Strategy by Corporate Banking

8/10/2019 Strategy by Corporate Banking

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Corporate Banking

Financing secured & unsecured loan, cash

management & other Banking services

custom tailored for large firms.


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Term loan

Debt originally scheduled for

repayment in more than 1 year, but

generally in less than 10 years.

Credit is extended under a formal loan

arrangement.

Usually payments that cover bothinterest and principal are made

quarterly, semiannually, or annually.


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Use to finance your permanent workingcapital, purchase of new equipment,

construction of buildings, businessexpansion, refinance existing debt andbusiness acquisitions.

Term loans are repaid from the long-termearnings of the business.

Therefore, projected profitability and cashflow from operations are two key factorslenders consider when making term loans.

Generally, interest rates on long- termloans are higher than for short-term loans.


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Cost of a Term Loan

Interest rates are either (1) fixed or (2)variable depending on changing marketconditions -- possibly with a floor or

ceiling. Borrower is also required to pay legal

expenses (loan agreement) and acommitment fee (25 to 75 basis points)may be imposed on the unused portion.


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Working Capital Finance

A loan whose purpose is to finance

everyday operations of a company

A working capital loan is not used to buy

long term assets or investments. Instead

it's used to clear up accounts payable,

wages, etc.


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Assessment of WC

THREE METHODS :

1. Turnover Method

WC requirement = 25% of turnoverPromoters contribution= 5% of turnover

Bank finance= 20 % of turnover

* Used for the small trading companiesNot for the manufacturing & big trading companies


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2.Cash budget system :

cash inflow

cash outflow = bank finance*Generally used for the service sector companies where eliminatestraditional requirement of debtors & stock.

3.Tandon Committee Recommendations

MAXIMUM PERMISSIBLE BANKINGFINANCE(MPBF)

Method 1 : 0.75( CA-CL )

Method 2: 0.75 CA CL

Method 3: 0.75 (CA

CCL)

CL*CCL : permanent component of current asset

Method 2 is used in the bank to finance working capital.


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LC- Letter of credit

A letter from a bank guaranteeing that a

buyer's payment to a seller will be

received on time and for the correct

amount. In the event that the buyer is

unable to make payment on the purchase,

the bank will be required to cover the full

or remaining amount of the purchase.


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Letters of credit are often used in internationaltransactions to ensure that payment will bereceived.

Due to the nature of internationaldealings including factors such as distance,differing laws in each country and difficulty inknowing each party personally, the use of lettersof credit has become a very important aspect ofinternational trade. The bank also acts on behalfof the buyer (holder of letter of credit) by

ensuring that the supplier will not be paid untilthe bank receives a confirmation that the goodshave been shipped.


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Elements o f a Letter o f Cred it

A payment undertaking given by a bank (issuingbank)

On behalf of a buyer (applicant) to pay a seller(beneficiary) for a given amount of money.

On presentation of specified documentsrepresenting the supply of goods

Within specified time limits

Documents must confirm to terms and conditions

set out in the letter of creditDocuments to be presented at a specified place


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Letter of Credit Characteristics Negotiability

Revocability- Letters of credit may be eitherrevocable or irrevocable.A revocable letter ofcredit may be revoked or modified for anyreason, at any time by the issuing bank withoutnotification. A revocable letter of credit cannotbe confirmed. If a correspondent bank is

engaged in a transaction that involves arevocable letter of credit, it serves as theadvising bank.

Sight and Time DraftsAll letters of credit require the beneficiary topresent a draft and specified documents in orderto receive payment. A draft is a written order bywhich the party creating it, orders another partyto pay money to a third party. A draft is alsocalled a bill of exchange


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Difference

A Bank Guarantee and a Letter of credit aresimilar in many ways but they're two differentthings. Letters of credit ensure that a transactionproceeds as planned, while bank guarantees

reduce the loss if the transaction doesn't go asplanned.

A letter of credit is an obligation taken on by abank to make a payment once certain criteriaare met. Once these terms are completed andconfirmed, the bank will transfer the funds. Thisensures the payment will be made as long asthe services are performed.


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A bank guarantee, like a line of credit,

guarantees a sum of money to a beneficiary.

Unlike a line of credit, the sum is only paid if theopposing party does not fulfill the stipulated

obligations under the contract. This can be used

to essentially insure a buyer or seller from loss

or damage due to nonperformance by the otherparty in a contract.


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E.g A letter of credit could be used in the delivery of goodsor the completion of a service. The seller may requestthat the buyer obtain a letter of credit before the transactionoccurs. The buyer would purchase this letter of credit from

a bank and forward it to the seller's bank. This letter wouldsubstitute the bank's credit for that of its client, ensuringcorrect and timely payment.

A bank guarantee might be used when a buyer obtains

goods from a seller then runs into cash flow difficulties andcan't pay the seller. The bank guarantee would pay anagreed-upon sum to the seller. Similarly, if the supplier wasunable to provide the goods, the bank would then pay thepurchaser the agreed-upon sum. Essentially, the bankguarantee acts as a safety measure for the opposing party inthe transaction.


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Types of bank guarantee

Financial Bank Guarantee:Financial Bank Guarantee is a bond which is notcancelable and ensures the payment of theinterest and repayment of the principal amount

as per the schedule agreed upon by both theborrower and the lender. A guarantor to this debtsecurity is liable to pay off the liability in case thefirst party or the issuer of the Financial BankGuarantee fails to make the payment.


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2)Performance Bank Guarantee:The seller issues a Performance Bank Guarantee to

ensure or give concrete commitment to the buyerthrough its bank. This method ensures the buyer thetimely execution of an agreement to have the goodsexported or delivered or services performed. In case theseller defaults on execution of the terms agreed upon thePerformance Bank Guarantee ensures the buyer thepayment of the guarantee amount by the issuing bank.Generally the performance Bank guarantee is 10 percentof the total assignment or project value.


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Equipment Finance

Equipment finance gives your business

the equipment, software, and furniture it

needs in order to operate successfully and

make a profit..


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Types of Equipment Financing Equipment Loan - Making of a loan using the

equipment as collateral. Good operatinghistory, credit rating, debt ratios are the keys.

Equipment Leasing - Contract for a fixedperiod of time in exchange for payments,

usually in the form of rent for equipment.Typically lower credit requirements. Equipmentfinance through a lease is appealing tobusinesses because they do not need large

amounts of collateral in order to get approved.The other major positive is that with a lease thetaxes can be expensed.


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Municipal Equipment Leasing - A lease

transaction with any government agency


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Equity/Ownership

Whether it's a conventional term-loan, a

line of credit (secured or unsecured) or anasset-based loan, the key factor is

ownership. You enjoy the benefits of

ownership and the future flexibility toutilize accrued equity to leverage working

capital when needed.


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First - Year Expensing

Purchasing may allow you to deduct up to

worth of equipment in the year it is

purchased (as part of first-year

expensing); anything above that amount

gets depreciated over several years. Withthe first-year expense deduction, the "real

cost" of the equipment is greatly reduced.


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Basel Norms

The Basel Accords (see alternative spellingsbelow) refer to the banking supervision Accords(recommendations on banking laws andregulations) -- Basel I and Basel II issued and

Basel III under development -- by the BaselCommittee on Banking Supervision (BCBS).They are called the Basel Accords as the BCBSmaintains its secretariat at the Bank forInternational Settlements in Basel, Switzerland

and the committee normally meets there.


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The purpose of Basel II, which was initially

published in June 2004, is to create aninternational standard that banking

regulators can use when creating

regulations about how much capital banksneed to put aside to guard against the

types of financial and operational risks

banks face


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Capital adequacy ratios

Capital adequacy ratios ("CAR") are a measure of theamount of a bank's core capital expressed as apercentage of its assets weighted credit exposures.

Capital adequacy ratio is defined as

{CAR} = {Tier 1 capital + Tier 2 capital}\{Risk weightedassets}}

TIER 1 CAPITAL -A)Equity Capital, B) DisclosedReserves

TIER 2 CAPITAL -A)Undisclosed Reserves, B)GeneralLoss reserves, C)Subordinate Term Debts


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Local regulations establish that cash and governmentbonds have a 0% risk weighting, and residentialmortgage loans have a 50% risk weighting. All other

types of assets (loans to customers) have a 100% riskweighting.

Bank "A" has assets totaling 100 units, consisting of:

* Cash: 10 units.

* Government bonds: 15 units.

* Mortgage loans: 20 units.

* Other loans: 50 units.

* Other assets: 5 units.

Bank "A" has debt of 95 units, all of which are deposits.By definition, equity is equal to assets minus debt, or 5units

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