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Sanjeeva Pieris
SECURITIES FOR ADVANCES
Types of Advances
FUNDED
o OVERDRAFT
o ALL TYPES OF LOANS
o CHEQUE PURCHASE
o BILLS PURCHASE
o LEASES
o CREDIT CARDS
NON FUNDED
o GUARANTEES
o LETTERS OF CREDIT (SIGHT / USANCE)
WHAT ARE THE IMPLICATIONS WHICH MAY ARISE
UNABLE TO PAY
o OVERDRAFT
o LOANS
o LEASES
o CREDIT CARDS
DISHONOURED
o
CHEQUES PURCHASED
o
BILLS DISCOUNTED
o
UNABLE TO SETTLE CLAIM
o GUARANTEES
UNABLE TO RETIRE DOCS
o LETTERS OF CREDIT
WHAT IS SECURITY………??
SECOND MODE OF REPAYMENT
A FALL BACK SITUATION
CHARACTERISTICS OF SECURITY
EASY TO ACCESS
EASY TO IDENTIFY THE TITLE
EASY TO OBTAIN
EASY TO REALIZE
STABLE IN VALUE
POINTS TO NOTE WHEN OBTAINING
SECURITY DOCUMENTS
Title
Authority
Value
Easy to realize
Identity & accessibility
Formalities
Proper title / without defects
Any other party having a right (get a charge over it.)
Are we getting all rights over the asset
Free of all encumbrances
AUTHORITY
Does he have authority to charge the asset.
In what capacity
VALUE
Is the value adequate
What will be the value in a forced sale
Is it stable over time
EASY TO REALIZE
How easy is it to realize
Cost of realization (financial , image of the bank)
Time taken to realize
Any other obstacle
IDENTITY & ACCESSIBILITY
Easy to identify / Locate
Easy access to security
FORMALITIES
Proper documentation & legal formalities
Prior notice to various authorities
Registration requirements
Periodic inspections
Insurance
PRIMARY & SECONDARY
SECURITY
PRIMARY SECURITY
The security you rely most.
SECONDARY SECURITY
The other supporting documents which cover incidence typical to the type
of facility
MOST COMMON PRIMARY SECURITY
CASH
LIFE INSURANCE POLICIES
SHARES
ABSOLUTE OWNERSHIP OF VEHICLES
MORTGAGES
– Property
– Stocks
– Vehicles
– Book debts
– Machinery
SECONDARY SECURITY DOCUMENTS
DEMAND PRO NOTES
FACILITY AGREEMENT FORMS
TERM LOAN AGREEMENT
OVERDRAFT AGREEMENT
GUARANTEE BONDS
INDEMNITIES
GENERAL SECURITY AGREEMENT
SERIES OF LOANS
PLEDGE LOAN AGREEMENT
Please Note……….
Some times secondary
security docs are considered as primary security
For PAL Loans
TODs…..etc…..
Primary Securities
CASH
SET- OFF
3rd PARTY SET-OFF/GUARANTEE
OTHER DOCS FOR THE FACILITY
LIFE INSURANCE
ORIGINAL POLICY
– Age Admitted
– Any Beneficiaries
ASSIGNMENT OVER POLICY * 3
DOCS FOR THE FACILITY
SHARES
SHARES TO BE LODGE IN SLACH A/C
SHARE TRANSFER FORMS
IRREVOCABLE POWER OF ATTORNEY
o ( To be registered at The Registrar General )
MORTGAGE OVER SHARES
o ( To be registered at The Land Registry. If the borrower is a Limited Liability Co.. The Document Should be registered in The Land Registry & The Registrar of Companies.)
OTHER DOCS FOR THE FACILITY
MORTGAGES
MORTGAGE OVER PROPERTY-NOTARIALLY EXECUTED
OTHERS -EXECUTED IN THE BANK
– Internal formatted Documents are used for this purpose
Mortgage over vehicles
Mortgage over stocks/Book Debts (Affidavit to be obtained )
Mortgage over machinery
Sanjeeva Pieris
Bad Credit
Five ‘C’s Of Bad Credit
Complacency
Over reliance on past performance.
Carelessness
Bad evaluation / documentation. Lack of information.
Communication
Ignore early warning signs. Not in touch with the client after granting facilities.
No follow up / monitoring.
Contingencies
Ignore what the financials told us. Did not say no to the client when we should have.
Competition
Being in competition with other banks. Lending to the same client doing the same business.
Early Warning Signals through Bank Records.
Cheque returns for lack of funds.
Frequent excesses in the current account.
Request to pay cheques in the morning & agreeing to deposit in the evening.
Loan installments & import loans become overdue.
Frequent request for TOD s
Signs of desperation for enhanced facilities/ agreeing to any rate of interest.
Drawing inter company cheques (Cross Firing).
Issue of cheques for round sums.
Drop in pay-ins.
Hardcore in the overdraft.
Increase tendency to draw against un cleared effects.
Request to convert short term / temporary facilities to a TLN
Other Early Warning Signs.
Sudden resignation of key people.
Disputes among key people.
Customer becoming too friendly or distance from the bank.
Inefficient, untidy & disorderly business premises.
Lethargic attitude of the management & employees.
Dissatisfied employees.
Change in attitude towards risks (Increase risk taking or overcautious).
Diversion of funds.
Change of accounting practice or auditors.
Delay in submitting management information.
Creative accounting / window dressing.
Adverse performance indicators in the financials.
1. Security overvalued / No valuation obtained / improperly margined.
2. Disbursement of funds prior to completion of documentation,
3. By pass authority due to personal relationships or gain.
4. Advances to new ventures with inexperienced owner / manager.
5. Grant of additional facilities without proper evaluation and/ or without additional Security
6. Repeatedly rescheduling of facilities to cover over dues.
7. Non analyzing of borrowers cash flows and repayment capacity.
8. Failure to review loan status frequently.
9. Disbursement of funds not being monitored by the bank. Loan proceeds being utilized for personal use or to pay another bank.
10. Loans granted not in line with the banks credit policy, some times credit officers hiding the purpose if it’s out side the credit policy.
11. Repayment & other terms and conditions not being clearly advised to the borrower prior to agreeing on the facility.
12. Failure to obtain infrequent financial statements from the client.
13. Failure to realize security because the borrower raised nuisance legal defences
14. Bank failure to follow its own written policies and procedures.
15. Undue pressure to grant loans to certain sectors due to political reasons.
16. Ignore of early warning signs.
17. Failure to visit the borrowers business premises regularly.
18. Lending against fictitious financials with no qualified audit verification.
19. Ignoring of negative CRIB reports.
20. Failure to demand repayment or realization or collateral quickly when it has become obviously hopeless
Risk Analysis
The degree of probability that a borrower might default on repayment of an advance.
We
are in the business of risk taking. To strike a balance we must learn to manage
risks.
Credit Risks…
- Management Risk
- Market Risk
- Technological Risk
- Financial Risk
- Non Economical Risk
Management Risk
- Character of the owners/ Directors.
- Integrity of the owners/ Directors.
- Past track record of the business, other related businesses, owners/ directors.
- Ability to carry out the activities related to the core of the business.
- Financial discipline of the owners/ Directors.
- Past experience of the owners/ Directors in related business activities.
- Organizational ability of the owners/ Directors.
- Labor Relations – whether the owners/ Directors have good rapport with the employees.
Market Risk
- Product stage in the life cycle (Renew )
- Every product has a life cycle shown in a form of a sine wave. Before the life cycle of a product is coming to an end it must be renewed. (E.g. Manufacturers periodically change the wrapping of a product)
- Competitors (If ruthless do not lend)
- Some times the competitors are well known multinational companies who are strong enough to destroy the new entrant to the market.
- Demand for the product
- Check whether there is a demand for the product or service. There may be existing providers of the product. Check whether there is a vacuum in the market. What are the alternative products which are available in the market.
- Marketing strategies (Price, Distribution, people, service
- Marketing edge (advantage over competitors )
Technological Risk
- Threat of new or improved technology.
- The new technology may be more cost effective of have more features.
- New inventions.
- New inventions might make your technology obsolete.
Financial Risk
- Amount of the advance.
- Is the amount adequate to fund the project? Will they have to borrow from other sources at a higher interest cost?
- Debt / Equity ratio.
- What is the owner’s contribution toward the business?
- Interest cover.
- How safe is our debt to the client. Can they service the interest from there earnings.
- Repayment capacity.
- The ability of the client to repay the loan capital & interest.
- Security available.
- The second mode of repayment if the project fails. The bank will have to have a safe fall back cushion. How strong is the second mode of repayment?
Non Economical Risk
- Socio Cultural Risk.
- Fresh water fishing in Anuradhapura will be Cultural Risk.
- A Bar in a Holy City might cause a public outcry.
- Political Risk.
- Liquor Licenses are issued to politically favored individuals.
- A competitor may be a politically influential party.
- Environmental.
- Does the project need environmental clearance from the relevant authorities.
- Government policies.
- Inconsistent Policies on taxes and other issues may affect the project. Religious
- Is the project controversial, going against accepted religious norms?
Other Risk Factors.
- Age of the borrower.
- Personal customers – Capacity to borrow if too old.
- Corporate customers – Older the better.
- Means Of the borrower.
- Assets of the borrower.
- Income from other sources.
- Break even point of the business.
- What is the production/ sales level required to cover costs.
- Remuneration to the bank.
- Is the bank retting properly remunerated for the risk it is taking.
- Term of the facility.
- Is the term of the facility inconsistent to the banks tending policy.
- Security.
- Second mode of repayment if the projected methods of repayment fails.
Here are some Examples…..
Strengths….
- Market potential.
- Market leaders / Monopoly.
- Connections.
- Immediate / consistent buyer.
- Well established Buyer / supplier network.
- Lack of strong competition.
- Strong / influential management.
- Management expertise.
- Financial support from a group.
- Past performance with the bank.
- Owners’ commitment towards the business.
- Increase in profitability / Growth in Capital.
- Tax holidays.
- Diverse range products.
- Ability to diverse.
- New technology.
Weaknesses….
- Start up business.
- Competition.
- Buyer plays a dominant role in pricing strategy.
- Lack of clear succession plan.
- One decision maker.
- High reliance on imported raw materials.
- High buffer stock requirement.
- No tangible security available.
- Substantial carried forward loses.
- Negative growth in financial indicators.
- Profitability depends on large volumes.
By
Sanjeeva Pieris
Financial Analysis
Introduction
A ratio is a simple mathematical expression of figures in a Balance Sheet and Profit & Loss Account. (A relationship between two figures)
What Is a……….?????
Balance Sheet….
A snap shot of the Firms Financial Position taken on a particular date.
Profit & Loss A/C
The Financial performance of a Firm over a period of time.
Ways of Expressing These
Relationships….
As a fraction (1/3 )
As a percentage ( 33% )
Express in words ( Gross profit of Rs1/- for every Rs3/- )
Interpretation of Ratios.
Interpretation is done by comparison of a ratio with…….
…the same ratio derived in another period of time.
…a result of a ratio which has been benchmarked as normal.
Basic Types of Financial Ratios.
Liquidity Ratios – Firms ability to meet obligations which are maturing on a short term.
Gearing Ratios – The extent to which the firm has been financed by Debt.
Activity Ratios – How effective has been the firm in using its resources.
Performance Ratios – Firm’s overall effectiveness shown by the profits generated on
sales and capital employed.
Liquidity Ratios
Current Assets
Current Ratio = ----------------------
Current Liabilities
Current Assets - Stocks
Quick Ratio = ---------------------------------
Current Liabilities
Current Ratio
Current Assets
Current
Ratio = ----------------------
Current Liabilities
1. Measure of short term solvency. (The extent to which, short term creditors are covered by current liabilities)
2. Usually mentioned as a simple ratio.
3. Rule of the thumb is 2:1
4. How ever if the ratio is lower that above it does not mean that their solvency is impaired.
5. If the ratio falls below 1:1, it should cause to be concern.
For example, if WXY Company's current assets are Rs50,000. and its current liabilities are Rs40,000. then its current ratio would be Rs50,000. divided by Rs40,000. Which equals 1.25. It means that for every rupee the company owes it has Rs1.25 available in current assets. A current ratio of assets to liabilities of 2:1 is usually considered to be acceptable (your assets are twice your liabilities).
The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets.
Quick Ratio
Current Assets - Stocks
Quick
Ratio =
---------------------------------
Current
Liabilities
Current ratio itself is not adequate to gauge the solvency of a firm. Quick ratio is acid test / checking margin of safety.
The firm must hold adequate liquid assets to pay off current liabilities as and when they fall due.
If the current ratio is high and quick ratio remains low it indicates a higher inventory.
Rule of the thumb is 1:1
In finance the Acid-test or quick ratio or liquid ratio measures the ability of a company to use its near cash or quick assets to immediately extinguish its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash Such items are cash, marketable securities, and some accounts receivable. This ratio indicates a firm's capacity to maintain operations as usual with current cash or near cash reserves in bad periods.
Gearing Ratios
Total Debt (Long/short)
Debt/
Equity Ratio= ---------------------------------
Equity (share holding+ Retained Profits+
Reserves)
Total external debts
Gearing = ---------------------------------------
Equity (share holding+ Retained Profits+
Reserves)
Equity = Tangible Net worth
Debt / Equity Ratio
Total Debt (Long/short)
Debt/
Equity Ratio= ---------------------------------
Equity (share holding+ Retained Profits+
Reserves)
Provides a measure of protection to share holders and other parties who contribute funds such as creditors / Banks.
When this ratio is above 1 – We call the firm High Geared.
When this ratio is below 1 – We call the firm Low geared.
Lending to high geared firms has a inherited financial risk.
The debt
to equity ratio (D/E) is a financial ratio indicating the relative proportion
of equity and debt used to finance a company's assets. This ratio is also known
as Risk or Gearing. It is equal to total debt divided by shareholders' equity.
The two components are often taken from the firm's balance sheet. The debt
usually includes only the Long Term Debt.
Financial
analysts quotes will generally not include other types of liabilities, such as
accounts payable, although some will make adjustments to include or exclude
certain items from the formal financial statements. Adjustments are sometimes
also made to, for example, exclude intangible assets (such as revaluation
reserve), and this will affect the formal equity; debt to equity will therefore
also be affected.
Gearing Ratio
Total external debts including creditors
Gearing =
---------------------------------------------------------------
Equity (share holding+ Retained Profits+
Reserves)
A measure of relative exposure / risk to the external providers of funds and shareholders.
High Geared firms a more vulnerable to downfall due to heavy burden of interest cost.
Increase in gearing could be due to the following. Incurring losses eroding equity.
Incurring Losses there by eroding Equity
The firm growing faster than the growth of equity.
If the assets of the company is on the rise. Check for over trading.
Activity Ratios
Trade Debtors
Debt
Collection Period = ---------------------- X 365
Sales
Trade
Creditors
Creditors
Payment Period = ----------------------- X 365
Cost
of Sales
Stocks & WIP
Stock
Turnover Period = ------------------------ X 365
Cost of Sales
Debt Collection Period
Trade
Debtors
Debt
Collection Period = ---------------------- X 365
Sales
This ratio is an indication how long it take the firm to collect it’s dues from their debtors.
If the ratio is high……
Any increase in the ratio is a poor sign.
Longer credit extended.
Relaxed credit control.
Bad debts.
If the Ratio is low…….
Check whether the bills are discounted.
Creditors Payment Period
Trade Creditors
Creditors
Payment Period = ----------------------- X 365
Cost of Sales
This ratio is an indication of how long it takes for the firm to repay it’s dues to creditos.
Increase ratio – Firm enjoying longer credit period.
Increased ratio might be a warning sign – due to liquidity constrains stretching payment to creditors.
New Firms might not enjoy longer credit - Low ratio.
Low ratio may mean firm being liquid and less reliance on creditors. Or some times they might be paying off the creditors faster , not taking the full advantage of the suppliers credit.
Sudden change in the ratio might be a change of the supplier or trade terms.
Stock Turnover Period
Stocks & (RM+WIP+FG)
Stock
Turnover Period =
---------------------------------- X 365
Cost of Sales
This ratio is an indication of how long the firm take to convert it’s inventories to cash or debtors.
Firms with large distribution net works may have higher ratios.
If the ratio is high…Denotes larger stock holding / longer rotation period.
If the ratio is high…Obsolete stocks.
Ratio being very low – the firm may not be holding adequate stocks.
Inefficient production might pile up work in progress.
Performance Ratios
Gross Profit
Gross
Profit Margin =
-------------------- X 100
Sales
Operating Profit
Operating
Profit Margin =
--------------------- X 100
Sales
Net Profit
Net
Profit Margin =
--------------------- X 100
Sales
Profit before Interest & Tax
Interest
Cover =
---------------------------------------
Interest
Profit before tax
Return
On Capital Employed =
-------------------------------------
Capital Employed
Gross Profit Margin
Gross Profit
Gross
Profit Margin =
-------------------- X 100
Sales
Gross Profit = Revenue − Cost of Goods Sold
Cost of goods sold includes variable and fixed costs directly linked to the product, such as material and labor. It does not include indirect fixed costs like office expenses, rent, administrative costs, etc.
Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. For a retailer it will be their mark up. Larger gross margins are generally good for companies,
1. Falling ratio – Cost of production / material has increased. This has not been passed to the customer.
2. Weakening of the local currency which has resulted increased cost of materials. This has not been passed on to the client.
3. Competition in the market has forced the firm to accept lower margins.
4. Low margin – under cutting the competitors.
5. Increase of production.
6. Alternative cheaper material / labor.
Operating Profit Margin
Operating Profit
Operating
Profit Margin = ----------------------- X 100
Sales
It is a measurement of what proportion of a company's revenue is left over, before taxes, after paying for variable costs of production as wages, raw materials, etc. A good operating margin is needed for a company to be able to pay for its fixed costs, as interest on debt.
Operating Profit = Profit after Distribution , Administrative , Selling expenses.
Will be a parameter to check behavior of the Distribution , Administrative , Selling costs.
If the ratio changes in line with the gross margin , there is no need for further investigation.
Observe change in comparative years. Any change will be due to the changes in the above.
Net Profit Margin
Net Profit
Net
Profit Margin = ---------------------
X 100
Sales
The profit margin is mostly used for internal comparison. It is difficult to accurately compare the net profit ratio for different entities. Individual businesses' operating and financing arrangements vary so much that different entities are bound to have different levels of expenditure, so that comparison of one with another can have little meaning.
The final out come of the business which is to be carried forward or appropriated.
Check whether the profits have been pulled out of the business.
With the analysis of the Operating Profit Margin and the Interest Cover you will be able to determine the behavior of the Net Margin.
Interest Cover
Profit before Interest & Tax
Interest
Cover = ---------------------------------------
Interest
To measure the extent of profits being generated to cover the interest.
This should be above 1.
If below 1, the firm can not service the interest – Warning.
If the ratio is falling – Fall of sales volume / margins. Increase in borrowings or interest rates & other costs.
Return On Capital Employed
Profit before tax
Return
On Capital Employed =
------------------------------------- X 100
Capital Employed
Return on Capital Employed (ROCE) is used in finance as a measure of the returns that a company is realizing from its capital employed. It is commonly used as a measure for comparing the performance between businesses and for assessing whether a business generates enough returns to pay for its cost of capital. It would be ideal if this is above the current market interest rates.
By
Sanjeeva Pieris
Methods of Financing Customers
Methods of financing Personal Customers.
A personal
customer is defined as an individual banking in his personal capacity. He could
be employed in some organization getting a monthly fixed salary, or an owner/
Director of a business deriving a monthly remuneration.
- A
personal customer may require a TOD to meet an urgent personal commitment such
as school admit ion fees for a child, urgent medical treatment which may be
considered favorably, to be recovered from the clients next month salary.
- A
client may need finance to purchase consumer durables or part finance a vehicle
which may be considered under a personal loan scheme,
- A
lease may be granted to finance a purchase of a vehicle or some times a
computer depending on the client’s credibility.
- Client may require opening a LC to import a
vehicle. Most of the time this is done when the client has got a permit to
import such vehicle on duty concessions.
-
Client
may require purchasing / constructing a house in which case a housing loan
could be provided to finance such requests. Housing loans are granted as long
term finance and attract lower interest rates.
- Client
may approach the bank to get a certain cheque purchased, which he has received.
We may consider the request depending on the credibility of the drawer of the
cheque. (LBP) (Most of the time this may be a pay order drawn by a bank.)
- Client
may approach the bank to get a foreign draft, which he has received. We may
consider the request subject to availability of the foreign banks specimen
signatures which has to be verified to confirm the authenticity of the
instrument. (FBP)
- A
client may require a bank guarantee to be given to a service provider such a
mobile net work to obtain certain services such as international roaming.
-
A
client may be given a credit card to finance his personal requirements. The
limit of such card may be determined by his monthly income.
Methods of financing a Trading Customer.
A trading
customer is a person who is engaged in buying of merchandise from the local
market and resells with a mark up on wholesale or retail basis.
- A trading customer may require working capital for his day to day business activities such as purchase of merchandise, payment of administration & selling expenses which may be financed by a POD. His requirement for working capital should be a fluctuation need in which case a POD is suitable.
- If the requirement for working capital is a permanent fixed amount it would be prudent to finance such requirement by way of a Term Loan. Where the client will be able to repay the loan with the profits generated from the business.
- If
the requirement for working capital is a permanent fixed amount it would be
prudent to finance such requirement by way of a Term Loan. Where the client
will be able to repay the loan with the profits generated from the business.
- Client may require the bank to purchase a
trade related cheque to finance a an urgent payment. This may be considered favorably depending on
the drawer of the cheque.
- If the client is extending credit to his
clients they may get cheques which are post dated, and will have to wait till
the date of such cheques dawns for them to encash or deposit to their account.
This would no doubt tie up clients working capital which would result in
liquidity constrains. We may consider granting the client a post dated cheque
purchase facility for the client to over come their liquidity constraints.
- There are clients who purchase produce such as paddy from farmers which require them hold large amounts of stocks at a given time. This is due to the fact that the client will have to purchase the entire produce from a particular farmer. In such cases the bank may consider giving Pledge Loans (PLN) and holding the produce in joint custody of the bank and the client.
- Client
may require bank guarantees to be given to his suppliers to purchase goods on
credit. We may consider giving the client an Ordinary Guarantee for such
requests.
- A trading client may want to purchase a vehicle for the purpose of transporting/ distributing goods which could be financed by way of a Lease.
- Any
special equipment required for trading activity could be financed under a lease
or a term loan.
Methods of financing an Importer.
An
Importer is a customer who is engaged importing goods and equipment, to be
resold on a whole sale basis or on retail basis. An importer may engage in
trading of their imported commodities.
- PODs & Term Loan can be considered to finance their working requirements as described above.
- A Post Dated Cheque Purchase facility could be considered if the client is giving credit to their customers to get over liquidity constraints.
- Cheques may be purchased depending on the drawer of such cheques if the need arises where the client wishes to utilize the funds before it is realized.
- An importer would require a Letter of Credit line to import good on a regular basis. This is when the supplier is relatively strong or when trusts between the buyer and the seller are in the process of bonding. When they have engaged in business for some time the supplier may opt to send goods on DP or DA teams where there is no liability towards the bank for the payment.
- When the imported good arrive to the country the importer must have funding to retire the import documents and clear such goods from the port by paying the applicable duty. If the client requires funding for retiring of import documents we may consider a Revolving Import Loan (RIL) facility for the client. This is in another way of financing working capital for an importer.
- If the security provided to the bank is weak, the bank may not be willing to give a RIL, as the custody of the goods would rest with the client and there is always the chance of client misappropriating the sales proceeds of goods. In such a circumstance the bank may opt to provide the client with a Pledge Loan (PLN), where the goods imported would be locked in acceptable pledge store, jointly locking up with two separate locks. The client will repay the PLN part by part and get the stocks released as and when such payments are made. It is prudent to grant only a percentage of the import bill value (90% to 75%) to ensure there is a client’s contribution towards the consignment. This will incline the client to get the stocks cleared as soon as possible as there is clients own funds blocked in the consignment.
- In some instances the vessel carrying the cargo might arrive before the shipping documents (Bill of Lading) arrive at the bank preventing the importer from clearing the goods. This may result in unwanted demerge incurred for the delay clearing of cargo from the port. In such instances the client may request the bank to issue a shipping guarantee favoring the shipper claiming that our client has true title to the goods under the relevant Bill of Lading. This will allow the client to clear the cargo with a set of copy documents. Shipping Guarantees are usually given for consignments imported through LC terms. On exceptional basis there can be instances where such shipping guarantees are issues on consignments brought under DP or DA terms where the client has unquestionable reputation and integrity. Please note that when shipping guarantees are issued additional 10% margin from the invoice value should be taken. The value of a Shipping guarantees will be 300% of the invoice value.
- The duty component is usually financed by the POD. But occasionally there can be instances where the duty component is incorporated in to the RIL or PLN.
- In some instances the imported consignment may be held by the customs for numerous reasons where proper duty component can not be decided. In such cases the client may require the bank to issue a PCC Guarantee (Principal Collector of Customs). This will guarantee a certain sum to the customs if there is additional duty imposed by them. The customs shall release the cargo relying on this PCC Guarantee. Please note that PCC Guarantee although has an expiry date, such guarantees should not be cancelled and may be claimed even after the said expiry date.
- Sometimes importers bid for tenders for the supply of good / machinery for the government in such cases the client will require tender guarantees and there after performance guarantees if they are successful in securing such tender/contract. Such contract may give provision for the payment of an advance for the purpose of caring out the contract, in which case the principal of the contract will require a advance payment guarantee to release such advance. In this case you will be required to formulate a suitable bank guarantee line for the client to accommodate such requests.
- Client’s requirements for vehicles machinery may be considered under leases.
Methods of financing Exporters.
An exporter is a customer engaged in purchasing/ manufacturing/ processing commodities in Sri Lanka and export to a foreign land against a valid export letter of credit or a confirmed order. The export of may send the commodities in the form of finished goods or raw material. Export may be in the form of a service.
A client providing good and servicers to a BOI company is also considered a indirect exporter.
- Client’s working capital requirement can be financed by way of a POD or a TLN.
- If the client requires capital in the form of a capital infusion a TLN can be considered for this purpose.
- When a client receives an Export LC or a confirmed order, they will require working capital to process the order. Although this can be financed by way of a term loan or an overdraft this is not done so for the reason that it would be hard to monitor the activities of the client. There is always the possibility of client misappropriating funds. Therefore it prudent to provide the client with a Packing Credit Loan (PCL) for each Export LC or Confirmed Order. Always provide a percentage of the Export LC or Confirmed Order (75% to 90%) so that the client’s contribution is evident. This is to recovered by the relevant export proceeds.
- After processing the order client could carry out the export and prepare the required documents as per the Export LC or Confirmed Order. These documents would be then handed over to the bank for on ward transmittance to the buyer’s bank.
- If the export is under LC and all the necessary documents are in order and every thing is in conformity to the LC conditions the exporter’s bank would negotiate the documents and the exporter would get the export proceeds immediately. However most often this not the case as there would be numerous discrepancies found in the set of export documents in relation to the Export LC. In which case negotiation is not possible. These documents would have to be sent to the exporter’s bank on collection basis and the exporters funds would be blocked until such time the buyer receives the export documents and clears them (pay for them). In such cases the bank may offer a Export Bills Purchase Facility (EBP) to the client and offer to purchase the export documents there by giving the exporter immediate credit for his export.
- An exporter may receive foreign drafts for some reason the bank may be requested to purchase same to utilize the funds immediately. The act of purchasing such foreign draft is called Foreign Bills Purchase (FBP)
- Any vehicles or machinery may be financed by way of leases.
Methods of financing Manufactures.
A manufacturer is a client who would process raw materials and produce a finished good for the sale in the local or foreign market. The inventories of this client would be in three stages Raw Materials, Work in Progress & Finished Goods.
- Working capital could be financed by way of PODs & TLNs as described above.
- Capital infusion could be made by the banks by way of a TLN.
- If the client is selling the finished goods in the local market all facilities mentioned under a trading customer are to be used,
- If the client is exporting the finished goods then all facilities mentioned under exporters are to be used.
- The client may require to import raw materials for the production process and the bank can offer all facilities mentioned under importers.
- All machinery and vehicles required could be finance under leases.
- If the client requires buildings to house the industry a medium or long term loan could be granted to finance such requirements. Mostly these kinds of requirement are financed my way of refinance loan where the interest rate in much lower than the normal loan schemes.
Methods of financing Contractors.
Contractors are clients engaged in construction. There are four types of contractors. Civil, Electrical, Road, & Water.
- Client will require working capital to finance their day to day expenses such as wages etc, which could be financed by way of a POD.
- If the working capital requirement is a permanent deficit a TLN is more appropriate.
- Vehicles and machinery should be finance by way of leases. There have been instances where TLNs have been granted for the finance of machinery.
- Refinance loans may be considered for the finance of machinery provided this is within the parameters of the refinance loan scheme.
- If the client requires to purchase local cheque drawn by a reputed organization, a pay order or a foreign bank draft this may be considered under LBP or FBP as described above.
- A contractor has to bid for tenders to secure contracts. This requires Tender Guarantees (TDG) favoring the principal.
- After the tender is awarded the contractor must furnish a Performance Guarantee (PFG) to secure due and diligent performance of the contract.
- The principal may offer an advance payment to mobilize and commence work for which a Advance Payment Guarantee (APG) will be called for by the principal. Your client will request such guarantee to be issued on behalf of him.
- When the contract is concluded, most of the time the principal shall hold 10% of the contract value for a period of 6 to 12 months. This known as retention money. This is to hold the contractor liable for any short coming in the work done. If the client requires this money as well for the smooth running of his business they might request the bank for a Retention Guarantee to be issued in favor of the principal there by the principal shall release the retention money relying on such guarantee.
Methods of financing Service
Providers.
Service providers are clients who perform or deliver some kind of service to its customers. A client who is in the telecommunication industry is a service provider. A client who provides an accounting and tax consultancy service is a service provider.
- Client’s requirement for working capital could be financed by way of PODs & TLNs.
- Their requirements for equipment & vehicles could be finance through leases.
- If the requirement to finance equipment is a substantial amount like in the case of mobile technology service providers it is prudent to finance same with TLNs. These loans are most of the time given as syndicate loans where two or more banks will fund the requirement of the client. This may be due to the fact that the loan quantum exceeds the single borrower limit of a bank or the banks may want to spread the risk involved.
- Any other facility may be offered to such clients looking at their financial requirements.
Methods of financing Brokers & Indenting Agents.
Brokers and Indenting Agents act as middle men for transactions between two parties. Usually these clients do not require any bank funding. How ever they may request for bank facilities on and off for numerous requirements.
- When ever there is a delay in receiving a designated commissions the client may require a over draft to fund their normal day to day activities such as payment of utility bills, salaries etc. The bank may decide whether such OD should be a TOD or a POD depending on the circumstances.
- Client may request you for a lease for a vehicle or computer to keep in touch with his foreign contacts, which may be considered after determining their level of regular income.
- Telecommunication service provider might request you to open a LC to import some equipment,which may be considered provided there is a facility line available to pay for the consignment when it arrives. A RIL should not be considered in cases like this, as RILs are granted for a short periods and involves goods for trading. It is prudent to have a medium or long term facility to fund such projects
- Any other facility requirements should be evaluated on a case by case basis.
By
Sanjeeva Pieris
Types of Commercial Facilities
TYPE OF FACILITIES
• OVERDRAFTS
• LOANS
• LOCAL BILLS PURCHASED
• FOREIGN BILLS PURCHASED
• POST-DATED CHEQUES PURCHASED
• LETTERS OF CREDIT (SIGHT & USANCE)
• REVOLVING IMPORT LOANS
• PLEDGE LOANS
• PACKING CREDIT LOANS
• EXPORT BILLS PURCHASED
• BANK GUARANTEES
– ORDINARY GUARANTEES
– TENDER GUARANTEES
– PERFORMANCE GUARANTEES
– ADVANCE PAYMENT GUARANTEES
– RETENTION GUARANTEES
– PCC GUARANTEES
•
LEASES
Overdraft
Brief Description:
This is a facility where the client is allowed to obtain funds more than what is in the account
Purpose:
Is to finance working capital requirements of a business or any personal requirement of an individual
Tenure: Revolving
Comments:
Could be accommodated under permanent or temporary basis. Temporary Overdrafts are granted for temporary working capital requirements or temporary personal requirement and should be settled within a period of 30 – 60 days depending on the management approval. Permanent Overdrafts are accommodated for the client’s permanent requirements on a revolving basis, to be reviewed annually.
Loans
Brief Description:
A facility where a block of funds is made
available to client and the client is expected to repay this loan over a period
of pre-determined time frame.
Purpose:
To finance working capital / Fixed capital / capital infusion /purchase of consumer durables / housing and to finance Projects.
Tenure:
Depends on the type of loan and to a maximum of 25 years
Comments:
All loans such as Housing Loans, PAL Loans, and Commercial Loans are included in the category.
Local Bills Purchased (LBP)
Brief Description:
An Advance given against a locally drawn cheque or a Pay Order/Bank Draft.
Purpose:
To finance working capital requirements/personal requirements.
Tenure:
Period taken for the clearance of the instrument.
Comments:
Usually Banks will purchase/advance cheques drawn on reputed companies or government bodies. Bank may also purchase cheques drawn by other Banks (Pay Orders/Bank Drafts)
FOREIGN BILLS PURCHASED (FBP)
Brief Description:
Purchase of instruments drawn by foreign Banks.
Purpose:
To finance working capital requirements/personal requirements
Tenure:
Period taken for the clearance of the instrument
Comments:
Usually Banks do not prefer to purchase the cheques drawn by parties other than Banks, as it is impossible to ascertain the standing of the drawer.
POST-DATED CHEQUES PURCHASED (PDC)
Brief Description:
An Advance against trade related cheques drawn on future dates (post-dated)
Purpose:
To finance working capital requirements
Tenure:
30 – 60 days (may be extended on the management discretion on exceptional basis)
Comments:
The tenure of the post-dated cheques and the percentage of the advance is determined by the approving authority.
LETTERS OF CREDIT (LC)
Brief Description:
A Method used to carry-out import transactions with the implication of the Bank to satisfy both the buyer and seller..
Purpose:
To carry-out imports.
Tenure:
To a maximum of 90 days. (May be extended under exceptional basis with the approval of the Exchange Control Dept.)
Comments:
There are various types of Letters of Credit mentioned in UCP 500. The most frequently used one are:
Letter of Credit (Sight) – Documents released against payment
Letter of Credit (Usance) - Documents released against acceptance
Brief Description:
A loan granted to retire import documents received under Letter of Credit or DP terms.
Purpose:
To finance Imports / working capital requirements
Tenure:
90 days. May increase to 120 days with the approval of the Management.
PLEDGE LOANS (PLN)
Brief Description:
A loan generally granted for imports where the imported goods are held under the custody of the Bank.
Purpose:
To finance Imports / purchase of periodical produce and/or goods.
Tenure:
3 –4 months
Comments:
In addition to holding imported cargo under pledge, pledge loans are granted to stocking of seasonal stocks such as paddy, etc… to help wholesaler. It is also important to note that pledge goods should not be perishable and storing instructions should be carried-out without exception. Pledge store should be in dual control and should be insured with the financial interest to the bank and warranties complied with.
PACKING CREDIT LOANS (PCL)
Brief Description:
A loan granted to an Exporter with a Export Letter of Credit in hand.
Purpose:
To finance exports.
Tenure:
3 months. However, should not exceed the validity of the export LC.
Comments:
When a Packing Credit Loan is granted, the original Export LC should be handed over to the Banks and only a percentage (i.e., 60% - 75%) of the value of the Export LC will be advanced to the client. This loan will be recovered from the proceeds of the export bill send on collection
EXPORT BILLS PURCHASED (EBP)
Brief Description:
A facility where the set of export bills are purchased by the bank and sent on collection.
Purpose:
To finance exports.
Tenure:
Depending on the tenure of the export bills
Comments:
Export bills are purchased when there are discrepancies against the LC and the maturity of the export bill is determined on the validity of the export LC and the country of destination.
BANK GUARANTEES (GTEE)
Brief Description:
Bank Guarantee is a facility where the bank undertakes to pay a certain sum of money (unconditionally and on demand) to a third party on behalf of a customer.
Purpose:
To finance contracts and credit transactions.
Tenure:
To a maximum of 02 years
Comments:
Various types of guarantees:
TYPES OF GUARANTEES
Ordinary Guarantee:
Issued on behalf of a customer to obtain various types of credit facility from a third party. Secures the third party in case our client fails to repay as agreed.
Tender Guarantee:
Issued on behalf of a Principal to participate in a tender. Secures the Principal in case the customer does not take-up the contract if awarded.
Performance Guarantee
Issued favoring a Principal at the time of taking-up the contract. Assures the Principal, diligent performance of the contract by the customer.
Advance Payment Guarantee:
Issued on behalf of a customer to obtain an advance from the principal for the performance of the contract. Secures the Principal the sum advanced and assures diligent performance of the contract.
Retention Guarantee:
Issued on behalf of a customer to obtain the retention money from the Principal. Assures the Principal that they will still have the hold on the contractor even though the retention money is released.
PCC Guarantee:
Issued favoring Principal collector of customs for the purpose of releasing imported consignments when cleared without duty or with duty concession.
Please note that although these guarantees carry an expiry date, it is a practice that not to cancel these guarantees even after the said guarantee has expired.
LEASES
Brief Description:
This a method of financing of vehicles, equipment where a security itself is the asset leased.
Purpose:
Maximum 5 years.
Tenure:
To finance capital expenditure / personal requirements.
Comments :
In addition to the asset, the bank prefers
to obtain additional collateral such as guarantors to secure the lease
facility. Absolute ownership of the asset will remain in the bank’s name till
the lease is fully paid. It should be noted the type of asset, the depreciation
value, etc… when determining the tenure of the lease. This is important on a
worse case scenario where the bank will have to repossess the asset if the
client fails to comply with the repayment schedule
By
Sanjeeva Pieris
Lending Guidelines
Lending is the Co Activity of all Banks which leads to profits if done prudently….
For prudent lending we follow numerous guidelines which we propose to discuss now…………..
Mnemonics
We use several mnemonics to guide us through principals of
Good Lending
5 C’s
Character
Capacity
Repayment Capacity
Capacity to borrow
Capacity to carry out business
Capital
Debt to equity Ratio
Conditions
Internal
External
Collateral
CAMPARI
Character
Ability
Margin
Purpose
Amount
Repayment
Insurance/Security
PARTS
Purpose of the facility.
Amount of the loan/Customer’s stake.
Repayment- Ability to repay.
Term of the facility.
Security.
Now
we will go through PARTS
PURPOSE
Should be profit generating (Excluding personal borrowers).
Should not put the Bank at risk.
Should be within the credit guidelines of the Bank.
NOTES…
For fixed assets
Generate sufficient profits to repay the loan.
To repay another
Borrowing/Creditor
Inquire as to why the client could not pay earlier. He may request for a take over of facilities for better benefits offered by the new bank. (Better package of facilities/better interest rates etc.)
Working capital
In proper lending, increase working
capital should constitute an increase in stocks.
New ventures
The funds should be properly utilized to set up a profit generating business.
Personal Requirements
Purchase of consumer durables, purchase of a vehicle, education, travel, etc. (To be repaid out of the client’s regular income.)
Facilities which should be turned down
Illegal
purposes.
Why….?
Criminal prosecution.
Inability to repay when the illegal activity is brought to a halt
Unauthorized
Buildings.
Building a house or extension without proper approvals.
Speculative
Purposes.
Should be discouraged. If how ever you choose to lend – margin of safety.
E.g.: Shark fin/Sea cucumber.
Purposes
which are out side the credit policy of the Bank
AMOUNT
Principals.
It is not for the bank to suggest how much the bank would be willing to lend the customer.
Should not be more or less than what is required.
Customer’s own financial stake compared to the borrowing.
If short funded
The bank may be compelled to advance against again. (TOD etc).
Client may borrow from an outside.
Project may halt.
If over funded…
Unnecessary interest cost.
Funds may be used utilized for other activities such as unwanted capital expenditure.
Notes….
Request for capital investment to purchase machinery. You may have to think about increased working capital to utilize the maximum production capacity.
Housing... Think about increase of cost of building materials, legal fees, and Stamp duty.
Importing of machinery… Think about Duty / Installation charges.
Customer’s own stake….
He is more likely to put a greater effort to ensure that the venture succeeds.
Client is expected to put at lease 25% of the project cost.
(For business clients). Ideally bank to put less than the customer’s own stake.
Personal customers rely on their salary to repay the loans and can finance a greater % of the requirement.
Golden Rule
“The customer should contribute enough to ensure that the bank’s stake is not put at risk”
REPAYMENT
Personal…….. Regular Income.
Business…….. Profits / Cash flows.
Calculate Repayment.
Loan……….. Capital & Interest.
Overdraft…. Interest & gradually reduce the size of the overdraft.
Repayment Capacity… What to look for
Bank statements
Profit & Loss A/C
Cash flow statements
Past records.
TERM
Term should be acceptable to the bank.
Housing 20 – 25 years.
Project Loans 5 – 7 years.
Trading 1 – 3 years.
Personal 3 – 5 years.
20 year Housing loan too long for a 50 year old customer.
5 year vehicle loan is too long for a second hand car.
Computer loan for 3 years may be too long.