Introduction Trade Finance

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INTRODUCTION

Trade involves purchase of merchandise from seller by a purchaser for his

onward Selling (with or without value addition to the goods) for a profit.

Any trade transaction involves movement of the documents representing

settlement of the transaction. While the merchandise passes through a range

of Logistics player operating at different levels of supply chain, bank have

traditionally been playing a significant role in the movement of documents

and funds. Though this basic concept of trade and the role played by banks

(as a lender or otherwise) remains the same, the dimensions of trade and the

role of players undergo a lot of change depending on whether the entire trade

transaction (sale/purchase) is carried on in the country, or it is a cross Border

transaction. It is a domestic trade in first situation, and international trade in

other. In banking parlance, the term TRADE FINANCE usually indicates

finance against an international trade transaction involving either import or

export of goods from/to foreign countries.

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PROPOSED METHODOLGY

Methodology is a systematic procedure of collecting information in

order to analyze and verify a phenomenon.

The present study is based on data collected from primary and

secondary.

PRIMARY DATA:- It is the information collected directly without any

reference. Primary data consists of information obtained from interaction

and discussion with concerned officials of the organization to elicit their

opinion on various relevant matters. In the process of interaction with

officials it is planned to confirm through secondary sources.

SECONDARY DATA:- Secondary source of data includes collection of data

through study of bank records, financing and banking journal, other financial

magazines and websites on the internet.

DATA SOURCES:-

1. SECONDARY SOURCES

INSIDE THE COMPANY( TEXT BOOKS)

OUTSIDE THE COMPANY(TEXT BOOKS,WEBSITES)

2. PRIMARY SOURCES

MANAGEMENT

RESPONDENT

`PERSONAL OBSERVATION

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LIMITATIONS

Though the project is completed successfully a few limitations can be

observed in the study.

Study has been conducted using secondary data.

Time constraints in completing the project.

The study was conducted with the data available, and the analysis

was made accordingly.

Interpretations are based on the validity of the data collected.

Due to the busy schedule of the executives, it was very difficult to

get valuable information about the organization.

FRAME WORK

Frame work deals with the topic on which the entire project is depended

up on i.e, trade finance in HDFC bank. This is the focus issue of the

entire 8 weeks project and it consists of five chapters:

CHAPTER1:- Describes the “introduction to the project, objectives of the

work, methodology, limitations of the study”.

CHAPTER2:- Portrays the “profile of the HDFC bank”

CHAPTER3:- this chapter explains about theoretical study of “trade

finance”

CHAPTER4:- case study

CHAPTER5:-this chapter consists of findings, summary and suggestions

relating the topics studied.

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OBJECTIVES

To gain practical understanding on all aspects of trade finance and

to sharpen the skill sets in dealing with trade finance documents.

To review the historical perspective and past performance of

HDFC bank in trade finance.

To gain insights of trade finance activities of HDFC bank

HDFC PROFILE

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an “in principle” approval from the Reserve Bank of India (RBI) to step up a private sector bank, as part or the RBI’s Liberalization of the Indian banking industry 1994. The bank was incorporated in August 1994 in the name of ‘HDFC Bank Limited’ with its registered office in Mumbai, India. HDFC Bank commenced its operations as a Scheduled Commercial Bank in January 1995.

PROMOTERS

HDFC is India's premier housing finance company and enjoys an

impeccable track record in India as well as in international markets.

Since its inception in 1977, the Corporation has maintained a

consistent and healthy growth in its operations to remain the market

leader in mortgages. Its outstanding loan portfolio covers well over a

million dwelling units. HDFC has developed significant expertise in

retail mortgage loans to different market segments and also has a

large corporate client base for its housing related credit facilities. With

its experience in the financial markets, a strong market reputation,

large shareholder base and unique consumer franchise, HDFC was

ideally positioned to promote a bank in the Indian environment.

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BSINESS FOCUS

HDFC Bank's mission is to be a World-Class Indian Bank. The

objective is to build sound customer franchises across distinct

businesses so as to be the preferred provider of banking services for

target retail and wholesale customer segments, and to achieve

healthy growth in profitability, consistent with the bank's risk appetite.

The bank is committed to maintain the highest level of ethical

standards, professional integrity, corporate governance and

regulatory compliance. HDFC Bank's business philosophy is based

on four core values - Operational Excellence, Customer Focus,

Product Leadership and People. HDFC Banks business philosophy is

based on four core values:

1. operational excellence

2. customer focus

3. product leadership

4. people

CAPITAL STRUCTURE

As on 31st March, 2010 the authorized share capital of the Bank is

Rs.550 crore. The paid-up capital as on said date is Rs.

457,74,32,720/- (45,77,43,272 equity shares of Rs. 10/- each). The

HDFC Group holds 23.73 % of the Bank's equity and about 16.97 %

of the equity is held by the ADS Depository (in respect of the bank's

American Depository Shares (ADS) Issue). 26.59 % of the equity is

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held by Foreign Institutional Investors (FIIs) and the Bank has about

4,41,347 shareholders. The shares are listed on the Bombay Stock

Exchange Limited and the National Stock Exchange of India Limited.

The Bank's American Depository Shares (ADS) are listed on the New

York Stock Exchange (NYSE) under the symbol 'HDB' and the Bank's

Global Depository Receipts (GDRs) are listed on Luxembourg Stock

Exchange under ISIN No US40415F2002.

CBoP AND TIMES BANK AMALGAMATION

On May 23, 2008, the amalgamation of Centurion Bank of Punjab

with HDFC Bank was formally approved by Reserve Bank of India to

complete the statutory and regulatory approval process. As per the

scheme of amalgamation, shareholders of CBoP received 1 share of

HDFC Bank for every 29 shares of CBoP.

The merged entity will have a strong deposit base of around Rs.

1,22,000 crore and net advances of around Rs. 89,000 crore. The

balance sheet size of the combined entity would be over Rs. 1,63,000

crore. The amalgamation added significant value to HDFC Bank in

terms of increased branch network, geographic reach, and customer

base, and a bigger pool of skilled manpower.

In a milestone transaction in the Indian banking industry, Times Bank

Limited (another new private sector bank promoted by Bennett,

Coleman & Co. / Times Group) was merged with HDFC Bank Ltd.,

effective February 26, 2000. This was the first merger of two private

banks in the New Generation Private Sector Banks. As per the

scheme of amalgamation approved by the shareholders of both

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banks and the Reserve Bank of India, shareholders of Times Bank

received 1 share of HDFC Bank for every 5.75 shares of Times Bank.

DISTRIBUTION NETWORK

HDFC Bank is headquartered in Mumbai. The Bank at present has an

enviable network of 1,725 branches spread in 779 cities across India. All

branches are linked on an online real-time basis. Customers in over 500

locations are also serviced through Telephone Banking. The Bank's

expansion plans take into account the need to have a presence in all major

industrial and commercial centers where its corporate customers are located

as well as the need to build a strong retail customer base for both deposits

and loan products. Being a clearing/settlement bank to various leading stock

exchanges, the Bank has branches in the centers where the NSE/BSE have a

strong and active member base.

The Bank also has 4,232 networked ATMs across these cities. Moreover,

HDFC Bank's ATM network can be accessed by all domestic and

international Visa/MasterCard, Visa Electron/Maestro, Plus/Cirrus and

American Express Credit/Charge cardholders.

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RATINGS

Credit Rating

The Bank has its deposit programs rated by two rating agencies - Credit

Analysis & Research Limited (CARE) and Fitch Ratings India Private

Limited. The Bank's Fixed Deposit programme has been rated 'CARE AAA

(FD)' [Triple A] by CARE, which represents instruments considered to be

"of the best quality, carrying negligible investment risk". CARE has also

rated the bank's Certificate of Deposit (CD) programme "PR 1+" which

represents "superior capacity for repayment of short term promissory

obligations". Fitch Ratings India Pvt. Ltd. (100% subsidiary of Fitch Inc.)

has assigned the "AAA ( ind )" rating to the Bank's deposit programme, with

the outlook on the rating as "stable". This rating indicates "highest credit

quality" where "protection factors are very high.”

The Bank also has its long term unsecured, subordinated (Tier II) Bonds

rated by CARE and Fitch Ratings India Private Limited and its Tier I

perpetual Bonds and Upper Tier II Bonds rated by CARE and CRISIL Ltd.

CARE has assigned the rating of "CARE AAA" for the subordinated Tier II

Bonds while Fitch Ratings India Pvt. Ltd. has assigned the rating "AAA

(ind)" with the outlook on the rating as "stable". CARE has also assigned

"CARE AAA [Triple A]" for the Banks Perpetual bond and Upper Tier II

bond issues. CRISIL has assigned the rating "AAA / Stable" for the Bank's

Perpetual Debt programme and Upper Tier II Bond issue. In each of the

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cases referred to above, the ratings awarded were the highest assigned by the

rating agency for those instruments.

Corporate Governance Rating

The bank was one of the first four companies, which subjected itself to a

Corporate Governance and Value Creation (GVC) rating by the rating

agency, The Credit Rating Information Services of India Limited (CRISIL).

The rating provides an independent assessment of an entity's current

performance and an expectation on its "balanced value creation and

corporate governance practices" in future. The bank has been assigned a

'CRISIL GVC Level 1' rating which indicates that the bank's capability with

respect to wealth creation for all its stakeholders while adopting sound

corporate governance practices is the highest.

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TRADE FINANCE

INTRODUCTION

Trade involves purchase of merchandise from seller by a purchaser for his

onward Selling (with or without value addition to the goods) for a profit.

Any trade transaction involves movement of the documents representing

settlement of the transaction. while the merchandise passes through a range

of Logistics player operating at different levels of supply chain, bank have

traditionally been playing a significant role in the movement of documents

and funds.

Though this basic concept of trade and the role played by banks (as a lender

or otherwise) remains the same, the dimensions of trade and the role of

players under go a lot of change depending on whether the entire trade

transaction (sale/purchase) is carried on in the country, or it is a CrossBorder

transaction. It is a domestic trade in first situation, and international trade in

other.

In banking parlance, the term TRADE FINANCE usually indicates finance

against an international trade transaction involving either import or export of

goods from /to foreign country.

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TRADE FINANCE-THE BASIC FEATURES:

One important feature of trade is that it is mostly working capital

intensive, and the need for capital intensive assets (plant and

machinery) is comparatively less. In context of trade finance,

therefore lending banks receive request for providing both fund based

and non fund based working capital credit facilities. In the context of

international trade, lending banks provide documentary credit to

facilitate import of capital intensive machinery as well.

Trade finance thus involves financing of individual transactions or a

series of revolving transactions which are often self-liquidating. This

self-liquidating feature of trade finance is critical to many small,

under capitalized business.

Trade finance can be divided in to two distinct categories export trade

finance, and import trade finance.

Export trade finance includes:

1. Pre-shipment export credit

2. Post-shipment export credit

Import trade finance includes

1. Pre-shipment finance

2. Post –shipment finance

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IMPORTANCE OF TRADE FINANCE.

Trade finance has been reviewing the global trade market since 1983.Trade

finance is the method of importer and exporters of commodities and goods

use to finance their business. Basically trade finance has been in existence

for many thousands of years and one can trace the roots of trade finance and

structured trade finance right back to the early days of china and the silk

route, Mesopotamia and Europe. Today trade finance is a massive, multi-

billion dollar business. As the world trades mare and more goods and

commodities are brought and sold, so more and more banks and financiers

are needed to lend money to finance the purchases and sale of these goods

and commodities. Trade finance determines how cash, credit, investment

and other assets can be utilized for trade.

The two board categories of trade finance:

Pre-shipment financing to produce or purchase the material and

labor necessary to fulfill the sales order.

Post-shipment financing in order to generate immediate cash while

offering payment terms to buyer .

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DOCUMENTARY CREDITS

A country rarely, if ever, produces everything it needs. This means that

countries are dependent upon one another for those products that they need

but which they themselves do not produce. The various steps covering the

movement of goods between countries the payment for such goods and the

relationship between the parties involved form the basis of International

Trade.

Types of International Trade Settlement :

Advance Payment : When the buyer’s credit is doubtful or the political or

economic environment in the buyer’s country is unstable seller may demand

advance payment, which will be to his advantage. Without any assurance for

supply of goods, blocking his capital prior to receipt of goods or services the

buyer will be at a disadvantageous position.

Open Account: By an arrangement between the buyer and the seller

manufactured goods will be delivered to the buyer directly or to his order

and the buyer will pay at the end of the agreed period. This type of trading

requires a high degree of trust between buyer and seller and it will be more

advantageous to the buyer.

Bills on collection basis : It is an arrangement by which the seller after

shipping the goods submits the documents to his bank as agent for

collection. Documents are presented to the buyer through the correspondent

bank of the seller’s bank, which will be released upon buyer’s payment of

the amount specified.

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Documentary Credits : (Letters of credit): It is one of the most convenient

methods of settling payments in International Trade. It provides complete

financial security to the Seller of goods. The Seller may not know the credit

worthiness of the Buyer and the prevailing Regulations in the country of the

buyer. But once a Letter of Credit is established by the buyer’s bank on

behalf of the buyer in favour of the seller and the seller submits the set of

required documents to the opening bank or to the nominated bank, seller is

assured of payment. Buyer also gets the advantage of his banker’s assistance

in closely scrutinizing the documents and only after receiving the relevant

documentary evidence from the seller by the banker nominated in the credit

the nominated banker releases payment.

DOCUMENTARY CREDITS :

OPERATION OF DOCUMENTARY CREDIT

STAGE I

Buyer and Seller arrive at a contract for sale, specifying the terms of sale.

Both the parties may not know the financial capacity of each other. As for

the Seller is concerned he may prefer a bank should undertake the payment

obligation of the buyer and payment should be made available to him

immediately on dispatch of goods from his country. On the basis of this

agreement buyer (Applicant) requests his bank (Issuing Bank) for

undertaking the payment obligation on his behalf in favour of the Seller

(beneficiary). The arrangement under which a bank on behalf of the buyer

(Importer) undertakes the payment obligation, subject to fulfillment of

certain documentary conditions, is known as Documentary Credit. As per

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the requirements of the contract and on the basis of the application given by

the applicant, Issuing Bank establishes the Letter of Credit and forwards the

Letter of Credit to its Correspondent Bank (Advising Bank) in the Seller’s

country, which advises the Letter of Credit to the Beneficiary At times, at

the insistence of the Seller, Buyer requests Issuing Bank to make suitable

arrangement with a bank in the Seller’s country for releasing payment

immediately to the Seller on submission of shipping documents as per

Sellers requirement. In such cases, the Issuing Bank request a bank in the

Sellers country or in any third country, to undertake the payment obligation

on their behalf under this transaction. A bank in the Seller’s country may

agree for this arrangement subject to their Correspondent relationship with

the Opening Bank.

STAGE 2:

The beneficiary after shipping the goods will present the document’s to his

bank (Negotiating Bank). Or he may have a choice of presenting the

documents to the confirming bank directly.

On receipt of the documents, the Negotiating Bank / Confirming Bank will

scrutinize it thoroughly and pay value to the exporter / beneficiary of the LC

against the shipping documents.

They will claim reimbursement from the bank notified by the Issuing Bank

in the Letter of Credit. Simultaneously, Negotiating Bank will forward the

documents to the Issuing Bank, which will hand over the documents to the

Applicant after recovering the bill value. Applicant / Importer will accept /

pay for the bills if the documents are as per their requirement.

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LETTER OF CREDIT:-

Ideally any seller of goods/services would like to receive payment before

the delivery of goods/services to a buyer. Similarly the buyer would also like

to ensure that the goods/services bought are as per his specifications and

deliveries are effected in time, before parting with the money. If the buyer

and seller are at two different, for away stations, both the factors cannot be

satisfied simultaneously.

As a compromise, service of third party as an intermediary are utilized.This

intermediary are utilized. This intermediary is usually a bank request of a

buyer for payment of cost of goods/services sold on certain terms and

conditions,Such an assurance letter is named as a “letter of credit”.

A letter of credit is a written instruement issued by a banker at the request of

a buyer(applicant) in favour of the seller (beneficiary) under taking to

honour the documents or drafts drawn by the seller in accordance with the

terms and conditions.

Parties to a letter of credit transaction:

Applicant/buyer -on whose behalf LC is opened.

Beneficiary/seller -in whose favor the LC is opened.

Opening bank -which opens/establishes the LC.

Advising bank -which advices the LC.

Confirmation bank -which confirms the LC.

Negotiating bank -normally beneficiary bank.

Reimbursing bank -which normally maintains nostro account of the

opening bank and reimburses the negotiating bank.

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KINDS OF CREDIT:- The different types of letter of credit which banks

generally issue are:

In Land L/C: An L/C where all the parties to an L/C are located

within the country.

Foreign L/C: An L/C where either the opener or the benefiary

is located outside the country of issue and arising out of export

or import of goods.

Revocable credit: A revocable credit may be amended or

cancelled at any movement without prior notice to the

beneficiary.

Irrevocable credit: is a definite undertaking of the issuing bank

and cannot be amended or cancelled without the agreement of

issuing bank the confirming bank (if any) the beneficiary.

ASSESSMENT OF LETTER OF CREDIT

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For assessing the letter of credit limit requirements of a barrower

following points considered.

i. The necessity for opening L/C.

a) The necessity may raise due to the fact that a particular

raw material or a fixed asset or consumables stores are to

be imported.

b) In case of inland sales also the seller may be willing to

sell the goods against L/C only.

c) The same may be verified by the original terms of sale

offered by the seller.

ii. Terms of L/C whether DP or DA.

iii. Periodicity of sup[ply by the seller

iv. Lead time: the time taken to receive goods after opening n L/C.

v. Storage facility

DOCUMENTS UNDER THE LETTER OF CREDIT:

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Draft :

The Beneficiary should draw it as per the tenor stipulated in the Letter of

Credit.It should be drawn either on the Issuing Bank or on the Confirming

Bank or on the Nominated Bank as per the stipulations of the Documentary

Credit.

Invoice:

The Beneficiary as mentioned in the Letter of Credit should draw the

invoice.It should be drawn in the name of the opener of Letter of Credit.

BILL OF LADING:

The Bill of Lading should be in sets with the number of non-negotiable

copies as stipulated in the Letter of Credit.

The Shipping Company or its authorized agents should sign it.

INSURANCE POLICY – CERTIFICATE

Insurance Policy should be issued and signed by Insurance-Company or

underwriters or their Agents and it should be as per the terms of the Letter of

Credit.

Cover Notes issued by Brokers cannot be accepted.

CERTIFICATION OF ORIGIN

This should be issued by the Chamber of Commerce or any other authority

as indicated in the Letter of Credit giving information regarding Origin of

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Goods, Value, Shipper, Bill of Lading Number etc. The LC should

specifically stipulate by whom such documents should be issued.

PACKING LIST / WEIGHT LIST/ETC.

All other documents like ‘packing list’, ‘weight list’, etc., would be as per

the letter of credit terms and should be in agreement with other documents.

BANK GUARANTEES:

Definition:

i) A “Contract of Guarantee” under the Indian Contract Act is

contract to perform the promise or discharge the liability of a third

person in case of his default.

ii) A “Contract of Guarantee” should be distinguished from “Contract

of Indemnity”, in the latter case, party promises to save another

person from loss caused to him by the conduct of the promisor

himself or by any other person.

BENEFICIARIES OF GUARANTEES:

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Guarantees are generally executed by the bank favouring:

a) Central and state Government Departments including railways.

b) Autonomous bodies, public sector undertakings.

c) Overseas suppliers of goods / machinery on deferred payment terms

(and for obtaining rupee or foreign currency loans).

d) Steamship companies for clearance of goods in the absence of the

relative bills of lading.

e) Foreign governments for imports under loans sanctioned or under aid.

f) Joint stock companies for issue of duplicate shares etc.,

g) Reputed institutions / limited companies / firms.

h) Tax / Customs / Court authorities.

TYPES OF GUARANTEES:

The different types of Bank guarantees which a borrower may require, can

be broadly classified into three categories:

Financial Guarantee

Performance Guarantee

Deferred Payment Guarantee

The guarantees issued by the bank can be broadly classified into three

categories viz. Financial, Performance and deferred payment guarantees. It

is sometimes difficult to differentiate between the financial and performance

guarantees, as in both cases, the ultimate liability of the bank gets converted

in monetary terms.

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A. Financial guarantees:

In case of financial guarantees, the bank guarantees the customer’s financial

worth, credit worthiness and his capacity to take up financial risks.

Therefore, guarantees issued in respect of constituents liability, such as

guarantees favouring tax / customs / excise / court authorities in respect of

disputed claims, payment of taxes, customs and excise etc. will come under

the classification of financial guarantees. While issuing such guarantees the

branches should be satisfied about the financial strength / liquidity of the

party.

B.Performance guarantees:

(i) Performance guarantees are issued on behalf of constituents

guaranteeing their performance as per the contracts entered into,

performance of machineries supplied, due discharge of other

contractual obligations undertaken etc. In such guarantees, Bank

does not undertake to perform the obligations undertaken by the

customer under the contract, in the event of his failure / default as

they may be of a highly technical nature. The purpose of the

performance guarantee is only to fix the financial responsibility in

the event of default or failure on the part of the customer to

perform the obligations undertaken by him. Hence, in the event of

default of the customer and on being notified to that effect, the

Bank will make payment under the guarantee.

(ii) Guarantees covering security deposit /earnest money/advance

payment / mobilization advance etc. would come under this

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category. Similarly, guarantees covering payment for supplies to

be lifted by parties will also be treated as performance guarantees.

(iii) The performance bank guarantee stands on a footing similar to an

irrevocable letter of credit and hence is also known as “standby

letter of credit”.

C.Deferred payment guarantees:

1) Deferred payment guarantee, which is a financial guarantee, is a way

of raising long term resources for acquiring fixed assets / capital

goods by securing guarnaee of repayment of principal and interest

from his banker to the supplier of capital goods for supplier’s credit.

This also helps the supplier to improve his cash flow by discounting

these bills from his bankers.

a) In case of capital goods / machinery / heavy vehicles/tractors / trailers,

the purchasers have to raise large amount of resources to buy these

items. For this the intending purchaser may approach his bank for

term loan repayable over a medium / long term in installments. It is

possible that due to various constraints like mismatch in resources /

deployment period, funds crunch etc. bank may not be able to

sanction term loans.

b) Under such circumstances, the borrower / intending purchaser may

request the supplier to extend him long term credit. The supplier of

such capital goods etc. may agree to extend such credit repayable over

a period of say 3/5/7 years at say half yearly installments. The

supplier will also charge interest on the credit extended and such

interest may also be recovered in installments along with principal.

c) However, the supplier may not agree to extend such credit, unless he

is satisfied about the capacity of the purchaser to pay the installments

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on due date. For this, he may insist on the purchaser’s bank

guaranteeing the repayments.

d) The purchaser (borrower) may then approach his bankers to guarantee

the repayment on due dates. The bank may consider his request and

will extend the guarantee which covers an extended repayment period

or ‘Deferred Payment’ by the borrower / purchaser to the supplier /

beneficiary. Hence such a guarantee is called ‘Deferred Payment

Guarantee’.

APPRAISAL/SANCTION OF BANK GUARANTEE LIMITS:

(i) General:

(a) An assessment of credit worthiness of the applicant, his past

performance and his capability to discharge the conditions of the

guarantee based on the analysis of financial statements of the

borrower / guarantor, as also detailed opinion and credit report on

proprietor / partners / directors / guarantors etc. is obtained.

(b)While entertaining any request for the issuance of the performance

guarantees, the branch should exercise due care and caution and

should have sufficient knowledge of the customer as regards his

means, experience and capacity to perform the obligations undertaken

and that he is not likely to commit any default. It should particularly

be ensured that the customer has sufficient experience and exposure in

the particular line of activity so that the contractual obligations can be

fulfilled by him without any difficulty. Reasonable cash margin and

charge on collateral securities should be obtained while considering

such guarantees.

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INVOKATION OF BANK GURANTEES:

(i) The beneficiary of a bank guarantee has the right to invoke the

guarantee any time during the currency of the guarantee and before

the expiry of the claim period, if any, and lodge the claim.

(ii) When a demand for payment on guarantee as per terms and

conditions of the guarantee bond is made within the validity period

of the guarantee by the beneficiary, it is deemed to be an

invocation. The demand should be made in writing. Guarantees are

sometimes invoked by telex / telegrams also.

(iii) For invoking a guarantee it is not essential, for the beneficiary to

satisfy the bank regarding the default or the quantum of actual loss

suffered by him. The bank’s obligation under the guarantee is

absolute and independent of any contract entered into by the

applicant customer.

(iv) When a guarantee is invoked by the beneficiary within the validity

period of the relative guarantee bond, it is incumbent on the bank

to meet such demand irrespective of whether the customer requests

us not to pay the amount owing to his dispute with the beneficiary

or for any other reason and also whether the bank is holding any

security or cash margin for the guarantee or not.

(v) Under no circumstances, branches should act on the instructions of

the clients not to make payment under the guarantee. To meet

commitments under the guarantee is an exclusive concern and

obligation of the Bank. If there is dispute between the client and

the beneficiary, the same has to be settled outside the Bank and

branches should not take cognizance of their disputes.

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(vi) The payments to the beneficiaries should be made promptly giving

no opportunity to the parties to take recourse to courts and obtain

injunction against enforcement of guarantees. Needless to mention

that the delay in making payments under guarantees under any

pretext creates a wrong impression that bank officials are in

collusion with the parties which tarnishes the image of the banking

system and the Bank is put in a very embarrassing position. Any

lapse in this regard is viewed seriously by the Bank. We should

carefully note that whenever a guarantee is invoked, steps are

immediately taken to honour the same.

(vii) It has been held that in case a guaranteeing bank pays the amount

of the bank guarantee in the absence of legal and proper invocation

by the beneficiary, then the applicant is not liable to reimburse the

amount in terms of counter indemnity executed by him in favour of

the bank. Therefore it must be ensured that invocation is proper.

CRYSTALLISATION OF BILLS

When a bill is not paid on the due date, the liability in foreign exchange has

to be converted into rupee liability. Such liability obviously cannot be kept

open in foreign currency and accordingly has to be converted into rupee

liability. As such, the bills which remain unpaid, the liability pertaining to

such bills is converted into rupee liability which is known as crystallization.

All exchange risk is to be passed on to exporter. Exporters should be

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encouraged to book forward cover. Normal transit period for all foreign bills

as per FEDAI is 20 days.

All bills on the 30th day from the expiry of normal transit period in case of

unpaid demand bills should be crystallized by converting to rupee liability

(TT selling rate on the date of crystallization or the original bill buying rate

whichever is higher will be applicable).

Interest will also be recovered on the date of crystallization for the period

from date of expiry of the normal transit period / notional due date to the

date of crystallization at the appropriate rate of interest as directed by RBI

for overdue export bills.The unpaid bill will be treated as outstanding under

the sanctioned limit of the customer with the exchange risk open against

him.

Swap cost / gain from due date to date of crystallization shall be absorbed by

authorized dealer.

REALISATION OF BILL AFTER CRYSTALLISATION:

On actual realization, TT buying rate will be applied on the realization

amount or contracted rate in case of forward contract will be applied. The

crystallized amount will be adjusted through this amount and any rise or fall

will be adjusted with the customer’s account. Interest from the date of

crystallization to the date of actual receipt of payment will also be recovered

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from the customer. In case of dishonor of bill, the rupee equivalent of the

bill amount arrived at the current TT selling rate or the amount originally

advanced, whichever is higher will be recovered. All applicable charges in

foreign currency at the current TT selling rate will be applied. Interest at

appropriate rate prescribed by RBI will be recovered.

NORMAL TRANSIT PERIOD:

For all bills in foreign currency other than exports to Iraq … 20 days.For

exports to Iraq … 60 days (provided exports conform to unguidelines).For

bills drawn in rupees … 3 days if reimbursement is provided at the centre of

negotiation.Bank located at 7 days if reimbursement is provided in India

from a centre other than negotiating bank centre 20 days in case of

reimbursing bank outside India Or Bills not under LC.

In case of export usance bills (Foreign / Rupee) where due dates are

reckoned from date of shipment or date of bill of exchange etc., no normal

transit time will be applicable, in case reimbursing bank is other than where

negotiating bank maintains Nostro account or reimbursement obtained

through other bank … normal 5 days transit period interest will be charged.

IMPORT BILLS:

If payable on demand under LC, the import bill will be crystallized, on 10 th

day after the date of receipt of documents at the LC opening branch of the

bank.In case of usance bills, it will be crystallized on the due date of the

bill.If the due date or 10th day is a Holiday, the importers liability will be

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crystallized the next day.The bills selling rate or the forward cover rate will

be applicable.

INTEREST PAYMENTS (IMPORTS):

Interest if any on the import bill amount will be recovered in full and shall

not be set off against margin amount.

PAYMENT OF COLLECTION BILLS:

In case of collection of bills TT buying rate ruling on the date of payment or

proceeds to the exporter or the forward is contract rate as the case may be

shall be applied and the payment will be made in India only after the foreign

currency amount is credited to the Nostro account of the Bank.

INTEREST PAYMENTS (EXPORTS):

If the exporter has completed all formalities after receipt of payment, the

banks are bound to pay interest. Where:

payment is to be effected in the same branch ... 1 working day.

Where payment is to be made at the same centre but

To another branch of the same bank or another bank … 2 days

Where payment is to be effected to a branch of the same

Bank or another bank at outstation centre … 3 days

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FACTORING AND FORFAITING

The main problem nowadays when trading with foreign countries is to

obtain payments from importers. Financing companies offer financial

support to traders in exchange for fees, and guarantees. There are two types

of financing forms: factoring and forfaiting. They are widely used as

alternative financing tools to banks.

FACTORING

Factoring is the process of purchasing invoices from a business at a certain

discount. Factors provide financing service to small and medium-sized

companies who need cash. For this the factor charges a fee equal to a

percentage of the invoices purchased generally 5%. Factoring is a low value

short term financing forms. It involves the purchase of invoices, for an

amount less than $10,000 and 90-120 days payment terms. After shipping

your goods or services, the factor purchases the invoices, and advances cash

to you company. Factoring provide liquid assets to small business. In fact

banks have strict criteria when lending money so it is difficult for these

companies to obtain loans.

FORFAITING

Forfaiting is the purchase of a series of credit instruments such as drafts,

bills of exchange, other freely negotiable instruments on a nonrecourse

basis. Nonrecourse means that if the importer does not pay, the forfeiter

cannot recover payment from the exporter.

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The exporter gets immediate cash on presentation of relevant documents and

the importer is the liable for the cost of the contract and receives credit for

“x” years and at certain per cent interest.

The forfaiter deducts interest at an agreed rate for credit period. The debt

instruments are drawn by the exporter, accepted by the importer, and will

bear an aval or unconditional guarantee, issue by the importer’s bank. The

forfeiter takes over responsibility for claiming the debt from the importer.

The forfeiter holds the notes until maturity, or sells them to another investor.

The holder of the notes presents each note to the bank at which they are

payable, as that fall due. Forfaiting is a high-value medium and long term

financing form. It involves the purchase of negotiable instruments for not

less than $100.000 and from six month to five years payment terms. The

forfeiter needs to know some important information, such as:

who the buyer is and his nationality

what goods are being sold

date and duration of the contract

interest rate already agreed with the buyer

negotiable instruments used identity of the guarantor of payment.

HDFC Bank extends the following facilities to eligible exporters:

Pre-Shipment Credit.Pre-shipment Credit is offered to an exporter by way of packing credit to enable him to finance purchase/import of raw materials, processing and packing of the goods meant for exports.

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Post-shipment Credit. Post-shipment Credit is offered to an exporter to finance export sales receivables after the date of shipment of goods till the date of realisation of export proceeds. We offer our clients a choice of the following services: Negotiation / Payment / Acceptance of export documents under letter of credit Purchase / discount of export documents under confirmed orders / export contracts etc. Advances against export bills sent on collection basis Advances against exports on consignment basis Advances against undrawn balance on exports Advances against approved deemed exports To meet your export financing needs, we offer customised packing / post shipment credit in rupee terms or foreign currency, tailor-made to match the clients' profile.

Post Shipment Finance

Post-shipment finance is a loan or advance granted by a bank to an exporter

of goods from India. This facility is available to an exporter subsequent to

the date of shipment of goods upto the date of realisation of export proceeds.

Some key features of post-shipment finance are as follows:

Finance is extended to either the exporter (seller's credit) or the

overseas buyer of the goods (buyer's credit).

Finance is extended against evidence of shipping documents.

Concessive rate of interest is available for a maximum period of 180

days, starting from the date of submission of documents. Normally,

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the documents are to be submitted within 21days from the date of

shipment.

Post-shipment finance can be further classified as under :

a. Negotiation of export documents under Letter of Credit (LC).

b. Purchase / Discount of export document under confirmed orders /

export contracts, etc.

c. Advances against export bills sent on collection basis.

1. Who is eligible for post-shipment finance?

Post-shipment finance is extended to the actual exporter who has

exported the goods or to an exporter in whose name the export

documents are transferred.

2. On what basis is post-shipment finance extended?

It is extended against evidence of shipment of export goods.

3. What is the purpose of post-shipment finance?

Post shipment finance is meant to finance export receivables.

4. What is the quantum of this finance?

Post shipment finance can be extended upto 100% of the invoice

value of goods.

5. What is the period for which this funding is available?

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In the case of routine exports, the maximum period allowed for realisation of

export proceeds is 6 months from the date of shipment. Banks can extend

post shipment finance at a lower interest rate upto the normal transit period

or the notional due dates (this is calculated as the sum of the Normal Transit

Period + Usance Period, subject to a maximum of 180 days). Beyond that

period, banks lend at non-concessive rates or the normal commercial rates.

Post-shipment credit

Sight Bills - Not more than 10%

Upto 90 days - Not more than 10%

91 days upto 6 months - 12%

Overdue (applicable only on the overdue portion) - Left to the discretion of

the bank, though it is most likely to be the unarranged overdraft rate.

Post-Shipment foreign currency loan - Maximum of Libor + 1.5 pct.

PRE-SHIPMENT FINANCE:-

Pre-shipment finance is issued by a financial institution when the seller want

the payment of the goods before shipment. The main objectives behind pre-

shipment finance or pre export finance to enable exporter to:

Procure raw material

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Carry out manufacturing process

Provide a secure warehouse for goods and raw material

Process and pack the goods

Ship the goods to the buyer

Meet other financial cost of the business

TYPES OF PRE-SHIPMENT FINANCE

Packing credit

Advances against receivables from government, like duty draw backs

etc.

Advances against cheques/drafts etc., representing advances payment.

Pre shipment finance is extended in the following forms:

Packing credit in Indian rupees

Packing credit in foreign currency(PCFC)

REQUIREMENTS OF PRE-SHIPMENT CREDIT

This service is provided to the exporter who satisfies the following criteria:

Exporter should have a ten-digit importer-exporter code number

allotted by DGFT.

Exporter should not be in caution list of RBI.

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If the goods to be exported are not under the OGL(open general

license),the exporter should have the required license/quota permit to

export the goods.

ELIGIBILITY

Pre-shipment credit is granted to an exporter who has the export order or LC

in his own name. The exporter is the person or company who actually

delivers the goods to the importer/buyers.

Quantum of finance

There is no fixed formula to determine the quantum of finance that is

granted to an exporter against a specific order/LC or an expected order. The

only guiding principle is the concept of need-based finance. Banks

determine the percentage of margin, depending on factors such as:

The nature of order

The nature of the commodity

The capability of exporter to bring in the requisite contribution.

DIFFERENT STAGES OF THE PRE SHIPMENT FINANCE

Appraisal and sanction of limits

INCOTERMS 2000:

13 Terms are grouped into 4 groups.

E (EXW)

F (FCA, FAS, FOB)

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C (CFR, CIF, CPT, CIP)

D (DAF, DES, DEQ, DDU, DDP)

EXW … EX works : Seller responsible for ready goods at his own

factory, all other costs to the buyer including taxes of seller’s country to be

borne by buyer. Seller responsible for only quantity, measurement,

weighing.

FCA … Free Carrier … Goods cleared for export by seller and delivered

to carrier as per directions of buyer (carrier may not be shipping agency).

FAS … Free Alongside Ship) … Seller responsible for delivery of goods

along side ship as given by buyer in seller’s country.

FOB … Free on Board … Seller will deliver the goods on board (ship to

be told by buyer).

CFR … Cost and Freight … (.. named port of destination) … it includes

cost of goods and freight upto the destination by seller. However, risk after

shipment is of buyer.

CIF… Cost, Insurance, Freight … all costs upto destination borne by

seller. The risk after boarding is on buyer.

CPT .. Carriage paid to … Freight of first carrier included. Risk after

boarding on buyer.

CIP … Carriage and Insurance paid to … Freight and Insurance by seller,

Risk to buyer after loading.

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DAF … Delivered at Frontier … Seller responsible for delivery upto the

custom clearance stage of the adjoining country of buyer.

DES … Delivered EX Ship … Seller bears all costs upto the named

destination of delivery, the difference between CIF and des is only that the

risk of buyer starts from the time he takes delivery in this case.

DEQ …Delivered Ex … all costs upto payment of import duty of the

buyers destination. The risk of buyer starts only after that.

DDU … Delivery duty unpaid … Seller bears all costs upto the stage of

delivery to destination but before payment of import duty or clearance etc.,

buyers risk starts from getting the goods cleared.

DDP … Delivered Duty paid … Seller is responsible for delivery of

goods till the buyers premises or his designated premises. Entire risk till then

is of seller.

UNIFORM CUSTOMS, PRACTICE AND DOCUMENTARY CREDITS:

The Uniform Customs and Practice for Documentary Credits (UCPDC) are

universally recognized set of guidelines governing Letters of Credit. The

guidelines are published in the form of a Brochure by International Chamber

of Commerce. The first publication was made in the year 1933. Revised

versions were issued in 1951, 1962, 1974, 1983 and 1994. The latest

publication is known as ICC 600 and adopted with effect from 2nd July,

2007. The International Chamber of Commerce with its Headquarters in

Paris frames the guidelines. UCPDC has now become indispensable since

Letters of Credit has become one of the safe methods of International trade

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settlements. The reason being that the Sellers hesitate to release their goods

before receiving payment, while Buyers prefer to have control over the

goods before parting with their money.

Matching payment with physical delivery is rarely possible. So a media

through which payment against ‘Constructive delivery’ by handing over

documents or transferring title to or control over the goods is possible under

this mechanism.

The UCPDC gives the maximum possible guidance and assistance to all

parties. It guides the Buyer as responsible for stipulating clearly and

precisely the documents required and the conditions to be complied with. It

stipulates the liabilities and responsibilities of the Issuing Bank, Advising

Bank, Confirming Bank, Negotiating Bank and Reimbursing Bank.

UCPDC, ICC Publication No.600 shall apply to all Documentary Credits

including to the extent to which they may be applicable to Standby letter(s)

of Credit, where they are incorporated in the text of the credit.

They will be binding on all the parties thereto, unless otherwise expressly

stipulated in the credit.

For the purpose of UCPDC, the expressions “Documentary credit” means

any arrangement however named or described, whereby a bank (the Issuing

Bank) acting at the request and on the instructions of a Customer (the

Applicant for the Credit):

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i) Is to make a payment to or to the order of a third party (the

beneficiary) or is to pay or accept bills of Exchange {Draft(s)}

drawn by the Beneficiary or

ii) Authorises another bank to effect such payment or to accept and

pay such Bills of exchange {Draft(s)} or against stipulated

documents, provided that the terms and conditions of the Credit are

complied with.

iii) Authorises another bank to negotiate.

For the purpose of these articles, branch of a bank in different country is

considered as another Bank.

The Letter of Credit, by nature, are separate transactions from the sale or

other contracts on which they may be based and banks are in no way

concerned or bound by such contracts even if any reference to such contract

is included in the credit. It also clarifies that neither the Beneficiary nor the

Applicant can avail himself of any underlying contractual relationship. Non-

fulfillment of contractual obligations under the Sale contract cannot be

disputed through Letter of Credit mechanism.

In a Letter of Credit all parties concerned deal with documents and not in

goods.

While UCPDC 600, the modified version is a set of comprehensive rules,

however, the important provisions / changes are given as Annexure –

UCPDC 600 guidelines at the end of this manual.

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TRADE FINANCE PRODUCTS.

1. Guarantee

a. Issuance

A Bank Guarantee is an undertaking given by the Bank on behalf of an

Applicant customer to a Beneficiary to pay a certain sum of money up to a

particular date upon a valid invocation by the beneficiary, in terms of the

Bank Guarantee. Bank Guarantees are of two types-Financial Guarantee and

Performance Guarantee.

Some purposes for which Bank Guarantees are issued

Margin Money Guarantee

Security Deposit Guarantee

Subscription Guarantee

Bid Bond / tender

Earnest Money

Retention Money

Performance of goods / services

Excise / Customs dues

Export performance

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Transactional Documentation required for Guarantee issuance and

amendment.

1. Request letter duly signed by Authorised signatories.

2. Typed Guarantee text with adequate franking, once the Text in soft

copy is approved by the Bank.

3. A Foreign Currency Guarantee is sent by SWIFT, where franking of

text is not required.

2. Letter of Credit

A documentary / letter of credit may be defined as “ an agreement by means

of which a bank ( Issuing Bank ) acting at the request of a customer

(Applicant), undertakes to pay to a third party ( Beneficiary) a

predetermined amount by a given date according to agreed stipulations and

against presentation of stipulated documents.

In simple terms LC may be defined as an agreement where payment is made

against documents as per LC Terms. Under a Documentary Letter of Credit,

all the parties concerned deal with documents and not with goods, services

or performances to which the documents may relate. LC governed by

UCPDC 600.

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a. Parties Involved

Export Importer Banks

BENEFICIARY APPLICANT ISSUING/

OPENING BANK

SHIPPER BUYER ADVISING BANK

SELLER ACCOUNT

PARTY

CONFIRMING

BANK

MANUFACTURER NEGOTIATING

BANK

VENDOR

SUPPLIER

b. Some commonly used INCO Terms

INCO

Terms

Matrix Insurance Freight

FOB Free on Board Buyer Buyer

CFR Cost & Freight Buyer Seller

CIF Cost, Insurance, Freight Seller Buyer

EXW Ex-Works / Ex-Factory Buyer Buyer

c. Transactional Documentation required for Letter of Credit

Issuance and Amendment.

1. One time documents

a. IE Code Number Certificate

b. FEMA Declaration (Annexure)

c. KYC Report

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2. Request letter duly signed by Authorised signatories.

3. LC Application duly filled up and signed.

4. Purchase order/ Order confirmation.

5. Insurance to be submitted by the customer for all cases except for

CIF, with HDFC Bank as loss payee/bank clause endorsement.

d. Transactional Documents for acceptance and payment of Sight

Bill under LC.

1. Request letter from client to debit account for release of documents.

2. Requisite Form A1 / FEMA declarations to be received (Annexure).

3. Declaration stating that Bill of entry will be submitted within 90 days

from the date of remittance.

e. Transactional Documents for acceptance and payment of Usance

Bill under LC.

1. Bill Of Exchange duly accepted for payment on due date (foreign bills

stamps affixed if reqd),

2. Covering letter confirming that bill has been accepted for payment

and request to release the documents to be obtained.


4. Bill of Entry.

3. Documentary Import Collection

Documentary Collection is a Conditional form of payment in which the bank

acts at the request of the seller (exporter/principal/drawer).

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Bank undertakes to release to the buyer (importer/drawee) stipulated

documents after he makes a payment or after he accepts to make a payment

on terms consistent with the collection instruction. The bank that

intermediates in the transaction is the importer’s bank.

Trade off between higher risk and lower cost.

Seller ships and asks bank to collect.

Banks act as a collecting agent only.

No credit position taken.

Risk of non-payment due to political and commercial risks

a. Transactional Documents for payment of Sight Bill under

Collection.

1. One time documents

a. IE Code Number Certificate

b. FEMA Declaration (Annexure)

c. KYC Report

2. Request letter from client to debit account for release of documents.


4. Declaration stating that Bill of entry will be submitted within 90 days

from the date of remittance.

4. Documentary Export Collection

Documentary Collection is a Conditional form of payment in which the bank

acting at the request of the seller (exporter/principal/drawer).

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Bank undertakes to release to the buyer (importer/drawee) stipulated

documents after he makes a payment or after he guarantees a payment on

terms consistent with the collection instruction. The bank that intermediates

in the transaction is the importer’s bank.

Trade off between higher risk and lower cost.

Seller ships and asks bank to collect.

Banks act as a collecting agent only.

No credit position taken.

Risk of non-payment due to political and commercial risks

a. Transactional Documents for payment of Bill under Collection.

Type of Export Document from Customs

Export of Goods Shipping Bill/SDF

Export of Services/Software Softex

The Role of Governments in Trade

Financing

The role of government in trade financing is crucial4. in emerging

economies. In the presence of underdeveloped financial and money markets,

traders have restricted access to financing. Governments can either play a

direct role like direct provision of trade finance or credit guarantees; or

indirectly by facilitating the formation of trade financing enterprises.

Governments could also extend assistance in seeking cheaper credit by

offering or supporting the following:

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• Central Bank refinancing schemes;

• Specialized financing institutes like

Export-Import Banks or Factoring Houses;

• Export credit insurance agencies;

• Assistance from the Trade Promotion Organisation; and

• Collaboration with Enterprise Development Corporations (EDC) or State

Trading Enterprises (STE).

a) Central Bank Refinancing Schemes

Under this type of schemes, the Central Bank will rediscount the commercial

bills of exporters at preferential rates. This will provide the cheap post-

shipment financing necessary for exporters to quickly turn around funds for

further export business.

Here, the government is subsidizing the cost of funds that exporters have to

pay if they rediscount their bills with commercial banks.

b) Export-Import Bank (EXIM Bank)

The Export-Import Bank (EXIM Bank) specifically caters to the needs of

exporters and importers and those of investors in foreign markets. It offers

various services, including long-term direct loans to foreign buyers for loans

and equipment sales of sufficient sizes.

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Several countries, including developed nations, have EXIM banks. For

example, the United States EXIM Bank was created in 1934 and established

under its present law in 1945. Its primary role is to aid in financing US

exports, and for medium-term(181 days to 5 years) transactions, it co-

operates with US commercial banks by providing export credit guarantees.

In setting up the EXIM Bank, the Unrecognized that job creation is a

consequence of exports. Its main customers are SMEs in the United States.

c) Export Credit Insurance Agencies:

Export credit insurance agencies act as bridges between banks and exporters.

In emerging economies where the financial sector is yet to be developed,

governments often take over the role of the export credit insurance agent.

Governments traditionally assume this role because they are deemed to be

the only institutions in a position to bear political risks. Several countries in

Asia and Africa have such an organization. However, the viability of such an

organization depends on the volume of business and income from insurance

premium. In that context, credit insurance policies vary according to the type

of exports. For example, short term policies on the sale of raw materials on

180 days terms are covered up to 95 per cent for commercial risk and 100

percent for political risk. Such trades are considered relatively secure.

Nonetheless, it is good practice to get the exporter to bear a certain portion

of the risk.

d) Support from Trade Promotion Organizations (TPO’s)

As explained earlier, banks are often reluctant to lend to exporters because

of their lack of knowledge about the creditworthiness of the traders, and as a

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result may raise interest to compensate for the risks taken. TPOs are in a

position to know the strengths and weaknesses of the individual trading

houses and exporters, and could share information with financial institutions

to facilitate access to financial services. TPOs are the government agencies

that are most directly involved with the trading community, often supporting

promising trading and exporting enterprises. The support and assistance

given by the TPOs could act as a signal to banks as to which companies are

creditworthy companies. In addition, TPOs could establish network of

financial institutions, identify their credit requirement, and match trading

enterprises and financial institutions based on these requirements.

e) Export Development Corporation and State owned

enterprises.

In most emerging economies, there are a few key conglomerates with a

diverse range of products, substantial export capacity and sustainable

financial resources. They could be private sector export development

corporations (EDCs) or state-owned enterprises (SOEs).

Governments could harness these enterprises as mechanisms to assist other

local firms, especially SME’s, to export their products or import goods

Unlike the SME’s, the EDC’s and the SOE’s have the financial resources

and trade expertise needed to participate in trading activities. Smaller

exporters could sell their products to the EDC’s and SOE’s and receive

payment earlier than if they exported directly by themselves. Small

importers could also purchase goods from the EDC’s and SOE’s, which

have the financial strength to bulk purchase from abroad.

Page 50 of 74

Case study

CREDIT APPROVAL MEMO

REVIEW Annual CAM # BBG/HYD/14164RBBO No:CAM Date : 02/09/2009

CUSTOMER NAME

M/s Siflon Polymers Private LimitedPAN.No.AAWFS4671D

CAM Revision Date : 15/09/2010

ADDRESS Administrative OfficePlot No.20& 21, Aleap Industrial Estates, Gajularamaram (V), Quthbullapur(M), hyderabad-500055Registered Office:76 & 77, Mythri Nagar, Near Miyapur, Hyderabad-500050

CREDIT LABELLING: Normal

BORROWERGRADING

5- Asset classification: STANDARD

SEGMENT Manufacturer RBI Code: 28101INDUSTRY Manufacturer and Supplier of

Poly Tetra Fluoro Ehtylene(PTFE) (Teflon/Hiflon) Componenets

Faces Code: MRP310

Page 51 of 74

FACILITY SUMMARY:

Fac No. & Description

Total Amount (Rs.inLacs) Inc/(Dec)

Tenor

Cash Credit 80 +15 1 yearTotal Credit Exposure

80 +15

1.FACILITY: TERMS AND CONDITIONS

Name of Facility

Tenor (in months)

Max Limit (in Rs. Lacs)

Interest Rate &Processing Fee

Margins Purpose of facility

Cash Credit

12 80 lakhs 13% & 0.5% 25% on stocks & 50% on debtors (< 90 days)

Working capital

1.1.BANKING FACILITY:

In Rs. Lakhs Existing Facilities (HDFC Bank)

Proposed Facilities (HDFC Bank)

Cash Credit 65.00 80.00Total 65.00 80.00

1.2Details of Security: Primary: Hypothecation of stock and book debts Collateral: Equitable Mortgage on the following properties.

Page 52 of 74

Sr No

Property Description Owner of the property

City & State

Area in sq. ft.

Market Value (Rs. Lacs)

Type of property (Residential )

1 Property located at Plot No.76 & 77, Phase-1, Mythrinagar madinaguda, near Miyapur ‘X’ Roads, Serlingampally Municiplaity & mandal, RR district

Mr.R.Ananthaiah and Mrs.R Parvathi

Hyderabad, AP

533.32Sq Yards

133.33Residential Property

*As per the valuation report submitted by M/s Mahender and associates

2. Documentation for the facility:

2.1 Documentation for Cash credit facility of Rs.65.00 Lacs:Request for the facility - ObtainedSanction Letter(Duly acknowledged by Borrower) - ObtainedCA Certificate confirming existing borrowings - ObtainedChartered Accountant Certificate indicating no existing charge on stocks and receivables - ObtainedLoan Agreements –Fund based limits - ObtainedPersonal Guarantee of all the Directors & property owners i.e Mr. Anantaiah, Mrs R Parvathi, Mr M Ram Prasad and Mr Sreedhar. - ObtainedPG of Shareholders covering 95% of the total shareholding - ObtainedMOA & AOA (certified true copy) - ObtainedDIN form - ObtainedDocuments / agreements required for creating and registering the first charge with ROC (for private and public limited companies - ObtainedNo Match/Good RBI & CIBIL and dedupe checks for the Company, Promoters - ObtainedNo considerations letters - ObtainedBoard Resolution for availing the limits - ObtainedCorporate Guarantee of M/s Siflon Drugs - Obtained

For CC limit:Overdraft agreement - ObtainedDemand Promissory Note - Obtained

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Letter of Continuity for Demand Promissory Note- ObtainedLetter of General Lien and Set off- ObtainedNotarised power of attorney for hypothecated book debts- ObtainedHypothecation of Stock and Book Debts for the entire facility amount. - Obtained

For mortgage of propertiesTitle Search report of the property - ObtainedValuation report of the property to be mortgaged - ObtainedMemorandum of Entry of Past Transaction of Creation of Mortgage by Deposit of Title Deeds- ObtainedDeclaration cum Indemnity. - Obtained

Others: Audit report for 3 Financial years- ObtainedProvisionals to be certified by CA - ObtainedPermanent SSI Certificate – Obtained

2.2 Post disbursement documentation

Comprehensive Insurance on all stocks, movable and immovable assets, and property with HDFC Bank as 1st loss payee (on assets on which HDFC Bank has charge). (To be received preferably within 30 days of disbursement). - ObtainedStock & receivables statement to be obtained on monthly basis. – Obtained

All the above documetns were obtained at the time of intial disbursement, now we are proposing the renewal cum enhancement, the below documents to be obtained from the customer.

Compliance w.r.t Financial covenants stipulated in the previous CAM:The Firm’s tangible Networth to be maintained at Rs. 161.82 Lacs as at 31.03.08(A) during the currency of the overdraft .The TNW as on 31.12.2008 is at Rs 190.8 Lac

Documentation for the facility of Enhancement of rs. 15 lakhs – Pre disbursementGeneral Documents: Request letter

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Approved CAM Sanction Letter (Acknowledged by the borrower)Application Form Personal Guarantee of the all Directors, shareholders covering 95% of total share holding and the Property OwnersCA Certified networth statement of the guarantorsBoard Resolution of the company MOA and AOACA certificate for the existing Share Holding pattern and present Directors Fresh stock Audit to be conducted and the report to be vetted by credit. Renewal of insurance policy should be done Documentation Modification/Creation of charge with ROC Track of ICICI car loan to be wetted.Undertaking from the customer that there is no litigation pending against firm or its directorsUndertaking from the company there is no change in the directors of the company, if there is any such change Form 32 filed with ROC should be produced or a CA certificate to that effect. Declaration from the company that none of its directors, is a director or specified near relation of a director of a banking companyCA certificate for the Annual sales and MIB of the company as on 31.03.2009

For CC facilityOD agreement Demand Promissory Note Letter of Continuity Letter of General Lien and Set off Notarized power of attorney Supplementary Hypothecation of stock and book debts for enhancement amount

For Mortgage of limit:Constructive MOE Declaration cum undertakingExtension of mortgage for entire Group exposure with all docs approved by Legal.

Financial covenants now proposed:

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The Firm’s tangible Networth to be maintained at Rs. 177.9 Lacs as at 31.3.09 during the currency of the overdraft Undertaking from the firm for:Non-Withdrawals of unsecured loans (nil presently) if any, during the currency of the overdraft.Conversion of USL into equity as and when required to maintain a positive TNW

3. Borrower Profile / Background:Details Remarks / proof

Name of firm M/s Siflon Polymers Private Limited

MOA & AOA

Constitution Private Limited Whether SSI or not NOName of the Directors Mr. Anantaiah

Mrs R ParvathiMr M Ram Prasad Mr Sreedhar

MOA & AOA

Main Contact Person & contact nos.

Mr.R.Anantaiah093468-56491

RM Business Banking has personally met the client.

Firm / Directors / Group companies in RBI Defaulters list – NILInterest of Directors / Senior Officers (only approvers) of bank, if any - NILChange in constitution or shareholding pattern during the review period- NILAny litigation pending against the Firm. or Proprietor of the firm. - No,However we have a stipulated a condition in this regard.

3.1. Promoters and Management:M/s Siflon Polymers Private Limited, a private limited company had been incorporated during 2004 as per the provisions of Companies Act 1956 by Mr. R.Ananthaiah, Mrs R Parvathi, Mr M Ram Prasad and Mr Sreedhar as the directors. Since its inception, company was engaged in manufacturing and trading of SPPL products which are basically used in Pharma Manufacturing units and the operations of the unit has commenced during 2004.

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The 2 major Shareholders are Ananthiah & Parvathi holding about 95% of the shareholding in the Company. We have obtained the PG of these 2 directors covering 95% of shareholding.

The company is engaged in manufacturing and trading of SPPL products which include Poly Tetra Fluoro Ethylene (PTFE) lined SS/MS pipes, bends, elbows FEP lined Tees, ball Valves, PTFE moulded components and ECTFE (Halar) coated Vessels , receivers tank.etc.

By academics, Mr. R.Anantaiah is a B.tech (Chemical) and is having a rich experience of 20 years in the same line of activity. During the year 2000, he has floated a firm by name Siflon Drugs, which is primarily engaged in bulk drugs manufacturing. Subsequently during the year 2004, Mr. Anantaiah alongwith other two directors have floated a company by name M/s Siflon Drugs and Pharmaceuticals Pvt Ltd, which is into manufacturing of pharma formulations. The said firm is located at Aleap Industrial Estate.

Group Companies:

Firm Business description

Sales (Rs. lacs)- FY 2008-09

Profit (Rs. Lacs)- FY 2008-09

Yearof incorporation

Banking facility

M/s Siflon Drugs Manufacturer and Supplier of Drugs

997.13 51.01 2000 Rs. 100.00 lakhs from Syndicate Bank

M/s Siflon Drugs and Pharmaceuticals Pvt Ltd

Manufacturer and Supplier of Vererinary Oral Solid dosage forms like Tablets, capsules and liquid orals

65.27 3.26 2006 TL of Rs 95 lacs from APSFC

There are no inter-group transactions.

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6. Banking account conduct:

Month

Credits with HDFC Bank OD A/c-

Credits with HDFC Bank C/A

Total Credits Sales

Utilization

Mar 23.24 2.51 25.75 28.71 85.61%Apr 29.63 26.74 56.37 25.83 87.49%May 62.21 28.69 90.9 33.07 81.29%June 43.35 15.98 59.33 56.05 77.15%Jul 38.58 38.71 77.29 27.97 76.82%Aug 38.11 26.08 64.19 82.46%

Banking Account Conduct Checklist & comments if any

Check

Remarks

Sanctioned credit facility with a bank/ Working capital facility > 6 months

Y Yes

Account behaviour- Inward cheque bounce less than 3 / quarter Y There is 1 inward cheque

return, which is due to technical reasons

- Account should be in TOD for less than 10 days / quarter

Y Yes

- Interest servicing within 3 days of the month Y YesAmount of debit and credits -Churn of min 75% in the bank a/c

Y Churn is more than 80%

Repayment Track Record

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- Positive Repayment record of Term Loan EMI's

Y Details given below

Conduct of TL account with ICICI Bank in respect of Vehicle Loans There are no instances of Cheque returns in respect of Car Loan taken from ICICI Bank during the period of Sep 08 to Aug09. There are no instances of cheque returns observed in respect of Commercial Vehicle Loan taken from ICICI Bank. (Note :) Above vehicles EMI is going through our bank, One is from HDFC bank OD A/c of Rs 13427 for TaTa 207 ,other is from HDFC Bank current A/c of Rs 32555 for Skoda

Comments of Stock AuditWe have done the Stock Audit in Oct 08 at the time of renewal. Now, the case is due for renewal in Sep 09. The present limit is Rs. 65 lakhs. As per norms, Stock Audit is not required when limit is <Rs.75 lakhs. However, as we are proposing enhancement to Rs. 80 lakhs and it is more than 1 yr since we have done the audit, we have stipulated Stock audit as a condition before disbursement of enhanced limit.

7.BUSINESS ANALYSIS:7.1 Operational Performance:Location & Infrastructure:The company is situated at Plot No.20 & 21, ALEAP Industrial Estate, Gajularamaram, Quthbullapur Mandal, Hyderabad which is 15 Kms away from the main city. The property is owned by one of the Promoters – Mrs. Parvathi. The company is located on a land admeasuring 1080 sq yds with a total built area of 10000 sq ft. The premises+ Ground Floor+ 1st Floor have been taken on lease from Mrs. Parvathi. In the same premises, 3rd and 4th floors have been leased out to M/s Siflon Drugs and Pharmaceuticals Pvt Ltd.

The company is well connected to the main road which is 21 km away from Hyderabad in a fairly pollution free environment

Power &Water:They are having their own borewell of 3 inches and more ever they require minimal water for the production. They are utilizing the 110 KVA of power from APSEB and the connection is 150 KVA

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Labour:The industry requires both skilled and unskilled labour in addition to administrative staff. For both the units, the company has employed around 34 people. From which 16 as technical staff,13 Unskilled people and 05 people as Administrative Staff. The key personnel are as under: Production Manager: Mr.K.Rajini Kanth, a B.Pharmacy , looks after the production and inventory control of the company. He is having a rich experience of around 20 years in this field.Quality Assurance Manager: Mr.M. Sreenivasa Rao, an Masters of Science, looks after to establish evaluate, validate and implement all quality control procedures and methods. He is having a rich experience of 12 year in this field.

Mr. Anathiah takes care of HR, Marketing, Sales of the Company.

Installed Capacity & Utilization: The initial installed capacity of the Company was 200 meters per Month. Gradually, it was increased to 800 Meters per month.

The unit works for 10 hours and based on the orders and project works it will works 24 hours in 3 shifts. Each shift consists of 8 hours. The Company has informed that they are operating at about 70% of the total capacity.

Products: The company is basically is into manufacture and trading of SPPL products which include Poly Tetra Fluoro Ethylene (PTFE) lined SS/MS pipes, bends, elbows FEP lined Tees, ball Valves, PTFE moulded components and ECTFE (Halar) coated Vessels , receivers tank etc. These are primarily used in all pharmaceutical and bulk drugs manufacturing units.

Raw Material & Suppliers:The main raw material for this Unit are Ptfe resion, Industry valves, Tubes ,MS & SS pipes, Blanges. The suppliers of the raw materials are

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Supplier name % of total salesBharath Tubes corporation 15Gelaxi metals 10Hitech Applicators 10EI Duepont 14Florfin industrie 9Rathan mani4Sri rama trading 2Perfect engineering 5

There will not be much fluctuation in the raw materials and they can get the credit period for 60-70 days

Manufacturing Process:The operations involved in the manufacturing process are simple and well establishes .The outline of the process are as indicated below.

a) PTFE Lined Pipes: Poly Tetra Fluoro Ethylene (PTFE) is mixed with lubricant in proper proportion by rotating machine and it is pre-formed in Hydraulic press. The pre-formed PTFE is taken in Extruders and mould is fixed. By exerting pressure, the PTFE is extruded into tubes and taken into MS tubes. Then the tubes are kept for specific time in Electric oven for sintering purpose. After sintering the tubes are heated and lined in pre-machined. Then they are welded and drilled MS/SS pipes of required sizes. The ends are flared. Then the pipes or elbows after testing for Hydraulic pressure they make it ready by sparking, final dimensions are painted and they are packed to despatch.

b) FEP Lined Tees, bell valves & Fittings:As per the requirement of the customer the MS/SS castings are machined and taken in suitable dies and filled with FEP material. The dies /moulds are heated to specific temperature where FEP granules are melted and forms shape as per moulds. Then the moulds are cooled and separated. The FEP lined products are machined, drilled, welded and assembled for preparation or Tees, ball Valves, reducers, Flanges etc

c) PTFE Components:The solid/hollow PTFE tubes extracted from Extruder are milled, drilled and assembled to produce PTFE components like Gaskets, seatings etc. Which are widely used for fitting and other purposes.

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Demand of the products:Traditional stainless steel and Glass no longer deliver the best results in chemical , pharmaceuticals and Bio- chemical Industries. These are widely replaced by fluro polymer lined and coated components. These products are chemically inert, non-sticky, non-cracking, non-welting, easily clearable and can be used for wide temperature range (-270 degrees C to 260 degrees C). Hence, the demand for these products is growing day by day.

Customers: M/s Divi’s Laboratories Ltd, M/s Matrix Laboratories Ltd, & Dr. Reddy’s Laboratories Ltd, Nicolus pharma are the main customers of the company. Apart from the above clients, all major pharmaceuticals and bulk drug manufacturers are associated with this company for their products which are used in their manufacturing activity. They are enjoying the credit period of 90-110 days. Generally payments are received only after the Tubes are installed and trail production commences with the end Customer. Due to this, the credit period is on the higher side

Customer name % of total salesDR Reddys laboratories 30Divis laboratories 20Matrix laboratories10Others 40

Even though the credit offered is on the higher side, there have been no bad debts till date. The Company has Rate contracts with top Customers. Earlier, there was no Price Escalation clause in the contract. From the current year 2007, RM price escalation clause has been included in all the rate contracts.

7.2 Market Position:M/s Siflon Polymers Private Limited, a Private Limited Company and a manufacturing and trading unit in “ PTFE (Teflon/Hiflon) components” which are mainly used in pharmaceutical and bulk drug manufacturing units.

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In view of Pharma industries boom, the demand for the products of the company will increase.

Month-wise Sales for the last 2 financial years for Unit 1&2 are as under:

2007-08 2008-09 % of Change 2008-09 2009-10 % of ChangeApril 29.27 37.24 27.23% 37.24 25.83 -30.64%May 40.69 25.36 -37.68% 25.36 33.07 30.40%June 22.73 27.07 19.09% 47.07 56.05 19.08%July 17.43 47.66 173.44% 27.66 27.97 1.12%Aug 26.31 47.25 79.59% 47.25Sep 6.59 33.22 404.10% 33.22Oct 20.1 17.54 -12.74% 17.54Nov 42.61 51.26 20.30% 51.26Dec 48.23 29.21 -39.44% 29.21Jan 35.62 42.39 19.01% 42.39Feb 57.95 26.17 -54.84% 26.17Mar 62.82 28.71 -54.30% 28.71Total 410.35 413.08 0.67% 413.08 142.92 4.07

The company has achieved Sales of Rs. 413.08 lakhs during 2008-09 compared to sales of Rs. 410.35 lakhs made during 2007-08, thereby shown a marginal increase of 0.67%.The main reason for marginal growth, explained by the customer is that, the company is not able to secure orders to larger extent, as the pharma industry is running under lean phase during the last financial year and there were no major expansion plans by the Pharma/Chemical industries during the last financial year.

However during the current financial year, the company is getting the orders in an encouraging phase and achieved sales of Rs. 142.92 lakhs till Jul'09 as against sales of Rs. 137.33 lakhs for corresponding period last year and based on same estimated turnover of Rs. 450lakhs appears reasonable.

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Also, the Company has orders to the tune of Rs. 150 lakhs to be executed in the next 3-4 months. They have added new customers like Rakshita Pharma, Sun Labs etc from whom also they are expecting orders. In view of the same, Party has requested for enhancement.

DP Calculation:

Months Stock Debtors Creditors Wc Gap DPFebruary 132.8 201.06 49.63 284.23 162.91March 126.73 211.17 78.82 259.08 141.52April 122.70 391.09 80.55 433.24 227.16May 126.83 398.56 76.5 448.89 237.03June 124.59 449.02 107.87 465.74 237.05jul 126.75 443.13 82.13 487.75 255.03The average Drawing power of the last 6 months is Rs. 210.11 lakhs

9. Financial Appraisal:

P&L Sheet (All figures in Rs. lacs)

Mar 31,09(P)

Mar 31,08(A)

Mar 31,07(A)

Total Income 413.2 410.4 694.0PBDIT 40.2 49.3 61.4Interest 8.5 4.9 0.4Depreciation 5.2 4.8 3.3PBT 26.5 39.6 57.7Tax 10.4 11.2 19.5PAT 16.1 28.4 38.2Cash Profits 21.3 33.2 41.5LiabilitiesTangible Networth 177.9 161.8 145.1Short Term Debt 56.8 60.7 0.0Long Term Debt 12.2 16.2 14.7Unsecured loans from promoters 0.0 0.0 0.0Total Debt 69.0 76.9 14.7

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Current Liabilities & Provisions 129.5 147.7 123.2Total Liabilities 376.3 386.4 283.0AssetsNet Fixed Assets 64.7 67.0 61.8Investments 0.0 0.0 0.0Loans & Advances 0.0 0.0 0.0Sundry Debtors 221.9 248.4 156.3Inventories 69.0 43.0 12.6Other Current Assets 20.7 27.9 52.4Total Current Assets 311.6 319.3 221.2Total Assets 376.3 386.3 283.0Financial RatiosGross Margin (PBDIT/TI) 9.7% 12.0% 8.8%Net Margin (PAT / TI) 3.9% 6.9% 5.5%Current Ratio 2.86 2.27 2.62Interest Coverage 4.72 10.13 157.46DSCR 2.37 3.71 7.92Debt / Equity Ratio 0.39 0.48 0.10Leverage (TOL / Tangible Networth) 1.12 1.39 0.95TOL (excl Unsec loans) / Tangible NW 1.12 1.39 0.95Current Assets / Sales 75% 78% 32%Debtor Days 196 221 82Inventory Days cost of sales 68 43 7Creditors days as cost of sales 51 81 49

Remarks on Financials:The company has achieved Sales of Rs. 413.08 lakhs during 08-09 compared to sales of Rs.410 lakhs made during 07-08, thereby shown an increase of 0.67%. The revenue growth is only 0.67% The main reason for leser revenue growth in sales as explained by the customer is that, the company is not able to secure orders to larger extent, as the pharma industry is running under lean phase during the last financial year and there were no major expansion plans by the Pharma/Chemical industries during the last financial year. However during the current financial year, the company is getting the orders in an encouraging phase and achieved sales of Rs. 142.92 Lac till Jul'09 and based on same estimated turnover of Rs.450 lakhs appears reasonable..

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The Cash accruals during the last 3 years are indicated below:FY’2009 --- Rs. 21.3 LacsFY’2008 --- Rs. 33.20 Lacs FY’2007 --- Rs. 41.50 Lacs The Gross and Net margins are in 9.7:1 and 3.9 respectively, compare to previous financial year ratios were declined, but the ratios are satisfactory level to serve the proposed limits.

The TNW increased from Rs. 161.80 lakhs as at 31.03.08 to Rs 177.90 Lacs as at 31.03.09, due to plough back of some portion of profit. Current ratio is 2.86:1 and it is above 1.33:1 indicates sufficient working capital margin. However debtors holding level is 196 days and it is very high. However, the position has improved in the current year.

Reason for increase in inventory level : Supply of stocks of Poly Tetra Fluoro Ethylene (PTFE) is time taken process and hence party is holding higher stocks of this product

Debtor days are on the higher side. About 60% of debtors are less than 90 days old and balance are more than 90 days old. There are no debtors which are more than 120 days. Party has informed they they are regularly collecting money from the Customers. The position has improved in current year.

Position is satisfactory as per provisional financials.

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10. WORKING CAPITAL ESTIMATION—For Cash Credit Facility:Based on Audited Sales Turnover:(FY’2007-08)

Particulars Amount (Rs. lacs)

A Sales turnover in 2008-9 413.08B Expected sales turnover in 2008-09 450.00C Max. working capital limits eligibility @ 25% of

expected sales112.50

D Minimum margin that would be brought in by the promoters(5% of exp sales)

22.50

E Max. Working capital limits eligibility 90.00F Credit facility availed from other banks 0.00G Limits that can therefore now be extended to the

establishment80.00

H Proposed fund based Limit 80 (=< G)

Justification for enhancement:

The company has achieved Sales of Rs. 413.08 lakhs during 2008-09 compared to sales of Rs. 410.35 lakhs made during 2007-08, thereby shown a marginal increase of 0.67%.The main reason for marginal growth, explained by the customer is that, the company is not able to secure orders to larger extent, as the pharma industry is running under lean phase during the last financial year and there were no major expansion plans by the Pharma/Chemical industries during the last financial year.

However during the current financial year, the company is getting the orders in an encouraging phase and achieved sales of Rs. 142.92 lakhs till Jul'09 as against sales of Rs. 137.33 lakhs for corresponding period last year and based on same estimated turnover of Rs. 450lakhs appears reasonable.

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Also, the Company has orders to the tune of Rs. 150 lakhs to be executed in the next 3-4 months. They have added new customers like Rakshita Pharma, Sun Labs etc from whom also they are expecting orders. In view of the same, Party has requested for enhancement

Recommended for sanction considering: Satisfactory account conductCollateral cover of 156% in the form of residential property Good top line growth in the current year MIB of 2.09 times the limitStrong reco of BM

SOURCING CRITERIA:

Fast Track Criteria (Non-ODAP) ActualsRemarks - Eligibility

1 Years in Business - Min. 5 years 5 Y2 Annual Sales Turnover - Min. Rs. 60 lacs 413.08 Y3.1 Proposed WC Limits / Existing Limits - Max. 150% 131% Y

AND

3.2Proposed Limits / Previous Year's Sales - (For Mfr Max. 20% / For Non Mfr 15%) 19% Y

4Promoters Money in Business / Facility Requested (Min. 1 Times) 2.09 Y

5Facility Amount requested (Min Rs.10 lacs / Max. Rs. 100 lacs) 85 Y

6 Banking Account Conduct – Good Good Y

7.1Property Cover - Residential / Commercial - Non Mfr (Min. 110%) - -

7.2Property Cover - Residential / Commercial / Industrial - Mfr (Min. 110%) 156.5% Y

7.3Property Cover - Residential / Commercial - Mfr (Min. 35%) 156.5% Y

ELIGIBLE

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QUALIFYING CRITERIA:

Sr. No.

Criteria to be checked by Credit Managers Applicability

Actuals

Reqd. Approval of(If Deviation)

1 Satisfactory contact point verification by Bank officer Yes Yes No Deviation2 Satisfactory reference checks with suppliers Yes Yes No Deviation3 Satisfactory reference checks with customers Yes Yes No Deviation4 Business vintage above 5 years Yes 5 No Deviation5 Inward cheque bounces below 3 / quarter Yes 1 No Deviation6 10 Days in TOD / quarter Yes 0 No Deviation7 Interest servicing within 3 days per month Yes 0 No Deviation8 Churn in the bank a/c above 75% Yes 100% No Deviation9 Satisfactory TL repayments and promoters personal

trackYes NA NA

10 Working capital facility > 6 months (put actuals in yrs) Yes 2 No Deviation11 (CC + LC + BG) limits restricted to - - -

· 15 % of previous years sales for non manufacturers No NA NA· 20 % of previous years sales for manufacturers Yes 19.4% No Deviation

12 PMB > 100% of the facility amount requested No NA NAFor ODAP - PMB > 150% of the facility amount requested

Yes 209% No Deviation

13 Positive NP after tax in the latest financials Yes 16.09 No Deviation14 Revenue growth of above 10% in the immediate

preceeding yearYes 1% CM with DP

15 Interest coverage above 2 Yes 4.72 No Deviation16 Current ratio above 1.5 Yes 2.86 No Deviation17 TOL / (TNW + USL from promoters) upto 1.5 Yes 1.12 No Deviation18 Current assets / sales below 60% (manufacturers /

retailers) and below 30% (traders / distributors)Yes 75% RCH

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19.1

Collateral Security – (CC + LC + BG) facilities – 110 % of property (residential / commercial / industrial) –

Yes 166% No Deviation

19.2

For manufacturers – min 35 % of aggregate collateral to be residential / commercial

No 166% NA

19.3

Margin for ODAP - Collateral Security – OD against property only – 30% of property (residential) / 35% or 40% of commercial property upto Rs. 50 Lacs and above Rs. 50 Lacs resp.) – OD option not permitted for manufacturers and NO Deviation permitted

Yes 36% Not Permitted

Total number of Deviations 3 Status Complete

13. Risk & Mitigates:

Risk Factors Mitigate ProposedRevenue growth of above 10% in the immediate preceeding year – (0.67%)

In the Current year, the firm is showing growth in its sales and has already achieved sales of Rs. 142.92 lakhs from April 09 to Jul 09 and if we annualise the sales on proportionate basis, the Total sales for the Current financial year would be at Rs.450.00 lakhs which is very reasonable

Current assets / sales is 75%

Present Current Assets by Sales are at 75%, mainly because of Debtors level. However, during the current financial year the company has reduced its debtors levels considerably and also considering that the major debtors for more than 90 days are by way of reputed companies like Matrix Laboratories, Dr. Reddy Laboratories, Divis Laboratories etc., we presume the debtors as good debtors even though the debtors are for more than 90 days.

Recommended for renewal considering:Satisfactory account conductCollateral cover of 156% in the form of residential property Good top line growth in the current year MIB of 2.09 times the limit

14. Ways out: Business Cash flowsSale of primary securitySale of collateral securityPersonal guarantee Legal recourse

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15. Recommendations:Based on the above, Recommended for renewal cum enhancement of Cash Credit facility of Rs.80.00 Lacs to M/s Siflon Polymers Private Limited The facilities shall be backed by 1st charge on stocks, book debts of the firm and also with collateral security by way of Mortgage of residential property mentioned above.

16. Customer Grading Criteria:

Criteria:Grade A (4 marks)

Grade B (2 marks)

Grade C (1 mark)

Management

Years in business>=15 years >=10 years >=5 yearsFamily in business

3rd generation 2nd generation 1st generation

Promoter involvement & competence

High involvement & competence

Multiple businesses, less personalised attn

No experience, is a side activity

Business CriteriaDependence on customers - Max. Share of any customer in applicant's sales

< 5 % 5-10% 10-20%

Dependence on govt. policies

Low Medium High

Impact of technology change

Low Medium High

FinancialsPMB/Facility Amount

>2 >=1.5 >=1

Ability to raise funds from internal sources

>= 50% of (TNW + USL) of previous year



Current Ratio >=1.5 >=1.33 >=1

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ISCR >=4.0 >=3 >=2Net Profit Margin - For Manufacturing

>=7.5% >=2.5% >=1.0%

- For Retail / Distributors / Services

>=5.0% >=2.0% >=0.5%

Current Assets / Sales

<= 25% <=40% <=75%

Debtor Days (Days sales) - For manufacturers

<=60 days <=90 days <=120 days

- For retail / distributors/ services


Inventory Days (Days cost of sales) - For manufacturers / dealers/ distributors / services


- For retail <= 90 days <=120 days <=180 daysAuditor Qualification

No qualification Low implication Material Implication

TOL (Excl. Unsec loans from Prom.)/(Tangible Networth + Unsec. Loans from promoters)

<=1.5 <=2.0 <=3.0

Financial TrendsSales turnover >=110% of last

2 years average >=90% of last 2 years average

60-90% of last 2 years average

Net profits >=110% of last 2 years average

>=90% of last 2 years average


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Net worth + Unsec loans from promoters




Total Outside Liabilities / Tangible Networth

<=90% of last 2 years average

<=110% of last 2 years average


Current ratio >=110% of last 2 years average



Banking BehaviourOverdrawing / TOD

No overdrawing Occasional Overdrawing

Usually Overdrawn

Repayment Track Record

Prompt <=30 days > 30 days

Cheque Returns No cheque bounces

Outward Cheques Inward Cheques

Churn >= 75% >= 60% >=50%Score 64 Rating 5-

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SUMMARY

This project has examined the various types of financing alternatives for

trade finance.

The project has examined the financial requirements of trade finance

activities and found out that there is a need for financing at every stage of

the activities performed. The project has delt with various instruments used

in trade finance activities.

Trade finance is the backbone of all economies and key sources of economic

growth.

This project also delt with guidelines /instructions for financing trade

finance activities and also various laws governing trade finance activities are

studied in this project.

Hence how cash, credit, investments and other assets are utilized for trade

finance are studied in this project.

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SUGGESTIONS

Banking business and banking risks have become much more complicated

with globalization and the resolution in information technology. There is a

need for banking supervisory tools to keep up with changes in the market to

track the risk and ensure that they are prudently and carefully managed.

While assessing the project the profit element should be considered with risk

element collectively .

Sometimes the client business looks promising and real then certain

relaxation should be provided as far as policies are considered.

.