

All banks have structured appraisal formats for Working Capital Loans. The data that is input in
these forms and the appraisal done thereon is as follows:

a) The static data of the borrowing company, i.e., its name and address, constitution, names
of directors and key management personnel, location of factories, the product code, the
internal credit rating by the bank, etc.

b) The present and proposed facilities, i.e., the limits and outstanding in all existing and
proposed fund based accounts such as term loans, cash credit against stocks, cash credit
against receivables, overdrafts, and non-fund based accounts such as deferred payment
guarantees, letters of credit and bank guarantees. This data is normally presented in a
tabular format, showing the rates of interest and security against each facility

c) Credit Information Bureau of India Ltd., (CIBIL) report on the borrower. CIBIL is an
organization, originally promoted by SBI (40%), HDFC (40%), Dun & Bradstreet (10%)
and Trans Union International (10%). At present the shareholding has been vastly
widened to include most major Indian and foreign banks operating in India. CIBIL
maintains a very detailed credit history of both companies and individuals that can be
accessed by its members

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d) The conduct of the account over the last one year, i.e., irregularities observed; level of
compliance with existing terms and conditions of sanction, amount of business routed
through the bank’s accounts, vis-à-vis the total turnover, etc. In case it is a fresh proposal,
the opinion reports from the existing bankers should be obtained, together with search of
the records of Registrar of Companies (RoC), RBI website, and, above all, market report
on the standing of the company.

e) Financial Appraisal: This is usually done on the CMA (Credit Monitoring Arrangement)
Data format, that has the 4 Forms:

i) Form I: Company’s performance in the last financial year and projections


for 2 forthcoming years

ii) Form II: Operating statement. This is the profit and loss statement of the
company, reclassified according to the Form

iii) Form III A: Liabilities statement. This is the liabilities side of the balance
sheet, reclassified according to the Form

iv) Form III B: Assets statement. This is the assets side of the balance sheet,
reclassified according to the Form

v) Form IV: Analysis of Current Assets and Current Liabilities

vi) Form V: Computation of Assessed Bank Finance (ABF)

vii) Form VI: Funds Flow Statement

f) Structuring of Facilities: Once the quantum of fund based limits is determined, the
facilities, i.e., the mechanism of delivery – cash credit against stocks, cash credit against
bills or book debts, working capital term loans, etc., are arrived at according to the RBI
guidelines and the bank’s own credit policy, in consultation with the client.

g) Margin requirements: Once the facilities are structured, the margin requirements against
each facility are arrived at according to the RBI guidelines and the bank’s own credit
policy, in consultation with the client.

h) Security: The assets created out of the bank’s loan are invariably taken as security. This is
known as the primary security. However, when the time comes, in cases of loan default,
to enforce the primary security, it is often found that it may not be sufficient to cover the
bank’s dues, especially in the case of stocks and book debts. In such cases banks insist on
a collateral security, that may be in the form of:

i) Personal guarantee of the directors, partners

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ii) Personal guarantee of third parties

iii) Mortgage of factory land and buildings

iv) Mortgage of other property belonging to the owners or guarantors

i) Creation of Charge: Charge is created on the security by way of the following usual
ways:

Pledge: the possession of the property pledged passes to the creditor. But in the present
practice, the debtor holds the property as an agent for the creditor.

Hypothecation: the possession remains with the debtor, and the creditor holds a “floating
charge”.

Mortgage: the borrower creates a charge on immovable property making a conditional


conveyance of the property that can be enforced in the event of default.

j) Documentation: Depending on the facilities proposed, their terms and conditions, security
charged, and the mechanism for creation of charge are determined, the documentation is
decided upon. Most banks have standard documentation for usual facilities; custom
designed documentation is required only in special cases.

CONDUCT AND MONITORING OF INDUSTRIAL LOANS

Industrial loans require very close monitoring so as to ensure safety of the bank’s interests. The
two main points to be kept in mind, before we embark on the topic are:

a) Asymmetric information: The borrower has more information about the affairs of his own
industrial unit than the bank officials. Usually sensitive and negative information is with
held by the borrower from his banker. The bank has, therefore, to ascertain the correct
position by remaining constantly vigilant and meticulously follow the procedure
described below laid down for conduct of accounts.

b) Moral hazard: The borrower has far less financial stake than the bank in his project. This
is because loans are usually given with a Debt: Equity ratio of 3:1 or even more. Thus the
borrower has less to lose than the bank in case the enterprise does not succeed. In other
words, there is a possibility that the borrower may not take as much care of the assets
taken by the bank as security, but the possession of which remains with the borrower, as
he would have, had the entire money been his own.

Keeping these two very important aspects in mind, the following guidelines are prescribed by
banks, within the framework stipulated by RBI, for the conduct and monitoring of industrial
loans.

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Drawing Power (DP): Based on the position of current assets declared by the borrower in his
stock statement (explained below) the bank calculated the DP, or, the level up to which the
borrower can be permitted to draw in his Cash Credit Account. The DP does not exceed the limit
that has been sanctioned to the borrower. Normally non-moving stocks and receivables beyond
90 days are taken out from cover while calculating the DP under Cash Credit facilities.

In case of exceptional requirement that could not have been anticipated before, ad hoc additional
limits need to be sanctioned by the appropriate authority. Normally, however, the practice of ad
hoc additional limits should be avoided. Instead, the fluctuations in holding of assets should be
incorporated into the assessment of working capital requirements.

A. Periodic Inspection

Industrial borrowers have to submit the following information periodically to their lending
banks:

Stock To be submitted at monthly Format is usually prescribed by banks designed


Statements intervals to reveal the age-wise position of different
assets and their movements during the month

QIS I* To be submitted at quarterly (a) estimates of production & sales for the
intervals current year and ensuing quarter and (b)
estimates of Current Assets (CA) and Current
Liabilities (CL) for ensuing quarter

QIS II* To be submitted at quarterly (a) actual production & sales in the current
intervals year & last completed year, and (b) actual CA
and CL for the last completed quarter

Form III To be submitted at half-yearly (a) actual performance for the last half year
A* intervals vis-à-vis the estimates

Form III To be submitted at half-yearly Funds flow for the last half year vis-à-vis the
B* intervals estimates

(*) formats prescribed by the Tandon Committee, modified by the Chore Committee. These
returns are now no longer mandatory. Most banks, however, insist on their submission, so as to
be able to maintain a close watch on the functioning of the industrial unit.

All banks usually have trained field staff for carrying out periodic inspection of the borrower’s
assets secured to the bank. The purpose of these inspections is:

a) To ascertain whether the charged assets are actually all present in the industrial unit to the
full value declared by the borrower, and in good and proper condition.

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b) To discuss the operation of the unit over the previous month and the plans for the near
term period.

c) To pick up soft signals at the unit. Much can be learned from the unspoken word, i.e., the
level of activity actually evident at the factory, body language of the employees, and so
on.

B. Renewal of Borrowal Accounts

According to RBI instructions all sanctions are valid for one year only. The facilities must be
renewed at intervals of not more than a year, based on audited annual financial statements, not
more than 6 months old. All companies close their books as on 31 st March each year and have to
submit their Income Tax Returns based on their audited balance sheets by the following 30th of
September.

In view of this, normally borrowal accounts are renewed during the last quarter of each calendar
year, based on the audited figures for the last Financial Year.

The renewal exercise is akin to the exercise for grant of fresh limits, as a fresh sanction is
granted as a result of the exercise.

In most cases it is observed that the borrower is interested in the renewal of his facilities only
when he needs an enhancement of the existing limits. Otherwise, there is normally no interest on
the part of the borrower. The bank official must closely follow up with the borrower and ensure
that all facilities are renewed on time.

C. Revival of Documents

Care must be taken to ensure that all loan documents taken from the borrower are completely
executed and kept in order. Documents in the nature of a promissory note are normally subject to
the Law of Limitation. That is, such documents become time-barred, and therefore invalid, once
the time limit is over.

Such documents therefore need to be carefully diarised, at least six months in advance, for
revival.

In case it is found that some borrower is unwilling or unable to revive his documents, the
appropriate authority should be reported to and legal or other action should be initiated well in
time.

Let us Sum Up:

Commercial loans based on the performance and purpose of the company, rather than on security
offered was started in the 1960s.

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Banks offer fund-based facilities, such as, term loans, cash credits and overdrafts, and non-fund-
based facilities such as letters of credit, guarantees.

Working Capital (WC) appraisal is done on the basis of the cash cycle projected by the borrower

Tandon Committee recommended norms for inventory, norms for WC appraisal and periodic
submission of information by the borrower to monitor the account and ensure end use of funds.

Key Words:

MPBF – Maximum permissible bank finance, recommended by the Tandon Committee

Security – the tangible or intangible items offered by the borrower to the lender against the risk
of default, such as the assets created out of the bank’s finance, other assets, not related to the
loan, personal guarantees of the directors, partners, or, third parties

Margin – banks do not normally finance the entire requirement, but insist on 25-33% stake from
the borrower’s own funds. This is called the margin

Drawing power – the value of the primary security, present or future, less the margin stipulated is
the drawing power. This is calculated usually once a month, based on the monthly statement
stocks and bills/ book debts submitted by the borrower

Current assets (CA) – the raw materials, goods in process, finished goods and the receivables are
the major components of CA

Current liabilities (CL) – credit received from vendors, service providers, etc., are major
components of CL

Documentation – promissory notes and other instruments required to be signed by the borrower
in token of accepting the terms and conditions of advance

Check your Progress:

What are current assets and liabilities, and how do companies finance the gap between the two?

Terminal Questions:

What are the different methods of WC finance?

Explain in brief the balance sheet projections method

Answers to Check your Progress:

Current assets (CA) are the raw materials, goods in process, finished goods and the receivables
are the major components of CA, while current liabilities (CL) are credit received from vendors,

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service providers, etc., are major components of CL. The gap between the two, is financed partly
by banks and partly from long term sources of the borrower.

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EXPORT FINANCE

India’s exports are extremely valuable as they earn foreign exchange income for the country.
This is very important as our economy runs on imported oil, without which our industry and
transport sectors would grind to a halt.

In order to provide a boost for exports, certain special facilities have provided for extending
finance to the export sector. We shall study each of these facilities.

RBI first introduced the scheme Export Financing in 1967. The scheme is intended to make
short-term working capital finance available to exporters at internationally comparable interest
rates. RBI fixes only the ceiling rate of interest for export credit. However, banks are free to
decide the rates of interest within the ceiling rates keeping in view the BPLR and spread
guidelines and taking into account track record of the borrowers and the risk perception.
In order to enhance transparency in banks' pricing of their loan products, banks have been
advised to fix their Benchmark Prime Lending Rate (BPLR) after taking into account (i) actual
cost of funds, (ii) operating expenses and (iii) a minimum margin to cover regulatory
requirement of provisioning / capital charge and profit margin.
In this section we shall study:
Rupee Export Credit
1. Pre-shipment Rupee Export Credit
2. Post-shipment Rupee Export Credit
3. Deemed Exports – concessive Rupee Export Credit
4. Interest on Rupee Export Credit
Export Credit in Foreign Currency
5. Pre-shipment Credit in Foreign Currency
6. Post-shipment Export Credit in Foreign Currency
7. Interest on Export Credit in Foreign Currency
Export Credit - Customer Service, Simplification of Procedures for Delivery and Reporting
Requirements
8. Customer service and simplification of procedures
9. Reporting requirements
10. Pre-shipment credit to diamond exporters- conflict diamonds
RUPEE EXPORT CREDIT
1. PRE-SHIPMENT RUPEE EXPORT CREDIT

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'Pre-shipment / Packing Credit' means any loan or advance granted or any other credit provided
by a bank to an exporter for financing the purchase, processing, manufacturing or packing of
goods prior to shipment / working capital expenses towards rendering of services on the basis of
letter of credit opened in his favour or in favour of some other person, by an overseas buyer or a
confirmed and irrevocable order for the export of goods / services from India.
Period of Advance
The period for which a packing credit advance may be given by a bank will depend upon the
circumstances of the individual case, such as the time required for procuring, manufacturing or
processing (where necessary) and shipping the relative goods / rendering of services.
On the basis of the appraisal procedure for working capital requirements, banks decide the period
for which a packing credit advance may be given, having regard to the various relevant factors so
that the period is sufficient to enable the exporter to ship the goods / render the services.
If pre-shipment advances are not adjusted by submission of export documents within 360 days
from the date of advance, the advances will cease to qualify for concessive rate of interest to the
exporter ab initio.
RBI would provide refinance only for a period not exceeding 180 days.
Disbursement of Packing Credit
(i) Ordinarily, each packing credit sanctioned should be maintained as separate account for the
purpose of monitoring period of sanction and end-use of funds.
(ii) The bank may release the packing credit in one lump sum or in stages as per the requirement
for executing the orders or LC.
(iii) The borrower may also maintain different accounts at various stages of processing,
manufacturing etc. depending on the types of goods / services to be exported e.g., hypothecation,
pledge, etc., accounts and may ensure that the outstanding balance in accounts are adjusted by
transfer from one account to the other and finally by proceeds of relative export documents on
purchase, discount etc.
(iv) RBI requires that banks keep a close watch on the end-use of the funds and ensure that credit
at lower rates of interest is used for genuine requirements of exports. Banks should also monitor
the progress made by the exporters in timely fulfillment of export orders.
Liquidation of Packing Credit
The packing credit / pre-shipment credit granted to an exporter should be liquidated out of
proceeds of bills drawn for the exported commodities on its purchase, discount etc., thereby
converting pre-shipment credit into post-shipment credit. Further, subject to mutual agreement
between the exporter and the banker it can also be repaid / prepaid out of balances in Exchange
Earners Foreign Currency A/c (EEFC A/c) as also from rupee resources of the exporter to the
extent exports have actually taken place. If not so liquidated / repaid, banks are free to decide the
rate of interest from the date of advance.
(ii) Packing credit in excess of export value
(a) Where by-product can be exported

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Where the exporter is unable to tender export bills of equivalent value for liquidating the packing
credit due to the shortfall on account of wastage involved in the processing of agro products like
raw cashew nuts, etc., banks may allow exporters, inter alia, to extinguish the excess packing
credit by export bills drawn in respect of by-product like cashew shell oil, etc
(b) Where partial domestic sale is involved
However, in respect of export of agro-based products like tobacco, pepper, cardamom, cashew
nuts etc., the exporter has necessarily to purchase a somewhat larger quantity of the raw
agricultural produce and grade it into exportable and non-exportable varieties and only the
former is exported. The non-exportable balance is necessarily sold domestically. For the packing
credit covering such non-exportable portion, banks are required to charge commercial rate of
interest applicable to the domestic advance from the date of advance of packing credit and that
portion of the packing credit would not be eligible for any refinance from RBI.
Banks have, however, operational flexibility to extend the following relaxations to their exporter
clients who have a good track record:
(a) Repayment / liquidation of packing credit with proceeds of export documents will continue;
however, this could be with export documents relating to any other order covering the same or
any other commodity exported by the exporter. While allowing substitution of contract in this
way, banks should ensure that it is commercially necessary and unavoidable. Banks should also
satisfy themselves about the valid reasons as to why packing credit extended for shipment of a
particular commodity cannot be liquidated in the normal method. As far as possible, the
substitution of contract should be allowed if the exporter maintains account with the same bank
or it has the approval of the members of the consortium, if any.
(b) The existing packing credit may also be marked-off with proceeds of export documents
against which no packing credit has been drawn by the exporter. However, it is possible that the
exporter might avail of EPC with one bank and submit the documents to another bank. In view of
this possibility, RBI has permitted banks to extend such facility after ensuring that the exporter
has not availed of packing credit from another bank against the documents submitted. If any
packing credit has been availed of from another bank, the bank to which the documents are
submitted has to ensure that the proceeds are used to liquidate the packing credit obtained from
the first bank.
(c) These relaxations should not be extended to transactions of sister / associate / group concerns.
'Running Account' Facility
(i) Banks provide pre-shipment credit to exporters on lodgment of L/Cs or firm export orders.
The availability of raw materials is seasonal in some cases. In some other cases, the time taken
for manufacture and shipment of goods is more than the delivery schedule as per export
contracts. In many cases, the exporters have to procure raw material, manufacture the export
product and keep the same ready for shipment, in anticipation of receipt of letters of credit / firm
export orders from the overseas buyers. Having regard to difficulties being faced by the
exporters in availing of adequate pre-shipment credit in such cases, banks have been authorised
to extend Pre-shipment Credit ‘Running Account’ facility in respect of any commodity, without
insisting on prior lodgement of letters of credit / firm export orders, depending on the bank’s
judgement regarding the need to extend such a facility and subject to the following conditions:

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(a) Banks may extend the ‘Running Account’ facility only to those exporters whose track record
has been good as also to Export Oriented Units (EOUs) / Units in Free Trade Zones / Export
Processing Zones (EPZs) and Special Economic Zones (SEZs)
(b) In all cases where Pre-shipment Credit ‘Running Account’ facility has been extended, letters
of credit / firm orders should be produced within a reasonable period of time to be decided by the
banks.
(c) Banks should mark off individual export bills, as and when they are received for negotiation /
collection, against the earliest outstanding pre-shipment credit on 'First In First Out' (FIFO)
basis. Needless to add that, while marking off the pre-shipment credit in the manner indicated
above, banks should ensure that concessive credit available in respect of individual pre-shipment
credit does not go beyond the period of sanction or 360 days from the date of advance,
whichever is earlier.
(d) Packing credit can also be marked-off with proceeds of export documents against which no
packing credit has been drawn by the exporter.
(ii) If it is noticed that the exporter is found to be abusing the facility, the facility should be
withdrawn forthwith.
(iii) In cases where exporters have not complied with the terms and conditions, the advance will
attract commercial lending rate ab initio. In such cases, banks will be required to pay higher rate
of interest on the portion of refinance availed of by them from the RBI in respect of the relative
pre-shipment credit. All such cases should be reported to the Monetary Policy Department,
Reserve Bank of India, Central Office, Mumbai 400 001 which will decide the rate of interest to
be charged on the refinance amount.
(iv) Running account facility should not be granted to sub-suppliers.
Export Credit against Proceeds of Cheques, Drafts, etc. Representing Advance Payment for
Exports
(i) Where exporters receive direct remittances from abroad by means of cheques, drafts etc. in
payment for exports, banks may grant export credit at concessive interest rate to exporters of
good track record till the realisation of proceeds of the cheque, draft etc. received from abroad,
after satisfying themselves that it is against an export order, is as per trade practices in respect of
the goods in question and is an approved method of realisation of export proceeds as per extant
rules.
(ii) If, pending compliance with the above conditions, an exporter has been granted
accommodation at normal commercial interest rate, banks may give effect to concessive export
credit rate retrospectively once the aforesaid conditions have been complied with and refund the
difference to the exporter.
Rupee Pre-shipment Credit to Specific Sectors/Segments
Rupee Export Packing Credit to Manufacturer Suppliers for Exports Routed through
STC/MMTC/Other Export Houses, Agencies etc.
(i) Banks may grant export packing credit to manufacturer suppliers who do not have export
orders/letters of credit in their own name and goods are exported through the State Trading
Corporation/Minerals and Metal Trading Corporation or other export houses, agencies etc.
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(ii) Such advances will be eligible for refinance, provided the following requirements are
complied with apart from the usual stipulations:
(a) Banks should obtain from the export house a letter setting out the details of the export order
and the portion thereof to be executed by the supplier and also certifying that the export house
has not obtained and will not ask for packing credit in respect of such portion of the order as is to
be executed by the supplier.
(b) Banks should, after mutual consultations and taking into account the export requirements of
the two parties, apportion between the two i.e. the Export House and the Supplier, the period of
packing credit for which the concessionary rate of interest is to be charged. The concessionary
rates of interest on the pre-shipment credit will be available up to the stipulated periods in respect
of the export house/agency and the supplier put together.
(c) The export house should open inland L/Cs in favour of the supplier giving relevant
particulars of the export L/Cs or orders and the outstandings in the packing credit account should
be extinguished by negotiation of bills under such inland L/Cs. If it is inconvenient for the export
house to open such inland L/Cs in favour of the supplier, the latter should draw bills on the
export house in respect of the goods supplied for export and adjust packing credit advances from
the proceeds of such bills. In case the bills drawn under such arrangement are not accompanied
by bills of lading or other export documents, the bank should obtain through the supplier a
certificate from the export house at the end of every quarter that the goods supplied under this
arrangement have in fact been exported. The certificate should give particulars of the relative
bills such as date, amount and the name of the bank through which the bills have been
negotiated.
(d) Banks should obtain an undertaking from the supplier that the advance payment, if any,
received from the export house against the export order would be credited to the packing credit
account.
Rupee Export Packing Credit to Sub-Suppliers
Packing credit can be shared between an Export Order Holder (EOH) and sub-supplier of raw
materials, components etc. of the exported goods as in the case of EOH and manufacturer
suppliers, subject to the following:
(a) Running Account facility is not contemplated under the scheme. The scheme will cover the
L/C or export order received in favour of Export Houses/Trading Houses/Star Trading Houses
etc. or manufacturer exporters only. The scheme should be made available to the exporters with
good track record.
(b) Bankers to an EOH will open an inland L/C specifying the goods to be supplied by the sub-
supplier to the EOH against the export order or L/C received by him as a part of the export
transaction. On the basis of such an L/C, the sub-supplier's banker will grant EPC as working
capital to enable the sub-supplier to manufacture the components required for the goods to be
exported. On supplying the goods, the L/C opening bank will pay to the sub-supplier's banker
against the inland documents received on the basis of inland L/C. Such payments will thereafter
become the EPC of the EOH.
(c) It is up to the EOH to open any number of L/Cs for the various components required with the
approval of his banker/leader of consortium of banks within the overall value limit of the order

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or L/C received by him. Taking into account the operational convenience, it is for the L/C
opening bank to fix the minimum amount for opening such L/Cs. The total period of packing
credit availed by the sub-supplier (s), individually or severally and the EOH should be within
normal cycle of production required for the exported goods. Normally, the total period will be
computed from the date of first drawdown of packing credit by any one of the sub-suppliers to
the date of submission of export documents by EOH.
(d) The EOH will be responsible for exporting the goods as per export order or overseas L/C and
any delay in the process will subject him to the penal provisions issued from time to time. Once
the sub-supplier makes available the goods as per inland L/C terms to the EOH, his obligation of
performance under the scheme will be treated as complied with and the penal provisions will not
be applicable to him for delay by EOH, if any.
(e) The scheme is an additional window besides the existing system of sharing of packing credit
between EOH and manufacturer in respect of exported goods. The scheme will cover only the
first stage of production cycle. For example, a manufacturer exporter will be allowed to open
domestic L/C in favour of his immediate suppliers of components etc. that are required for
manufacture of exportable goods. The scheme will not be extended to cover suppliers of raw
materials/components etc. to such immediate suppliers. In case the EOH is merely a trading
house, the facility will be available commencing from the manufacturer to whom the order has
been passed on by the Trading House.
(f) EOUs/EPZ/SEZ units supplying goods to another EOU/EPZ/SEZ unit for export purposes are
also eligible for rupee pre-shipment export credit under this scheme. However, the supplier
EOU/EPZ/SEZ unit will not be eligible for any post-shipment facility as the scheme does not
cover sale of goods on credit terms.
(g) The scheme does not envisage any change in the total quantum of advance or period.
Accordingly, the credit extended under the system will be treated as export credit from the date
of advance to the sub-supplier to the date of liquidation by EOH under the inland export L/C
system and up to the date of liquidation of packing credit by shipment of goods by EOH and will
be eligible for refinance from RBI by the respective banks for the appropriate periods. It has to
be ensured that no double financing of the same leg of the transaction is involved.
(h) Banks may approach the ECGC (Export Credit Guarantee Corporation of India) for availing
suitable cover in respect of such advances.
(i) The scheme does not envisage extending credit by a sub-supplier to the EOH/manufacturer
and thus, the payment to sub-suppliers has to be made against submission of documents by L/C
opening bank treating the payment as EPC of the EOH.
Export of Services
Pre-shipment and post-shipment finance may be provided to exporters of all the 161 tradable
services covered under the General Agreement on Trade in Services where payment for such
services is received in free foreign exchange as stated at Chapter 3 of the Foreign Trade Policy
2004-09. All provisions of this circular shall apply mutatis mutandis to export of services as they
apply to export of goods unless otherwise specified. A list of services is given in Appendix 36 of
Handbook (Vol.1) of the Foreign Trade Policy 2004-09.

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The financing bank should ensure that there is no double financing and the export credit is
liquidated with remittances from abroad. Banks may take into account the track record of the
exporter/overseas counter party while sanctioning the export credit. The statement of export
receivables from such service providers may be tallied with the statement of payables received
from the overseas party.
In view of the large number of categories of service exports with varied nature of business as
well as in the environment of progressive deregulation where the matters with regard to micro
management are left to be decided by the individual financing banks, the banks may formulate
their own parameters to finance the service exporters.
Exporters of services qualify for working capital export credit (pre and post shipment) for
consumables, wages, supplies etc.
RBI stipulates that banks must ensure that –
• The proposal is a genuine case of export of services.
• The item of service export is covered under Appendix – 36 of the Hand Book (Vol.1)
• The exporter is registered with the Export Promotion Council for services
• There is an Export Contract for the export of the service
• There is a time lag between the outlay of working capital expense and actual receipt of payment
from the service consumer or his principal abroad.
• There is a valid Working Capital gap i.e., service is provided first while the payment is
received some time after an invoice is raised.
• Banks should ensure that there is no double financing/excess financing.
• The export credit granted does not exceed the foreign exchange earned less the margins if any
required, advance payment/credit received.
• Invoices are raised
• Inward remittance is received in Foreign Exchange.
• Company will raise the invoice as per the contract where payment is received from overseas
party, the service exporter would utilize the funds to repay the export credit availed of from the
bank.
Pre-shipment Credit to Floriculture, Grapes and Other Agro-based Products
(i) In the case of floriculture, pre-shipment credit is allowed to be extended by banks for
purchase of cut-flowers etc. and all post-harvest expenses incurred for making shipment.
(ii) However, with a view to promoting export of floriculture, grapes and other agro-based
products, banks are allowed to extend concessional credit for working capital purposes in respect
of export-related activities of all agro-based products including purchase of fertilizers, pesticides
and other inputs for growing of flowers, grapes etc., provided banks are in a position to clearly
identify such activities as export-related and satisfy themselves of the export potential thereof,
and that the activities are not covered by direct/indirect finance schemes of NABARD or any
other agency, subject to the normal terms & conditions relating to packing credit such as period,
quantum, liquidation etc.
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(iii) Export credit should not be extended for investments, such as, import of foreign technology,
equipment, land development etc. or any other item which cannot be regarded as working
capital.
Export Credit to Processors/Exporters-Agri-Export Zones
(i) Government of India have set up Agri- Export Zones in the country to promote Agri Exports.
Agri- Export Oriented Units (processing) are set up in Agri- Export zones as well as outside the
zones and to promote such units, production and processing are to be integrated. The producer
has to enter into contract farming with farmers and has to ensure supply of quality seeds,
pesticides, micro-nutrients and other material to the group of farmers from whom the exporter
would be purchasing the products as raw material for production of the final products for export.
The Government, therefore, suggested that such export processing units may be provided
packing credit under the extant guidelines for the purpose of procuring and supplying inputs to
the farmers so that quality inputs are available to them which in turn will ensure that only good
quality crops are raised. The exporters will be able to purchase / import such inputs in bulk,
which will have the advantages of economies of scale.
(ii) Banks may treat the inputs supplied to farmers by exporters as raw material for export and
consider sanctioning the lines of credit/export credit to processors/exporters to cover the cost of
such inputs required by farmers to cultivate such crops to promote export of agri products. The
processor units would be able to effect bulk purchases of the inputs and supply the same to the
farmers as per a pre-determined arrangement.
(iii) Banks have to ensure that the exporters have made the required arrangements with the
farmers and overseas buyers in respect of crops to be purchased and products to be exported
respectively. The financing banks will also appraise the projects in agri export zones and ensure
that the tie-up arrangements are feasible and projects would take off within a reasonable period
of time.(iv) They are also to monitor the end-use of funds, viz. distribution of the inputs by the
exporters to the farmers for raising the crops as per arrangements made by the exporter/main
processor units.
(v) They have to further ensure that the final products are exported by the processors/exporters as
per the terms and conditions of the sanction in order to liquidate the pre-shipment credit as per
extant instructions.
INTEREST ON RUPEE EXPORT CREDIT
General
A ceiling rate has been prescribed for rupee export credit linked to Benchmark Prime Lending
Rates (BPLRs) of individual banks available to their domestic borrowers. Banks have, therefore,
freedom to decide the actual rates to be charged within the specified ceilings. Further, the ceiling
interest rates for different time buckets under any category of export credit should be on the basis
of the BPLR relevant for the entire tenor of export credit.
ECNOS
ECNOS means Export Credit Not Otherwise Specified in the Interest Rate structure for which
banks are free to decide the rate of interest keeping in view the BPLR and spread guidelines.
Banks should not charge penal interest in respect of ECNOS.

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Interest Rate on Rupee Export Credit
Interest Rate Structure
Interest Rates effective from May 1, 2009 to October 31, 2009 will be not exceeding Benchmark
Prime Lending Rate (BPLR) minus 2.5 % pa for the following categories of Export Credit.
Categories of Export Credit
Pre-shipment Credit (from the date of advance)
(a) Up to 270 days
(b) Against incentives receivable from Government covered by ECGC Guarantee up to 90 days
Post-shipment Credit (from the date of advance)
(a) On demand bills for transit period, as specified by the Foreign Exchange Dealers Association
of India (FEDAI)
(b) Usance bills (for total period comprising usance period of export bills, transit period as
specified by FEDAI, and grace period, wherever applicable)
i) Up to 180 days
ii) Up to 365 days for exporters under the Gold Card Scheme.
(c) Against incentives receivable from Govt. (covered by ECGC Guarantee) up to 90 days
(d) Against undrawn balances (up to 90 days)
(e) Against retention money (for supplies portion only) payable within one year from the date of
shipment (up to 90 days)
• Since these are ceiling rates, banks would be free to charge any rate below the ceiling
rates.
• Interest rates for the above-mentioned categories of export credit beyond the tenors as
prescribed above are deregulated and banks are free to decide the rate of interest, keeping
in view the BPLR and spread guidelines.
Rupee Export Credit Interest Rates Subvention
In 2007, the Government of India (GoI) announced a package of measures to provide interest
rate subvention of 2 percentages points per annum on rupee export credit availed of by exporters
in nine specified categories of exports, viz., textiles (including handlooms), readymade garments,
leather products, handicrafts, engineering products, processed agricultural products, marine
products, sports goods and toys and to all exporters from the SME sector defined as micro
enterprises, small enterprises and medium enterprises for a period from April 1, 2007 to
September 30, 2008.
Accordingly, banks would charge interest rate not exceeding BPLR minus 4.5 per cent on pre-
shipment credit up to 180 days and post-shipment credit up to 90 days on the outstanding amount
for the period April 1, 2007 to September 30, 2008. The coverage was extended on October 6,
2007 to include jute and carpets, processed cashew, coffee and tea, solvent extracted de-oiled
cake, plastics and linoleum.

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Further, in respect of leather and leather manufacturers, marine products, all categories of textiles
under the existing scheme excluding man-made fibre and handicrafts, GoI has provided
additional subvention of 2 per cent (in addition to the 2 per cent offered earlier) in pre-shipment
credit for 180 days and post-shipment credit for 90 days from November 1, 2007 to September
30, 2008 (for carpet sector the pre-shipment credit would be available for 270 days). However,
the total subvention will be subject to the condition that the interest rate, after subvention will not
fall below 7 per cent which is the rate applicable to the agriculture sector under priority sector
lending.
Export growth dipped in response to the severe recession in many countries in the EU and the
US, which are our major export destinations. In response to this the GoI announced a stimulus
package, a component of which was a scheme of subvention for certain employment oriented
export sectors viz. Textiles (including Handloom), handicrafts, carpets, leather, gems &
jewellery, marine products and Small and Medium Enterprises for a period December 1, 2008 to
September 30, 2009. Accordingly, banks would charge interest rate not exceeding BPLR minus
4.5 percent on pre-shipment credit up to 270 days and post-shipment credit up to 180 days on the
outstanding amount for the period December 1, 2008 to September 30, 2009.
Banks are required to pass on the benefit of 2 percent/ 4 percent interest subvention completely
to the eligible exporters upfront and submit the claims to RBI for reimbursement duly certified
by the independent auditor. The subvention would be reimbursed by RBI on the basis of
quarterly claims submitted by the banks.

EXPORT CREDIT IN FOREIGN CURRENCY

Pre-shipment Credit in Foreign Currency (PCFC)


With a view to making credit available to exporters at internationally competitive rates,
authorised dealers have been permitted to extend pre-shipment Credit in Foreign Currency
(PCFC) to exporters for domestic and imported inputs of exported goods at LIBOR/EURO
LIBOR/EURIBOR related rates of interest as detailed below.
(i) The scheme is an additional window for providing pre-shipment credit to Indian exporters at
internationally competitive rates of interest. It will be applicable to only cash exports. The
instructions with regard to Rupee Export Credit apply to export credit in Foreign Currency also
mutatis mutandis, unless otherwise specified.
(ii) The exporter will have the following options to avail of export finance:
(a) to avail of pre-shipment credit in rupees and then the post-shipment credit either in rupees or
discounting/ rediscounting of export bills under Export Bills Rediscounting (EBR) Scheme,
described below.
(b) to avail of pre-shipment credit in foreign currency and discount/ rediscounting of the export
bills in foreign currency under EBR Scheme.
(c) to avail of pre-shipment credit in rupees and then convert drawals into PCFC at the discretion
of the bank.

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Choice of currency
(a) The facility may be extended in one of the convertible currencies viz. US Dollars, Pound
Sterling, Japanese Yen, Euro, etc.
(b) To enable the exporters to have operational flexibility, it will be in order for banks to extend
PCFC in one convertible currency in respect of an export order invoiced in another convertible
currency. For example, an exporter can avail of PCFC in US Dollar against an export order
invoiced in Euro. The risk and cost of cross currency transaction will be that of the exporter.
(c) Banks are permitted to extend PCFC for exports to ACU countries.
(d) The applicable benefit to the exporters will accrue only after the realisation of the export bills
or when the resultant export bills are rediscounted on ‘without recourse’ basis.
Source of Funds in Foreign Exchange for Banks
(i) The foreign currency balances available with the bank in Exchange Earners Foreign Currency
(EEFC) Accounts, Resident Foreign Currency Accounts RFC (D) and Foreign Currency (Non-
Resident) Accounts (Banks) Scheme are utilised for financing the pre-shipment credit in foreign
currency.
(ii) Banks can be permitted to utilise the foreign currency balances available under Escrow
Accounts and Exporters Foreign Currency Accounts for the purpose, subject to ensuring that the
requirements of funds by the account holders for permissible transactions are met and the limit
prescribed for maintaining maximum balance in the account under broad based facility is not
exceeded.
(iii) Foreign currency borrowings
a. In addition, banks may arrange for borrowings from abroad. Banks may negotiate lines of
credit with overseas banks for the purpose of grant of PCFC to exporters without the prior
approval of the RBI, provided the rate of interest on the borrowing does not exceed 150 basis
points over six months LIBOR/EURO LIBOR/EURIBOR.
b. Banks should draw on the line of credit arranged only to the extent of loans granted by them to
the exporters under the PCFC.
c. Banks may avail of lines of credit from other banks in India if they are not in a position to
raise loans from abroad on their own, subject to the condition that ultimate cost to the exporter
should not exceed 350 basis points above LIBOR/ EURO LIBOR / EURIBOR, provided the
bank does not have a branch abroad. The spread between the borrowing and lending bank is left
to the discretion of the banks concerned.
(iv) In case the exporters have arranged for the suppliers’ credit for procuring imported inputs,
the PCFC facility may be extended by the banks only for the purpose of financing domestic
inputs for exports.
(v) Banks are also permitted to use foreign currency funds borrowed in terms of para 4.2(i) of
Notification No. FEMA.3/2000 RB dated May 3, 2000 as also foreign currency funds generated
through buy-sell swaps in the domestic forex market for granting pre-shipment credit in Foreign
Currency (PCFC) subject to adherence to Aggregate Gap Limit (AGL) prescribed by RBI (FED).
Spread
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(i) The spread for pre-shipment credit in foreign currency will be related to the international
reference rate such as LIBOR/EURO LIBOR/EURIBOR (6 months).
(ii) The lending rate to the exporter should not exceed 350 basis points over LIBOR / EURO
LIBOR/EURIBOR, excluding withholding tax.
(iii) LIBOR / EURO LIBOR / EURIBOR rates are normally available for standard period of 1, 2,
3, 6 and 12 months. Banks may quote rates on the basis of standard period if PCFC is required
for periods less than 6 months. However, while quoting rates for non-standard period, banks
should ensure that the rate quoted is below the next upper standard period rate.
(iv) Banks may collect interest on PCFC at monthly intervals against sale of foreign currency or
out of balances in EEFC accounts or out of discounted value of the export bills if PCFC is
liquidated.
Period of Credit
(i) PCFC will be available for a maximum period of 360 days. Any extension of the credit will
be subject to the same terms and conditions as applicable for extension of rupee packing credit
and it will also have additional interest cost of 200 basis points above the rate for the initial
period of 180 days prevailing at the time of extension.
(ii) Further extension will be subject to the terms and conditions fixed by the bank concerned and
if no export takes place within 360 days, the PCFC will be adjusted at T.T. selling rate for the
currency concerned. In such cases, banks can arrange to remit foreign exchange to repay the loan
or line of credit raised abroad and interest without prior permission of RBI.
(iii) For extension of PCFC within 180 days, banks are permitted to extend on a fixed roll over
basis of the principal amount at the applicable LIBOR/EURO LIBOR/EURIBOR rate for
extended period plus permitted margin 350 basis points over LIBOR/EURO LIBOR/
EURIBOR).
Disbursement of PCFC
(i) In case full amount of PCFC or part thereof is utilised to finance domestic input, banks may
apply appropriate spot rate for the transaction.
(ii) As regards the minimum lots of transactions, it is left to the operational convenience of banks
to stipulate the minimum lots taking into account the availability of their own resources.
However, while fixing the minimum lot, banks may take into account the needs of their small
customers also.
(iii) Banks should take steps to streamline their procedures so that no separate sanction is needed
for PCFC once the packing credit limit has been sanctioned the disbursement is not delayed at
the branches.
Liquidation of PCFC Account
PCFC should be liquidated out of proceeds of export documents on their submission for
discounting/rediscounting under the EBR Scheme detailed in para 6.1 or by grant of foreign
currency loans (DP Bills). Subject to mutual agreement between the exporter and the banker, it
can also be repaid / prepaid out of balances in EEFC A/c as also from rupee resources of the
exporter to the extent exports have actually taken place.

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Forward Contracts
(i) As explained above, PCFC can be extended in any of the convertible currencies in respect of
an export order invoiced in another convertible currency. Banks are also permitted to allow an
exporter to book forward contract on the basis of confirmed export order prior to availing of
PCFC and cancel the contract (for portion of drawal used for imported inputs) at prevailing
market rates on availing of PCFC.
(ii) Banks are permitted to allow customers to seek cover in any permitted currency of their
choice which is actively traded in the market, subject to ensuring that the customer is exposed to
exchange risk in a permitted currency in the underlying transaction.
(iii) While allowing forward contracts under the scheme, banks should ensure compliance of the
basic Exchange Control requirement that the customer is exposed to an exchange risk in the
underlying transaction at different stages of the export finance.
Sharing of Export Packing Credit under PCFC
(i) The rupee export packing credit is allowed to be shared between an export order holder and
the manufacturer of the goods to be exported.
(ii) Similarly, banks may extend PCFC also to the manufacturer on the basis of the disclaimer
from the export order holder through his bank. PCFC granted to the manufacturer can be repaid
by transfer of foreign currency from the export order holder by availing of PCFC or by
discounting of bills. Banks should ensure that no double financing is involved in the transaction
and the total period of packing credit is limited to the actual cycle of production of the exported
goods.
(iii) The facility may be extended where the banker or the leader of consortium of banks is the
same for both the export order holder and the manufacturer or, the banks concerned agree to such
an arrangement where the bankers are different for export order holder and manufacturer. The
sharing of export benefits will be left to the mutual agreement between the export order holder
and the manufacturer.
Supplies from One EOU/EPZ/SEZ Unit to another EOU/EPZ/SEZ Unit
(i) PCFC may be made available to both the supplier EOU/EPZ/ SEZ unit and the receiver
EOU/EPZ/ SEZ.
(ii) The PCFC for supplier EOU/EPZ/SEZ unit will be for supply of raw materials/components
of goods which will be further processed and finally exported by receiver EOU/ EPZ / SEZ unit.
The PCFC extended to the supplier EOU/EPZ/SEZ unit will have to be liquidated by receipt of
foreign exchange from the receiver EOU/EPZ/SEZ unit, for which purpose, the receiver
EOU/EPZ/SEZ unit may avail of PCFC. The stipulation regarding liquidation of PCFC by
payment in foreign exchange will be met in such cases not by negotiation of export documents
but by transfer of foreign exchange from the banker of the receiver EOU/EPZ/SEZ unit to the
banker of supplier EOU/EPZ/SEZ unit. Thus, there will not normally be any post-shipment
credit in the transaction from the supplier EOU/EPZ/ SEZ unit’s point of view.
(iii) In all such cases, it has to be ensured by banks that there is no double financing for the same
transaction. Needless to add, the PCFC to receiver EOU/EPZ/SEZ unit will be liquidated by
discounting of export bills.

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Deemed Exports
PCFC may be allowed for ‘deemed exports’ only for supplies to projects financed by
multilateral/bilateral agencies/funds. PCFC released for ‘deemed exports’ should be liquidated
by grant of foreign currency loan at post-supply stage, for a maximum period of 30 days or up to
the date of payment by the project authorities, whichever is earlier. PCFC may also be repaid/
prepaid out of balances in EEFC A/c as also from rupee resources of the exporter to the extent
supplies have actually been made.
Refinance
Banks will not be eligible for any refinance from RBI against export credit under the PCFC
scheme and, as such, the quantum of PCFC should be shown separately from the export credit
figures reported for the purpose of drawing export credit refinance.
Post-shipment Export Credit in Foreign Currency
Rediscounting of Export Bills Abroad Scheme (EBR)
Banks may utilise the foreign exchange resources available with them in Exchange Earners
Foreign Currency Accounts (EEFC), Resident Foreign Currency Accounts (RFC), Foreign
Currency (Non-Resident) Accounts (Banks) Scheme, to discount usance bills and retain them in
their portfolio without resorting to rediscounting. Banks are also allowed to rediscount export
bills abroad at rates linked to international interest rates at post-shipment stage.
(i) It will be comparatively easier to have a facility against bills portfolio (covering all eligible
bills) than to have rediscounting facility abroad on bill by bill basis. There will, however, be no
bar if rediscounting facility on bill to bill basis is arranged by a bank in case of any particular
exporter, especially for large value transactions.
(ii) Banks may arrange a "Bankers Acceptance Facility" (BAF) for rediscounting the export bills
without any margin and duly covered by collateralised documents.
(iii) Each bank can have its own BAF limit(s) fixed with an overseas bank or a rediscounting
agency or an arrangement with any other agency such as factoring agency (in case of factoring
arrangement, it should be on ‘without recourse’ basis only).
(iv) Exporters, on their own, can arrange for themselves a line of credit with an overseas bank or
any other agency (including a factoring agency) for discounting their export bills direct subject to
the following conditions:
(a) Direct discounting of export bills by exporters with overseas bank and/or any other agency
will be done only through the branch of an authorized dealer designated by him for this purpose.
(b) Discounting of export bills will be routed through designated bank / authorized dealer from
whom the packing credit facility has been availed of. In case, these are routed through any other
bank, the latter will first arrange to adjust the amount outstanding under packing credit with the
concerned bank out of the proceeds of the rediscounted bills.
(v) The limits granted to banks by overseas banks/discounting agencies under BAF will not be
reckoned for the purpose of borrowing limits fixed by RBI (FED) for them.
Eligibility Criteria

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(i) The Scheme will cover mainly export bills with usance period up to 180 days from the date of
shipment (inclusive of normal transit period and grace period, if any). There is, however, no bar
to include demand bills if overseas institution has no objection to it.
In case borrower is eligible to draw usance bills for periods exceeding 180 days as per the extant
instructions of FED, Post-shipment Credit under the EBR may be provided beyond 180 days.
(ii) The facility under the Scheme of Rediscounting may be offered in any convertible currency.
(iii) Banks are permitted to extend the EBR facility for exports to ACU countries.
(iv) For operational convenience, the BAF Scheme may be centralised at a branch designated by
the bank. There will, however, be no bar for other branches of the bank to operate the scheme as
per the bank's internal guidelines / instructions.
Source of On-shore Funds
(i) In the case of demand bills these may have to be routed through the existing post-shipment
credit facility or by way of foreign exchange loans to the exporters out of the foreign currency
balances available with banks in the Schemes ibid.
(ii) To facilitate the growth of local market for rediscounting export bills, establishment and
development of an active inter-bank market is desirable. It is possible that banks hold bills in
their own portfolio without rediscounting. However, in case of need, the banks should also have
access to the local market, which will enable the country to save foreign exchange to the extent
of the cost of rediscounting. Further, as different banks may be having BAF for varying amounts,
it will be possible for a bank which has balance available in its limit to offer rediscounting
facility to another bank which may have exhausted its limit or could not arrange for such a
facility.
(iii) Banks may avail of lines of credit from other banks in India if they are not in a position to
raise loans from abroad on their own or they do not have branches abroad, subject to the
condition that ultimate cost to the exporter should not exceed 350 basis points above LIBOR /
EURO LIBOR / EURIBOR excluding withholding tax. The spread between the borrowing and
lending bank is left to the discretion of the banks concerned.
(iv) Banks are also permitted to use foreign currency funds borrowed as also foreign currency
funds generated through buy - sell swaps in the domestic forex market for granting facility of
rediscounting of Export Bills Abroad (EBR) subject to adherence to Aggregate Gap Limit (AGL)
approved by RBI (FED)
INTEREST ON EXPORT CREDIT IN FOREIGN CURRENCY
Interest Rate Structure on Export Credit in Foreign Currency

In respect of export credit to exporters at internationally competitive rates under the Interest Rate
schemes of 'Pre-shipment Credit in Foreign Currency' (PCFC) and 'Rediscounting of (% pa)
Export Bills Abroad' (EBR), banks are permitted to fix the rates of interest with
reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever applicable, as
under: Type of Credit
(i) Pre-shipment Credit
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(a) Up to 180 days Not exceeding 350 basis points over LIBOR/EURO
LIBOR/EURIBOR
(b) Beyond 180 days and up to 360 days Rate for initial period of 180 days prevailing at the
time of extension plus 200 basis points i.e. (i)(a)
above plus 200 basis points
(ii) Post-shipment Credit
(a) On demand bills for transit period (as Not exceeding 350 basis points over LIBOR/EURO
specified by FEDAI) LIBOR/EURIBOR
(b) Against usance bills (credit for total period Not exceeding 350 basis points over LIBOR/EURO
comprising usance period of export bills + LIBOR/EURIBOR
transit period as specified by FEDAI and
grace period wherever applicable)
Up to 6 months from the date of
shipment
(c) Export Bills (Demand or Usance) realized Rate for (ii) (b) above plus 200 basis points
after due date but up to date of
crystallization
RBI has stipulated that banks should not levy any other charges over and above the interest rate under
any name viz., service charge, Management charge etc. except recovery towards out of pocket expenses
incurred by banks as per IBA guidelines.
ii) Interest rates for the above mentioned categories of export credit beyond the tenors as prescribed
above are deregulated and banks are free to decide the rate of interest, keeping in view the BPLR and
spread guidelines.

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CUSTOMER SERVICE AND SIMPLIFICATION OF PROCEDURES
Customer Service
(i) RBI has directed that banks must provide timely and adequate credit and also render essential
customer services/guidance in regard to procedural formalities and export opportunities to their
exporter clients.
(ii) Banks should open Export Counsel Offices to guide exporters particularly the small ones and
those taking up non-traditional exports.
Working Group to review Export Credit
As part of the on-going efforts to address various issues relating to customer service to exporters,
the Reserve Bank of India had constituted a Working Group in May 2005, consisting of select
banks and exporters’ organizations to review Export Credit. The Group has come out with a
comprehensive set of recommendations most of which have been accepted and communicated to
banks. The details are available in the RBI Master Circular on Export Credit, dated 1st July, 2009.
Gold Card Scheme for Exporters

The Government (Ministry of Commerce and Industry), in consultation with RBI had indicated
in the Foreign Trade Policy 2003-04 that a Gold Card Scheme would be worked out by RBI for
creditworthy exporters with good track record for easy availability of export credit on best terms.
Accordingly, in consultation with select banks and exporters, a Gold Card Scheme was drawn
up. The Scheme envisages certain additional benefits based on the record of performance of the
exporters. The Gold Card holder would enjoy simpler and more efficient credit delivery
mechanism in recognition of his good track record. The salient features of the Scheme are:
(i) All creditworthy exporters, including those in small and medium sectors with good track
record would be eligible for issue of Gold Card by individual banks as per the criteria to be laid
down by the latter.
(ii) Gold Card under the Scheme may be issued to all eligible exporters including those in the
small and medium sectors who satisfy the laid down conditions.
(iii) Gold Card holder exporters, depending on their track record and credit worthiness, will be
granted better terms of credit including rates of interest than those extended to other exporters by
the banks.
(iv) Applications for credit will be processed at norms simpler and under a process faster than for
other exporters.
(v) Banks would clearly specify the benefits they would be offering to Gold Card holders.
(vi) The charges schedule and fee-structure in respect of services provided by banks to exporters
under the Scheme will be relatively lower than those provided to other exporters.
(vii) The sanction and renewal of the limits under the Scheme will be based on a simplified
procedure to be decided by the banks. Taking into account the anticipated export turnover and
track record of the exporter the banks may determine need-based finance with a liberal approach.

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(viii) 'In-principle' limits will be sanctioned for a period of 3 years with a provision for automatic
renewal subject to fulfillment of the terms and conditions of sanction.
(ix) A stand-by limit of not less than 20 per cent of the assessed limit may be additionally made
available to facilitate urgent credit needs for executing sudden orders. In the case of exporters of
seasonal commodities, the peak and off-peak levels may be appropriately specified.
(x) In case of unanticipated export orders, norms for inventory may be relaxed, taking into
account the size and nature of the export order.
(xi) Requests from card holders would be processed quickly by banks within 25 days / 15 days
and 7 days for fresh applications / renewal of limits and ad hoc limits, respectively.
(xii) Gold Card holders would be given preference in the matter of granting of packing credit in
foreign currency;
(xiii) Banks would consider waiver of collaterals and exemption from ECGC guarantee schemes
on the basis of card holder's creditworthiness and track record.
(xiv) The facility of further value addition to their cards through supplementary services like
ATM, Internet banking, International debit / credit cards may be decided by the issuing banks.
(xv) The applicable rate of interest to be charged under the Gold Card Scheme will not be more
than the general rate for export credit in the respective bank and within the ceiling prescribed by
RBI. In keeping with the spirit of the Scheme, banks will endeavour to provide the best rates
possible to Gold Card holders on the basis of their rating and past performance.
(xvi) In respect of the Gold Card holders, the concessive rate of interest on post-shipment rupee
export credit applicable up to 90 days may be extended for a maximum period up to 365 days.
(xvii) Gold Card holders, on the basis of their track record of timely realization of export bills,
will be considered for issuance of foreign currency credit cards for meeting urgent payment
obligations etc.
(xviii) Banks may ensure that the PCFC requirements of the Gold Card holders are met by giving
them priority over non-export borrowers with regard to granting loans out of their FCNR (B)
funds etc.
(xix) Banks will consider granting term loans in foreign currency in deserving cases out of their
FCNR (B), RFC etc. funds. (Banks may not grant such loans from their overseas borrowings
under the 25 per cent window of overseas borrowings.)
(xx) The credit to Indian exporters should be at rates of interest not exceeding LIBOR plus 350
basis points
Simplification of Procedure for Delivery of Export Credit in Foreign Currency and in
Rupees
With a view to ensuring timely delivery of credit to exporters and removing procedural hassles,
the following guidelines may be brought into effect. These guidelines are applicable to Rupee
export credit as well as export credit in Foreign Currency.
(i) Simplification of procedures

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Banks should simplify the application form and reduce data requirements from exporters for
assessment of their credit needs, so that exporters do not have to seek outside professional help
to fill in the application form or to furnish data required by the banks.

Banks should adopt any of the methods, viz. Projected Balance Sheet method, Turnover method
or Cash Budget method, for assessment of working capital requirements of their exporter-
customers, whichever is most suitable and appropriate to their business operations.
In the case of consortium finance, once the consortium has approved the assessment, member
banks should simultaneously initiate their respective sanction processes.
(ii) 'On line' credit to exporters
(a) Banks provide 'Line of Credit' normally for one year which is reviewed annually. In case of
delay in renewal, the sanctioned limits should be allowed to continue uninterrupted and urgent
requirements of exporters should be met on ad hoc basis.
(b) In case of established exporters having satisfactory track record, banks should consider
sanctioning a 'Line of Credit' for a longer period, say, 3 years, with in-built flexibility to step-
up/step-down the quantum of limits within the overall outer limits assessed. The step-up limits
will become operative on attainment of pre-determined performance parameters by the exporters.
Banks should obtain security documents covering the outer limit sanctioned to the exporters for
such longer period
(c) In case of export of seasonal commodities, agro-based products etc., banks should sanction
Peak/Non-peak credit facilities to exporters.
(d) Banks should permit interchangeability of pre-shipment and post- shipment credit limits.
(e) Term Loan requirements for expansion of capacity, modernization of machinery and up
gradation of technology should also be met by banks at their normal rate of interest.
(f) Assessment of export credit limits should be 'need based' and not directly linked to the
availability of collateral security. As long as the requirement of credit limit is justified on the
basis of the exporter's performance and track record, the credit should not be denied merely on
the grounds of non-availability of collateral security.
(iii) Waiver of submission of orders or L/Cs for availing pre-shipment credit.
(a) Banks should not insist on submission of export order or L/C for every disbursement of pre-
shipment credit, from exporters with consistently good track-record. Instead, a system of
periodical submission of a statement of L/Cs or export orders in hand should be introduced.
(b) Banks may waive, ab initio, submission of order/LC in respect of exporters with good track
record and put in place the system of obtaining periodical statement of outstanding orders/LCs
on hand. The same may be incorporated in the sanction proposals as well as in the sanction
letters issued to exporters and appropriately brought to the notice of ECGC. Further, if such
waivers are permitted at a time subsequent to sanction of export credit limits with the approval of
the appropriate authority, the same may be incorporated in the terms of sanction by way of
amendments and communicated to ECGC.
(iv) Handling of export documents

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Banks are required to obtain, among others, original sale contract/confirmed order / proforma
invoice countersigned by overseas buyer / indent from authorized agent of overseas buyer for
handling the export documents as per Exchange Control regulations. Submission of such
documents need not be insisted upon at the time of handling the export documents, since the
goods have already been valued and cleared by the Customs authorities, except in the case of
transactions with Letters of Credit (L/C) where the terms of L/C require submission of the sale
contract / other alternative documents.
(v) Fast track clearance of export credit: RBI has directed that the following steps should be
taken by banks to expedite sanction of proposals for export credit.
(a) At specialized branches and branches having sizeable export business, a facilitation
mechanism for assisting exporter-customers should be put in place for quick initial scrutiny of
credit application and for discussions for seeking additional information or clarifications.
(b) Banks should streamline their internal systems and procedures to comply with the stipulated
time limits for disposal of export credit proposals and also endeavour to dispose of export credit
proposals ahead of the prescribed time schedule. A flow chart indicating chronological
movement of credit application from the date of receipt till the date of sanction should also
accompany credit proposals.
(c) Banks should delegate higher sanctioning powers to their branches for export credit.
(d) Banks should consider reducing at least some of the intervening layers in the sanctioning
process. It would be desirable to ensure that the total number of layers involved in decision-
making in regard to export finance does not exceed three.
(e) Banks should introduce a system of 'Joint Appraisal' by officials at branches and
administrative offices, to facilitate quicker processing of export credit proposals.
(f) Where feasible, banks should set up a 'Credit Committee' at specialized branches and at
administrative offices, for sanctioning working capital facilities to exporters. The 'Credit
Committee' should have sufficiently higher sanctioning powers.
(vi) Publicity and training
(a) Generally, export credit at internationally competitive rates is made available in foreign
currency at select branches of banks. In order to make the scheme more popular and considering
the competitive interest rate on foreign currency loans and to mitigate any possible exchange
risk, exporters need to be encouraged to make maximum use of export credit in foreign currency.
Banks located in areas with concentration of exporters should, therefore, give wide publicity to
this important facility and make it easily accessible to all exporters including small exporters and
ensure that more number of branches are designated for making available export credit in foreign
currency.
(b) Banks may also arrange to publicise widely the concessionality available in the interest rates
for deemed exports and ensure that operating staff are adequately sensitized in this regard.
(c) Officers at operating level should be provided with adequate training. In the matter of transfer
of officials from critical branches dealing in export credit, banks should ensure that the new
incumbents posted possess adequate knowledge/ exposure in the areas of forex as well as export

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credit to avoid delays in processing/sanctioning of export credit limits and thereby subjecting
exporters to the risk of cancellation of export orders.
REPORTING REQUIREMENTS
Export Credit Performance Indicator for Banks
Banks are required to reach a level of outstanding export credit equivalent of 12% of each bank's
Adjusted Net Bank Credit (Net Bank Credit (NBC) plus investments made by banks in non-SLR
bonds held in Held to Maturity (HTM) category).
Quarterly Data of Export Credit Disbursements
Banks should submit the export credit disbursement data on a quarterly basis in the stipulated
format. Banks should ensure that the statement reaches Reserve Bank of India, Department of
Banking Supervision, Central Office, OSMOS Division, Centre-1, World Trade Centre, Cuffe
Parade, Mumbai 400005 positively by the end of the month following the quarter to which it
relates.
Pre-shipment credit to Diamond Exporters - Conflict Diamonds - Implementation of
Kimberley Process Certification Scheme (KPCS)
Trading in conflict diamonds has been banned by U. N. Resolutions Nos. 1173 and 1176 as the
conflict diamonds play a large role in funding the rebels in the civil war torn areas of Sierra
Leone. There is also a Prohibition on the direct / indirect import of all rough diamonds from
Sierra Leone and Liberia in terms of UN Resolution No. 1306(2000) and 1343(2001)
respectively. India, among other countries, has adopted a UN mandated new Kimberley Process
Certification Scheme to ensure that no rough diamonds mined and illegally traded enter the
country. Therefore, import of diamonds into India should be accompanied by Kimberley Process
Certificate (KPC). Similarly, exports from India should also be accompanied by the KPC to the
effect that no conflict/ rough diamonds have been used in the process. The KPCs would be
verified/validated in the case of imports/ exports by the Gem and Jewellery Export Promotion
Council. In order to ensure the implementation of Kimberley Process Certification Scheme,
banks should obtain an undertaking from such of the clients who have been extended credit for
doing any business relating to diamonds.
Let us Sum Up:

Since exports are very important for the country’s economy, RBI has made special provisions for
extending WC finance for exporters. The main advantages are:

a) Concession in rate of interest

b) Priority in sanction and disbursement

c) Simplification of procedures for appraisal

Export finance at concessional rates of interest should be liquidated from export proceeds
remitted from abroad in approved currencies
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Although each export contract should have to be liquidated individually, in cases of exporters
with good track record, banks may permit “running account facility”

Export credit is available in Indian Rupees as well as in designated foreign currencies, in both
cases at concessional rates of interest.

In case of export credit in foreign currency banks permit their clients to enter into forward
contracts for the sale of foreign exchange

A Gold Card Scheme is offered to exporters with an excellent track record

The RBI instructions also lay down detailed instructions for reporting of all export import related
transactions

Key Words:

Pre-shipment finance – WC finance extended by banks for exports in Indian rupees or foreign
currency

Post shipment finance – WC finance extended by banks for export receivables in Indian rupees
or foreign currency

Export Bills Rediscounting (EBR) Scheme – Post shipment export finance in foreign currency

Deemed exports – means those transactions in which the goods supplied do not leave the country
and the supplier in India receives the payment for the goods. It means the goods supplied need
not go out of India to treat them as an export

Check your Progress:

What are the benefits extended to exporters by RBI?

Terminal Questions:

What are the main differences between export credit in Indian rupees and in foreign currency?

Answers to Check your Progress:

The main advantages are concession in rate of interest, priority in sanction and disbursement and
simplification of procedures for appraisal. Export finance at concessional rates of interest should
be liquidated from export proceeds remitted from abroad in approved currencies.

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CORPORATE DEBT RESTRUCTURING

Industrial sickness is a common phenomenon over the years. However, as bank finance to
industry grew, such sickness led to bad debts in banks. This not only locked up precious
resources in non-performing assets in banks, but it also made banks risk averse.
Defaults in corporate borrowings were being dealt with by banks according to their own
procedures and interpretation of the problems leading up to delinquency. However, it was felt by
RBI that in cases where no moral hazard was involved, and, the company had a potential for
survival, provided the debt service was reduced, a uniform approach was required. Hence RBI
came out with guidelines on Corporate Debt Restructuring (CDR).
In spite of their best efforts and intentions, sometimes corporates find themselves in financial
difficulty because of factors beyond their control and also due to certain internal reasons. For the
revival of the corporates as well as for the safety of the money lent by the banks and FIs, timely
support through restructuring in genuine cases is called for. However, delay in agreement
amongst different lending institutions often comes in the way of such endeavors.
Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in place
institutional mechanism for restructuring of corporate debt and need for a similar mechanism in
India, a Corporate Debt Restructuring System was evolved, and detailed guidelines were issued
in August 2001 for implementation by banks.
Subsequently based on the recommendations made by the Working Group to make the
operations of the CDR mechanism more efficient, the guidelines on Corporate Debt
Restructuring system were revised in terms of RBI in February 2003.
Thereafter a Special Group was constituted in September 2004 with Ms. S. Gopinath, Deputy
Governor, RBI as the Chairperson to review and suggest changes / improvements, if any, in the
CDR mechanism. Based on the suggestions of the Special Group, and the feedback received on
the draft guidelines, the CDR Guidelines have been further revised.
One of the main features of the restructuring under CDR system is the provision of two
categories of debt restructuring under the CDR system:
• Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the
creditors, will be restructured under the first category (Category 1).
• Accounts which are classified as ‘doubtful’ in the books of the creditors would be
restructured under the second category (Category 2).
The main features of the CDR mechanism are given below:
Objective
The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring the corporate debts of viable entities facing problems,
outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.
In particular, the framework will aim at preserving viable corporates that are affected by certain
internal and external factors and minimize the losses to the creditors and other stakeholders
through an orderly and coordinated restructuring programme.

Module A: Corporate Banking & Finance Page 87


Structure
RBI directs that CDR system in the country will have a three tier structure:
• CDR Standing Forum and its Core Group
• CDR Empowered Group
• CDR Cell
CDR Standing Forum
The CDR Standing Forum would be the representative general body of all financial institutions
and banks participating in CDR system. All financial institutions and banks should participate in
the system in their own interest. CDR Standing Forum will be a self-empowered body, which
will lay down policies and guidelines, and monitor the progress of corporate debt restructuring.
The Forum will also provide an official platform for both the creditors and borrowers (by
consultation) to amicably and collectively evolve policies and guidelines for working out debt
restructuring plans in the interests of all concerned.
The CDR Standing Forum shall comprise of Chairman & Managing Director, Industrial
Development Bank of India Ltd; Chairman, State Bank of India; Managing Director & CEO,
ICICI Bank Limited; Chairman, Indian Banks' Association as well as Chairmen and Managing
Directors of all banks and financial institutions participating as permanent members in the
system. Since institutions like Unit Trust of India, General Insurance Corporation, Life Insurance
Corporation may have assumed exposures on certain borrowers, these institutions may
participate in the CDR system. The Forum will elect its Chairman for a period of one year and
the principle of rotation will be followed in the subsequent years. However, the Forum may
decide to have a Working Chairman as a whole-time officer to guide and carry out the decisions
of the CDR Standing Forum. The RBI would not be a member of the CDR Standing Forum and
Core Group. Its role will be confined to providing broad guidelines.
The CDR Standing Forum shall meet at least once every six months and would review and
monitor the progress of corporate debt restructuring system. The Forum would also lay down the
policies and guidelines including those relating to the critical parameters for restructuring (for
example, maximum period for a unit to become viable under a restructuring package, minimum
level of promoters’ sacrifice etc.) to be followed by the CDR Empowered Group and CDR Cell
for debt restructuring and would ensure their smooth functioning and adherence to the prescribed
time schedules for debt restructuring. It can also review any individual decisions of the CDR
Empowered Group and CDR Cell. The CDR Standing Forum may also formulate guidelines for
dispensing special treatment to those cases, which are complicated and are likely to be delayed
beyond the time frame prescribed for processing.
A CDR Core Group will be carved out of the CDR Standing Forum to assist the Standing Forum
in convening the meetings and taking decisions relating to policy, on behalf of the Standing
Forum. The Core Group will consist of Chief Executives of Industrial Development Bank of
India Ltd., State Bank of India, ICICI Bank Ltd, Bank of Baroda, Bank of India, Punjab National
Bank, Indian Banks' Association and Deputy Chairman of Indian Banks' Association
representing foreign banks in India.

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The CDR Core Group would lay down the policies and guidelines to be followed by the CDR
Empowered Group and CDR Cell for debt restructuring.
These guidelines shall also suitably address the operational difficulties experienced in the
functioning of the CDR Empowered Group. The CDR Core Group shall also prescribe the PERT
chart for processing of cases referred to the CDR system and decide on the modalities for
enforcement of the time frame. The CDR Core Group shall also lay down guidelines to ensure
that over-optimistic projections are not assumed while preparing / approving restructuring
proposals especially with regard to capacity utilization, price of products, profit margin, demand,
and availability of raw materials, input-output ratio and likely impact of imports / international
cost competitiveness.
CDR Empowered Group
The individual cases of corporate debt restructuring shall be decided by the CDR Empowered
Group, consisting of ED level representatives of Industrial Development Bank of Inida Ltd.,
ICICI Bank Ltd. and State Bank of India as standing members, in addition to ED level
representatives of financial institutions and banks who have an exposure to the concerned
company.
While the standing members will facilitate the conduct of the Group’s meetings, voting will be in
proportion to the exposure of the creditors only. In order to make the CDR Empowered Group
effective and broad based and operate efficiently and smoothly, it would have to be ensured that
participating institutions / banks approve a panel of senior officers to represent them in the CDR
Empowered Group and ensure that they depute officials only from among the panel to attend the
meetings of CDR Empowered Group. Further, nominees who attend the meeting pertaining to
one account should invariably attend all the meetings pertaining to that account instead of
deputing their representatives.
The level of representation of banks/ financial institutions on the CDR Empowered Group should
be at a sufficiently senior level to ensure that concerned bank / FI abides by the necessary
commitments including sacrifices, made towards debt restructuring. There should be a general
authorisation by the respective Boards of the participating institutions / banks in favour of their
representatives on the CDR Empowered Group, authorizing them to take decisions on behalf of
their organization, regarding restructuring of debts of individual corporates.
The CDR Empowered Group will consider the preliminary report of all cases of requests of
restructuring, submitted to it by the CDR Cell. After the Empowered Group decides that
restructuring of the company is prima-facie feasible and the enterprise is potentially viable in
terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring
package will be worked out by the CDR Cell in conjunction with the Lead Institution.
However, if the lead institution faces difficulties in working out the detailed restructuring
package, the participating banks / financial institutions should decide upon the alternate
institution / bank which would work out the detailed restructuring package at the first meeting of
the Empowered Group when the preliminary report of the CDR Cell comes up for consideration.
The CDR Empowered Group would be mandated to look into each case of debt restructuring,
examine the viability and rehabilitation potential of the Company and approve the restructuring
package within a specified time frame of 90 days, or at best within 180 days of reference to the

Module A: Corporate Banking & Finance Page 89


Empowered Group. The CDR Empowered Group shall decide on the acceptable viability
benchmark levels on the following illustrative parameters, which may be applied on a case-by-
case basis, based on the merits of each case:
• Return on Capital Employed (ROCE),
• Debt Service Coverage Ratio (DSCR),
• Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF),
• Extent of sacrifice.
The Board of each bank / FI should authorise its Chief Executive Officer (CEO) and / or
Executive Director (ED) to decide on the restructuring package in respect of cases referred to the
CDR system, with the requisite requirements to meet the control needs. CDR Empowered Group
will meet on two or three occasions in respect of each borrowal account. This will provide an
opportunity to the participating members to seek proper authorisations from their CEO / ED, in
case of need, in respect of those cases where the critical parameters of restructuring are beyond
the authority delegated to him / her.
The decisions of the CDR Empowered Group shall be final. If restructuring of debt is found to be
viable and feasible and approved by the Empowered Group, the company would be put on the
restructuring mode. If restructuring is not found viable, the creditors would then be free to take
necessary steps for immediate recovery of dues and / or liquidation or winding up of the
company, collectively or individually.
CDR Cell
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all
their functions. The CDR Cell will make the initial scrutiny of the proposals received from
borrowers / creditors, by calling for proposed rehabilitation plan and other information and put
up the matter before the CDR Empowered Group, within one month to decide whether
rehabilitation is prima facie feasible. If it is found feasible, the CDR Cell will proceed to prepare
detailed Rehabilitation Plan with the help of creditors. If necessary, experts may be engaged
from outside. If not found prima facie feasible, the creditors may start action for recovery of their
dues.
All references for corporate debt restructuring by creditors or borrowers will be made to the
CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the
corporate, to work out a preliminary restructuring plan in consultation with other stakeholders
and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan
in terms of the general policies and guidelines approved by the CDR Standing Forum and place
for consideration of the Empowered Group within 30 days for decision. The Empowered Group
can approve or suggest modifications but ensure that a final decision is taken within a total
period of 90 days. However, for sufficient reasons the period can be extended up to a maximum
of 180 days from the date of reference to the CDR Cell.
The CDR Standing Forum, the CDR Empowered Group and CDR Cell is at present housed in
Industrial Development Bank of India Ltd. However, it may be shifted to another place if
considered necessary, as may be decided by the Standing Forum. The administrative and other

Module A: Corporate Banking & Finance Page 90


costs shall be shared by all financial institutions and banks. The sharing pattern shall be as
determined by the Standing Forum.
CDR Cell will have adequate members of staff deputed from banks and financial institutions.
The CDR Cell may also take outside professional help. The cost in operating the CDR
mechanism including CDR Cell will be met from contribution of the financial institutions and
banks in the Core Group at the rate of Rs.50 lakh each and contribution from other institutions
and banks at the rate of Rs.5 lakh each.
Other features
Eligibility criteria
The scheme will not apply to accounts involving only one financial institution or one bank. The
CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts
of corporate borrowers with outstanding fund-based and non-fund based exposure of Rs.10 crore
and above by banks and institutions.
The Category 1 CDR system will be applicable only to accounts classified as 'standard' and 'sub-
standard'. There may be a situation where a small portion of debt by a bank might be classified as
doubtful. In that situation, if the account has been classified as ‘standard’/ ‘substandard’ in the
books of at least 90% of creditors (by value), the same would be treated as standard /
substandard, only for the purpose of judging the account as eligible for CDR, in the books of the
remaining 10% of creditors. There would be no requirement of the account / company being
sick, NPA or being in default for a specified period before reference to the CDR system.
However, potentially viable cases of NPAs will get priority. This approach would provide the
necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any
milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by
banks and financial institutions or with their consent.
While corporates indulging in frauds and malfeasance even in a single bank will continue to
remain ineligible for restructuring under CDR mechanism as hitherto, the Core group may
review the reasons for classification of the borrower as wilful defaulter specially in old cases
where the manner of classification of a borrower as a wilful defaulter was not transparent and
satisfy itself that the borrower is in a position to rectify the wilful default provided he is granted
an opportunity under the CDR mechanism. Such exceptional cases may be admitted for
restructuring with the approval of the Core Group only. The Core Group may ensure that cases
involving frauds or diversion of funds with malafide intent are not covered.
The accounts where recovery suits have been filed by the creditors against the company, may be
eligible for consideration under the CDR system provided, the initiative to resolve the case under
the CDR system is taken by at least 75% of the creditors (by value) and 60% of creditors (by
number).
BIFR cases are not eligible for restructuring under the CDR system. However, large value BIFR
cases, may be eligible for restructuring under the CDR system if specifically recommended by
the CDR Core Group. The Core Group shall recommend exceptional BIFR cases on a case-to-
case basis for consideration under the CDR system. It should be ensured that the lending
institutions complete all the formalities in seeking the approval from BIFR before implementing
the package.
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Reference to CDR system
Reference to Corporate Debt Restructuring System could be triggered by (i) any or more of the
creditor who have minimum 20% share in either working capital or term finance, or (ii) by the
concerned corporate, if supported by a bank or financial institution having stake as in (i) above.
Though flexibility is available whereby the creditors could either consider restructuring outside
the purview of the CDR system or even initiate legal proceedings where warranted, banks / FIs
should review all eligible cases where the exposure of the financial system is more than Rs.100
crore and decide about referring the case to CDR system or to proceed under the new
Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act,
2002 or to file a suit in DRT etc.
Legal Basis
CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor
Agreement (DCA) and Inter-Creditor Agreement (ICA). The Debtor-Creditor Agreement (DCA)
and the Inter-Creditor Agreement (ICA) shall provide the legal basis to the CDR mechanism.
The debtors shall have to accede to the DCA, either at the time of original loan documentation
(for future cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly, all
participants in the CDR mechanism through their membership of the Standing Forum shall have
to enter into a legally binding agreement, with necessary enforcement and penal clauses, to
operate the System through laid-down policies and guidelines. The ICA signed by the creditors
will be initially valid for a period of 3 years and subject to renewal for further periods of 3 years
thereafter. The lenders in foreign currency outside the country are not a part of CDR system.
Such creditors and also creditors like GIC, LIC, UTI, etc., who have not joined the CDR system,
could join CDR mechanism of a particular corporate by signing transaction to transaction ICA,
wherever they have exposure to such corporate.
The Inter-Creditor Agreement would be a legally binding agreement amongst the creditors, with
necessary enforcement and penal clauses, wherein the creditors would commit themselves to
abide by the various elements of CDR system. Further, the creditors shall agree that if 75 per
cent of creditors by value and 60 per cent of the creditors by number, agree to a restructuring
package of an existing debt (i.e., debt outstanding), the same would be binding on the remaining
creditors.
Since Category 1 CDR Scheme covers only standard and sub-standard accounts, which in the
opinion of 75 per cent of the creditors by value and 60 per cent of creditors by number, are likely
to become performing after introduction of the CDR package, it is expected that all other
creditors (i.e., those outside the minimum 75 per cent by value and 60 per cent by number)
would be willing to participate in the entire CDR package, including the agreed additional
financing.
Other Aspects
In order to improve effectiveness of the CDR mechanism a clause may be incorporated in the
loan agreements involving consortium/syndicate accounts whereby all creditors, including those
which are not members of the CDR mechanism, agree to be bound by the terms of the
restructuring package that may be approved under the CDR mechanism, as and when
restructuring may become necessary.

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Stand-Still Clause
One of the most important elements of Debtor-Creditor Agreement would be 'stand still'
agreement binding for 90 days, or 180 days by both sides. Under this clause, both the debtor and
creditor(s) shall agree to a legally binding 'stand-still' whereby both the parties commit
themselves not to take recourse to any other legal action during the 'stand-still' period, this would
be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise
without any outside intervention, judicial or otherwise. However, the stand-still clause will be
applicable only to any civil action either by the borrower or any lender against the other party
and will not cover any criminal action. Further, during the stand-still period, outstanding foreign
exchange forward contracts, derivative products, etc., can be crystallised, provided the borrower
is agreeable to such crystallisation. The borrower will additionally undertake that during the
stand-still period the documents will stand extended for the purpose of limitation and also that he
will not approach any other authority for any relief and the directors of the borrowing company
will not resign from the Board of Directors during the stand-still period.
During pendency of the case with the CDR system, the usual asset classification norms would
continue to apply. The process of reclassification of an asset should not stop merely because the
case is referred to the CDR Cell. However, if a restructuring package under the CDR system is
approved by the Empowered Group, and the approved package is implemented within four
months from the date of approval, the asset classification status may be restored to the position
which existed when the reference to the Cell was made. Consequently, any additional provisions
made by banks towards deterioration in the asset classification status during the pendency of the
case with the CDR system may be reversed.
If an approved package is not implemented within four months after the date of approval by the
Empowered Group, it would indicate that the success of the package is uncertain. In that case,
the asset classification status of the account should not be restored to the position as on the date
of reference to the CDR Cell.
Additional finance
Additional finance, if any, is to be provided by all creditors of a ‘standard’ or ‘substandard
account’ irrespective of whether they are working capital or term creditors, on a pro-rata basis. In
case for any internal reason, any creditor (outside the minimum 75 per cent and 60 per cent) does
not wish to commit additional financing, that creditor will have an exit option as described
below.
The additional finance may be treated as ‘standard asset’, up to a period of one year after the first
interest/ principal payment, whichever is earlier, falls due under the approved restructuring
package. However, in the case of accounts where the existing facilities are classified as ‘sub-
standard’ and ‘doubtful’, interest income on the additional finance should be recognized only on
cash basis. If the restructured asset does not qualify for upgradation at the end of the above
specified one year period, the additional finance shall be placed in the same asset classification
category as the restructured debt.
The providers of additional finance, whether existing creditors or new creditors, shall have a
preferential claim, to be worked out under the restructuring package, over the providers of
existing finance with respect to the cash flows out of recoveries, in respect of the additional
exposure
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Exit Option
As stated above, a creditor (outside the minimum 75 per cent and 60 per cent) who for any
internal reason does not wish to commit additional finance will have an option. At the same time,
in order to avoid the "free rider" problem, it is necessary to provide some disincentive to the
creditor who wishes to exercise this option. Such creditors can either (a) arrange for its share of
additional finance to be provided by a new or existing creditor, or (b) agree to the deferment of
the first year’s interest due to it after the CDR package becomes effective. The first year’s
deferred interest as mentioned above, without compounding, will be payable along with the last
instalment of the principal due to the creditor.
In addition, the exit option will also be available to all lenders within the minimum 75 percent
and 60 percent provided the purchaser agrees to abide by restructuring package approved by the
Empowered Group. The exiting lenders may be allowed to continue with their existing level of
exposure to the borrower provided they tie up with either the existing lenders or fresh lenders
taking up their share of additional finance.
The lenders who wish to exit from the package would have the option to sell their existing share
to either the existing lenders or fresh lenders, at an appropriate price, which would be decided
mutually between the exiting lender and the taking over lender. The new lenders shall rank on
par with the existing lenders for repayment and servicing of the dues since they have taken over
the existing dues to the exiting lender.
In order to bring more flexibility in the exit option, One Time Settlement can also be considered,
wherever necessary, as a part of the restructuring package. If an account with any creditor is
subjected to One Time Settlement (OTS) by a borrower before its reference to the CDR
mechanism, any fulfilled commitments under such OTS may not be reversed under the
restructured package. Further payment commitments of the borrower arising out of such OTS
may be factored into the restructuring package.
Conversion Option
The CDR Empowered Group, while deciding the restructuring package, should decide on the
issue regarding convertibility (into equity) option as a part of restructuring exercise whereby the
banks / financial institutions shall have the right to convert a portion of the restructured amount
into equity, keeping in view the statutory requirement under Section 19 of the Banking
Regulation Act, 1949, (in the case of banks) and relevant SEBI regulations.
Equity acquired by way of conversion of debt / overdue interest under the CDR mechanism is
allowed to be taken up without seeking prior approval from RBI, even if by such acquisition the
prudential capital market exposure limit prescribed by the RBI is breached, subject to reporting
such holdings to RBI, Department of Banking Supervision (DBS), every month along with the
regular DSB Return on Asset Quality. However, banks will have to comply with the provisions
of Section 19(2) of the Banking Regulation Act 1949.
Acquisition of non-SLR securities by way of conversion of debt is exempted from the mandatory
rating requirement and the prudential limit on investment in unlisted non-SLR securities
prescribed by the RBI, subject to periodical reporting to RBI in the aforesaid DSB return.
Category 2 CDR System

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There have been instances where the projects have been found to be viable by the creditors but
the accounts could not be taken up for restructuring under the CDR system as they fell under
‘doubtful’ category. Hence, a second category of CDR is introduced for cases where the accounts
have been classified as ‘doubtful’ in the books of creditors, and if a minimum of 75% of
creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the
account and consent for such restructuring, subject to the following conditions:
i). It will not be binding on the creditors to take up additional financing worked out under the
debt restructuring package and the decision to lend or not to lend will depend on each creditor
bank / FI separately. In other words, under the proposed second category of the CDR
mechanism, the existing loans will only be restructured and it would be up to the promoter to
firm up additional financing arrangement with new or existing creditors individually.
ii) All other norms under the CDR mechanism such as the standstill clause, asset classification
status during the pendency of restructuring under CDR, etc., will continue to be applicable to this
category also.
No individual case should be referred to RBI. CDR Core Group may take a final decision
whether a particular case falls under the CDR guidelines or it does not.
All the other features of the CDR system as applicable to the First Category will also be
applicable to cases restructured under the Second Category.
Creditors’ Rights
All CDR approved packages must incorporate creditors’ right to accelerate repayment and
borrowers’ right to pre-pay. The right of recompense should be based on certain performance
criteria to be decided by the Standing Forum.
Prudential and Accounting Issues
Restructuring of corporate debts under CDR system could take place in the following stages:
a. before commencement of commercial production;
b. after commencement of commercial production but before the asset has been classified as
‘sub-standard’;
c. after commencement of commercial production and the asset has been classified as ‘sub-
standard’ or ‘doubtful’.
Accounts restructured under CDR system, including accounts classified as 'doubtful' under
Category 2 CDR, would be eligible for regulatory concession in asset classification and
provisioning on writing off/providing for economic sacrifice only if
i) Restructuring under CDR mechanism is done for the first time,
ii) The unit becomes viable in 7 years and the repayment period for the restructured debts does
not exceed 10 years,
iii) Promoters’ sacrifice and additional funds brought by them should be a minimum of 15% of
creditors’ sacrifice, and
iv) Personal guarantee is offered by the promoter except when the unit is affected by external
factors pertaining to the economy and industry.

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Treatment of ‘standard’ accounts restructured under CDR
a. A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages
would not cause a standard asset to be classified in the sub-standard category, provided
conditions relating to asset classification - (i) to (iv) above are complied with and the loan /
credit facility is fully secured.
b. A rescheduling of interest element at any of the foregoing first two stages provided conditions
relating to asset classification - (i) to (iv) above are complied with would not cause an asset to be
downgraded to sub-standard category on writing off/providing for the amount of sacrifice, if any,
in the element of interest measured in present value terms. For this purpose, the sacrifice should
be computed as the difference between the present value of future interest income reckoned
based on the current BPLR as on the date of restructuring plus the appropriate term premium and
credit risk premium for the borrower category on the date of restructuring and the interest
charged as per the restructuring package discounted by the current BPLR as on the date of
restructuring plus appropriate term premium and credit risk premium as on the date of
restructuring.
Moratorium under Restructuring
If a standard asset is taken up for restructuring before commencement of production and the
restructuring package provides a longer period of moratorium on interest payments beyond the
expected date of commercial production / date of commercial production vis-à-vis the original
moratorium period, the asset can no more be treated as standard asset. It may, therefore, be
classified as sub-standard. The same regulatory treatment will apply if a standard asset is taken
up for restructuring after commencement of production and the restructuring package provides
for a longer period of moratorium on interest payments than the original moratorium period.
Treatment of ‘sub-standard’ / ‘doubtful’ accounts restructured under CDR
a. A rescheduling of the instalments of principal alone, would render a sub-standard / ‘doubtful’
asset eligible to be continued in the sub-standard / ‘doubtful’ category for the specified period,
[defined in sub para (b) below] provided the conditions relating to asset classification - (i) to (iv)
referred to above are complied with and the loan / credit facility is fully secured.
b. A rescheduling of interest element would render a sub-standard / ‘doubtful’ asset eligible to be
continued to be classified in sub-standard / ‘doubtful’ category for the specified period , i.e., a
period of one year after the date when first payment of interest or of principal, whichever is
earlier, falls due under the rescheduled terms, provided the conditions referred to above are
complied with and the amount of sacrifice, if any, in the element of interest, measured in present
value terms computed as per the methodology described above is either written off or provision
is made to the extent of the sacrifice involved.
Treatment of Provision
a) Interest sacrifice involved in the amount of interest should be written off provided for
necessarily by debit to Profit & Loss account and held in a distinct account.
b) Sacrifice may be re-computed on each balance sheet date till satisfactory completion of all
repayment obligations and full repayment of the outstanding in the account, so as to capture the
changes in the fair value on account of changes in BPLR, term premium and the credit category
of the borrower.
Module A: Corporate Banking & Finance Page 96
Consequently, banks may provide for the shortfall in provision or reverse the amount of excess
provision held in the distinct account.
c) The amount of provision made for NPA, may be reversed when the account is re-classified as
a ‘standard asset’.
d). In the event any security is taken against interest sacrifice, it should be valued at Re.1/- till
maturity of the security. This will ensure that the effect of charging off the economic sacrifice to
the Profit & Loss account is not negated
Upgradation of restructured accounts
The sub-standard / doubtful accounts at 6.2.3 (a) & (b) above, which have been subjected to
restructuring, etc. whether in respect of principal instalment or interest amount, by whatever
modality, would be eligible to be upgraded to the standard category only after the specified
period, i.e. a period of one year after the date when first payment of interest or of principal,
whichever is earlier, falls due under the rescheduled terms, subject to satisfactory performance
during the period.
Asset classification status of restructured accounts
During the specified one-year period, the asset classification of sub-standard / doubtful status
accounts will not deteriorate if satisfactory performance of the account is demonstrated during
the specified period. In case, however, the satisfactory performance during the specified period is
not evidenced, the asset classification of the restructured account would be governed as per the
applicable prudential norms with reference to the pre-restructuring payment schedule. The asset
classification would be bank-specific based on record of recovery of each bank/FI, as per the
existing prudential norms applicable to banks/FIs.
Prudential norms on conversion
a). Where overdue interest is funded or outstanding principal and interest components are
converted into equity, debentures, zero coupon bonds or other instruments and income is
recognized in consequence, full provision should be made for the amount of income so
recognized. Equity, debentures and other financial instruments acquired by way of conversion of
outstanding principal and/ or interest should be classified in the AFS category and valued in
accordance with the extant instructions on valuation of banks’ investment portfolio except to the
extent that (a) equity may be valued as per market value, if quoted (b) in cases where equity is
not quoted, valuation may be at break-up value in respect of standard assets and in respect of
sub-standard / doubtful assets, equity may be initially valued at Re1 and at break-up value after
restoration / up gradation to standard category.
b). If the conversion of interest into equity, which is quoted, interest income can be recognized
after the account is upgraded to the standard category at market value of equity, on the date of
such up gradation, not exceeding the amount of interest converted into equity. If the conversion
of interest is into equity, which is not quoted, interest income should not be recognized.
c). In case of conversion of principal and / or interest into equity, debentures, bonds, etc., such
instruments should be treated as NPA ab-initio in the same asset classification category as the
loan if the loan’s classification is substandard or doubtful on implementation of the restructuring
package and provision should be made as per the norms. Consequently, income should be
recognized on these instruments only on realization basis. The income in respect of unrealised
Module A: Corporate Banking & Finance Page 97
interest which is converted into debentures or any fixed maturity instruments, would be
recognized only on redemption of such instruments.
d). Banks may reverse the provisions made towards income recognised at the time of conversion
of accrued interest into equity, bonds, debentures etc. when the instrument goes out of balance
sheet on sale/ realisation of value/maturity.
Asset classification of repeatedly restructured accounts
The regulatory concession detailed above would not be available if the account is restructured for
the second or more times. In case a restructured asset, which is a standard asset on restructuring,
is subjected to restructuring on a subsequent occasion, it should be classified as sub-standard. If
the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a
subsequent occasion its asset classification would be reckoned from the date when it became
NPA on the previous occasion. However, such assets restructuring for the second or more time
may be allowed to be upgraded to standard category after one year from the date of first payment
of interest or repayment of principal whichever falls due earlier in terms of the current
restructuring package subject to satisfactory performance.
Disclosure
Banks / FIs should also disclose in their published annual Balance Sheets, under "Notes on
Accounts", the following information in respect of corporate debt restructuring undertaken
during the year:
a. Total number of accounts total amount of loan assets and the amount of sacrifice in the
restructuring cases under CDR.
[(a) = (b)+(c)+(d)]
b. The number, amount and sacrifice in standard assets subjected to CDR.
c. The number, amount and sacrifice in sub-standard assets subjected to CDR.
d. The number, amount and sacrifice in doubtful assets subjected to CDR.
Let us Sum Up:

Sometimes corporates find themselves in financial difficulty because of factors beyond their
control and also due to certain internal reasons. For the revival of the corporates as well as for
the safety of the money lent by the banks and FIs, RBI has evolved a scheme for Corporate Debt
Restructuring (CDR).
The objective of the CDR framework is to ensure timely and transparent mechanism for
restructuring the corporate debts of viable entities facing problems, outside the purview of BIFR,
DRT and other legal proceedings, for the benefit of all concerned.
The scheme will not apply to accounts involving only one financial institution or one bank. The
CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts
of corporate borrowers with outstanding fund-based and non-fund based exposure of Rs.10 crore
and above by banks and institutions.
The CDR system has two categories of debt restructuring:

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• Accounts, which are classified as ‘standard’ and ‘sub-standard’ in the books of the
creditors, will be restructured under the first category (Category 1).
• Accounts which are classified as ‘doubtful’ in the books of the creditors would be
restructured under the second category (Category 2).
Structure
RBI directs that CDR system in the country will have a three tier structure:
• • CDR Standing Forum and its Core Group. This body consists of the Heads of all major
banks in India
• • CDR Empowered Group. This body comprises of ED level executives of major banks
• • CDR Cell, which actually prepares the rehabilitation proposals, in consultation with the
creditors
Decision will be taken on the following illustrative parameters, which may be applied on a case-
by-case basis, based on the merits of each case:
• Return on Capital Employed (ROCE),
• Debt Service Coverage Ratio (DSCR),
• Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF),
• Extent of sacrifice.
Legal Basis: CDR is a non-statutory mechanism which is a voluntary system based on Debtor-
Creditor Agreement and Inter-Creditor Agreement. The Debtor-Creditor Agreement and the
Inter-Creditor Agreement shall provide the legal basis to the CDR mechanism.
Stand-Still Clause: One of the most important elements of Debtor-Creditor Agreement would be
'stand still' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the
debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the parties
commit themselves not to take recourse to any other legal action during the 'stand-still' period,
this would be necessary for enabling the CDR System to undertake the necessary debt
restructuring exercise without any outside intervention, judicial or otherwise.
Additional finance: Additional finance, if any, is to be provided by all creditors of a ‘standard’ or
‘substandard account’ irrespective of whether they are working capital or term creditors, on a
pro-rata basis. In case for any internal reason, any creditor (outside the minimum 75 per cent and
60 per cent) does not wish to commit additional financing, that creditor will have an exit option.
Exit Option: A creditor (outside the minimum 75 per cent and 60 per cent) who for any internal
reason does not wish to commit additional finance will have an option. At the same time, in
order to avoid the "free rider" problem, it is necessary to provide some disincentive to the
creditor who wishes to exercise this option.
Category 2 CDR System
A second category of CDR is introduced for cases where the accounts have been classified as
‘doubtful’ in the books of creditors, and if a minimum of 75% of creditors (by value) and 60%

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creditors (by number) satisfy themselves of the viability of the account and consent for such
restructuring, subject to certain conditions
There are explicit instructions from RBI about asset classification of accounts under the CDR
mechanism.
Key Words:

Corporate Debt Restructuring (CDR): This mechanism makes a systematic effort to restructure
debts of companies that are banking with more than one bank, and are facing liquidity problems,
but are otherwise viable.

CDR Standing Forum: The highest level in the 3 tiered structure, consisting of the heads of all
major banks

CDR Empowered Group: The second level, consisting of ED level officials of major banks.

CDR Cell: This is the functional unit, which will prepare the CDR proposal in consultation with
all other creditors.

Stand Still Clause: All creditors will voluntarily forebear legal action during the CDR process

Additional finance: While restructuring existing debt, it might be found by the banks concerned
that the borrower will be viable only if additional finance is provided

Exit option: The process through which a creditor can exit the CDR mechanism

Categories under CDR:

Category 1: Comprising of accounts classified as “Standard” and “Sub-Standard”

Category 2: Accounts classified as “Doubtful”

Check your Progress:

What is the basic objective of the CDR mechanism?

Terminal Questions:

Describe the structure and functions of each tier in the CDR mechanism.

Answers to Check your Progress:

The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring the corporate debts of viable entities facing problems,
outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.
In particular, the framework will aim at preserving viable corporates that are affected by certain

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internal and external factors and minimize the losses to the creditors and other stakeholders
through an orderly and coordinated restructuring programme.

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FURTHER READING

Reference Books

Cash Management

• Financial Management and policies – V.K.Bhalla

• Financial Management – Prasanna Chandra

• Financial Management – I.M.Pandey

Debt Management

• Financial Management – Prasanna Chandra

Factoring & Forfeiting, Business Advisory and Trade Finance Services

• Financial Services – MY Khan

Offshore Services

• International Finance risk management – A.V.Rajwade

• Offshore Financial Services Handbook – Bill Penman

Foreign Exchange Management

• Banking theory & practice – Shekhar and Shekhar

• Financial Management – M Y Khan

Trusteeship

• Indian Trusteeship act – Mukherjee & Goel

Custodial Service

• Clearing, Settlement & Custody (Securities Institute Operation Management) – David


Loader.

• Back Office & Beyond. A guide to procedures, settlement & risk in financial markets –
Mervyn King

• Corporate Action- A Guide to Securities Event Management– Michael Simmons &


Elaine Dalgleish

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