Corporate Banking

Financing secured & unsecured loan, cash

management & other Banking services
custom tailored for large firms.

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 both
interest and principal are made
quarterly, semiannually, or annually.

 Use to finance your permanent working

capital, purchase of new equipment,
construction of buildings, business
expansion, refinance existing debt and
business acquisitions.
Term loans are repaid from the long-term
earnings of the business.
Therefore, projected profitability and cash
flow from operations are two key factors
lenders consider when making term loans.
Generally, interest rates on long- term
loans are higher than for short-term loans.

Cost of a Term Loan

Interest rates are either (1) fixed or (2)
variable depending on changing market
conditions -- possibly with a floor or
ceiling.
Borrower is also required to pay legal
expenses (loan agreement) and a
commitment fee (25 to 75 basis points)
may be imposed on the unused portion.

Benefits of a Term Loan

The borrower can tailor a loan to their specific
needs through direct negotiation with the lender.
Flexibility in terms of changing needs allows the
borrower to revise the loan more quickly and
more easily.
Term loan financing is more readily available
over time making it a more dependable source
of financing than, say, the capital markets.

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.

Assessment of WC
THREE METHODS :
1. Turnover Method
WC requirement = 25% of turnover
Promoters contribution= 5% of turnover
Bank finance= 20 % of turnover
* Used for the small trading companies
Not for the manufacturing & big trading companies

2.Cash budget system :

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

3.Tandon Committee Recommendations

MAXIMUM PERMISSIBLE BANKING
FINANCE(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.

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.

 Letters of credit are often used in international

transactions to ensure that payment will be
received.
Due
to
the
nature
of
international
dealings including factors such as distance,
differing laws in each country and difficulty in
knowing each party personally, the use of letters
of credit has become a very important aspect of
international trade. The bank also acts on behalf
of the buyer (holder of letter of credit) by
ensuring that the supplier will not be paid until
the bank receives a confirmation that the goods
have been shipped.

Elements of a Letter of Credit

A payment undertaking given by a bank (issuing
bank)
On behalf of a buyer (applicant) to pay a seller
(beneficiary) for a given amount of money.
On
presentation
of
specified
documents
representing the supply of goods
Within specified time limits
Documents must confirm to terms and conditions
set out in the letter of credit
Documents to be presented at a specified place

Letter of Credit Characteristics

Negotiability
Revocability- Letters of credit may be either
revocable or irrevocable .A revocable letter of
credit may be revoked or modified for any
reason, at any time by the issuing bank without
notification. A revocable letter of credit cannot
be confirmed. If a correspondent bank is
engaged in a transaction that involves a
revocable letter of credit, it serves as the
advising bank.
Sight and Time Drafts
All letters of credit require the beneficiary to
present a draft and specified documents in order
to receive payment. A draft is a written order by
which the party creating it, orders another party
to pay money to a third party. A draft is also
called a bill of exchange

Difference
A Bank Guarantee and a Letter of credit are
similar in many ways but they're two different
things. Letters of credit ensure that a transaction
proceeds as planned, while bank guarantees
reduce the loss if the transaction doesn't go as
planned.
A letter of credit is an obligation taken on by a
bank to make a payment once certain criteria
are met. Once these terms are completed and
confirmed, the bank will transfer the funds. This
ensures the payment will be made as long as
the services are performed.

 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 the
opposing 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 other
party in a contract.

E.g A letter of credit could be used in the delivery of goods

or the completion of a service. The seller may request
that the buyer obtain a letter of credit before the transaction
occurs. The buyer would purchase this letter of credit from
a bank and forward it to the seller's bank. This letter would
substitute the bank's credit for that of its client, ensuring
correct
and
timely
payment.

A bank guarantee might be used when a buyer obtains

goods from a seller then runs into cash flow difficulties and
can't pay the seller. The bank guarantee would pay an
agreed-upon sum to the seller. Similarly, if the supplier was
unable to provide the goods, the bank would then pay the
purchaser the agreed-upon sum. Essentially, the bank
guarantee acts as a safety measure for the opposing party in
the transaction.

Types of bank guarantee

Financial
Bank
Guarantee:
Financial Bank Guarantee is a bond which is not
cancelable and ensures the payment of the
interest and repayment of the principal amount
as per the schedule agreed upon by both the
borrower and the lender. A guarantor to this debt
security is liable to pay off the liability in case the
first party or the issuer of the Financial Bank
Guarantee fails to make the payment.

2)Performance
Bank
Guarantee:
The seller issues a Performance Bank Guarantee to
ensure or give concrete commitment to the buyer
through its bank. This method ensures the buyer the
timely execution of an agreement to have the goods
exported or delivered or services performed. In case the
seller defaults on execution of the terms agreed upon the
Performance Bank Guarantee ensures the buyer the
payment of the guarantee amount by the issuing bank.
Generally the performance Bank guarantee is 10 percent
of the total assignment or project value.

Equipment Finance
Equipment finance gives your business
the equipment, software, and furniture it
needs in order to operate successfully and
make a profit..

Types of Equipment Financing

Equipment Loan - Making of a loan using the
equipment as collateral. Good operating
history, credit rating, debt ratios are the keys.
Equipment Leasing - Contract for a fixed
period of time in exchange for payments,
usually in the form of rent for equipment.
Typically lower credit requirements. Equipment
finance through a lease is appealing to
businesses because they do not need large
amounts of collateral in order to get approved.
The other major positive is that with a lease the
taxes can be expensed.

 Municipal Equipment Leasing - A lease

transaction with any government agency

Benefits of Equipment Loan

Low Obsolescence
Obsolescence is when something becomes
obsolete due to a shift in technology or a change
of needs in an industry. Certain equipment is not
as threatened by obsolescence as equipment in
industries such as technology or medical. You
would need to determine if, through proper
maintenance, your equipment would outlast the
cost benefits.

 Equity/Ownership
Whether it's a conventional term-loan, a
line of credit (secured or unsecured) or an
asset-based loan, the key factor is
ownership. You enjoy the benefits of
ownership and the future flexibility to
utilize accrued equity to leverage working
capital when needed.

 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. With
the first-year expense deduction, the "real
cost" of the equipment is greatly reduced.

Basel Norms
The Basel Accords (see alternative spellings
below) refer to the banking supervision Accords
(recommendations on banking laws and
regulations) -- Basel I and Basel II issued and
Basel III under development -- by the Basel
Committee on Banking Supervision (BCBS).
They are called the Basel Accords as the BCBS
maintains its secretariat at the Bank for
International Settlements in Basel, Switzerland
and the committee normally meets there.

 The purpose of Basel II, which was initially

published in June 2004, is to create an
international standard that banking
regulators can use when creating
regulations about how much capital banks
need to put aside to guard against the
types of financial and operational risks
banks face

Capital adequacy ratios

Capital adequacy ratios ("CAR") are a measure of the
amount of a bank's core capital expressed as a
percentage of its assets weighted credit exposures.
Capital adequacy ratio is defined as
{CAR} = {Tier 1 capital + Tier 2 capital}\{Risk weighted
assets}}
TIER 1 CAPITAL -A)Equity Capital, B) Disclosed
Reserves
TIER 2 CAPITAL -A)Undisclosed Reserves, B)General
Loss reserves, C)Subordinate Term Debts

 Local regulations establish that cash and government

bonds have a 0% risk weighting, and residential
mortgage loans have a 50% risk weighting. All other
types of assets (loans to customers) have a 100% risk
weighting.
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 5
units