CAIIB Super Notes: Corporate Banking: Module A: Corporate Banking and Finance: Corporate Banking

CAIIB – Super-Notes © M S Ahluwalia Sirf Business

Corporate Banking

Module A: Corporate Banking and Finance

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CAIIB – SUPER NOTES

Corporate Banking: Corporate Banking





Contents

Coverage:

1. Introduction

2. Corporate Banking – Meaning

and Importance

3. Salary Payment

4. Debtors Management

5. Factoring and Forfaiting

6. Forfaiting

7. Trusteeship Services

8. Debenture Trusteeship

9. Security Trusteeship

10. Attorneyship

11. Custodial Services

12. Business Advisory

13. Offshore Banking Services

14. Forex Services





INTRODUCTION

1.





Products

Asset Side Asset Side

• Deposit Accounts

• Cash Management Services

Liability Side Liability Side

• Working Capital Finance

• Bill Discounting

• Export Credit

• Short Term Finance

• Structured Finance

• Term Loans

Off Balance Sheet Services

Off Balance Sheet Services

• Letters of Credit

• Bank Guarantees

• Collection of Documents

Value Added Services

Value Added Services

• Loan Syndication

• RTGS

• Channel Financing

• Corporate Salary Accounts

• Bankers to rights/public issues

• Corporate Internet Banking

• Forex Desk

• Money Market Desk

• Derivatives Desk

• Employees’ Trust

• Tax Collection

• Payment Gateway Services





MEANING AND IMPORTANCE

2.





Services Provided

1. Cash Management

2. Local and Upcountry Cheque Collections

3. Electronic Collections

1. RTGS

2. NEFT

3. ECS

4. “Payable at Par” Customer Cheques

5. Banker’s Cheques and Demand Drafts





Difference b/w RTGS and NEFT/EFT

• RTGS is Real Time Settlement whereas in EFT/NEFT the

settlement is deferred

• RTGS is gross settlement system – transactions are settled on

one to one basis. In NEFT/EFT transactions are settled in

batches under Deferred Net Settlement System

• RTGS - min limit is Rs. 2 Lacs. No minimum limit in EFT/NEFT.

(RTGS – Real Time Gross Settlement)





ECS

• Electronic Clearing System

• Funds transfer from one bank to another using services of a

Clearing House

• Normally used for bulk transfers





ECS Debit System

1. Single Credit – Multiple Debit

2. Requirements:

1. ECS Mandate

2. Mandate from beneficiary

3. Advantages:

1. To Banks:

1. Free of Paper Handling/Processing

2. To Clients:

1. Trouble Free: No need for physical visit to deposit instruments.

2. No loss of instrument or fraudulent encashment

3. Better cash management





ECS Credit System

1. Single Debit – Multiple Credit

2. Participants

1. ECS User

2. Sponsor Bank(User’s Bank)

3. Beneficiary/Destination Account Holder

4. Destination Bank(Beneficiary’s Bank)

3. Advantages:

1. To Banks:

1. Free of Paper Handling/Processing

2. To Clients:

1. Trouble Free: No need for physical visit to deposit instruments.

2. No loss of instrument or fraudulent encashment

3. No delay in realisation of proceeds

4. Saves on administrative machinery

5. Ability to make payment and ensure the beneficiary’s account gets credited on a designated date





“Payable at Par” Customer Cheques

• Facility of cheques payable at par for customers with bulk

cheque writing requirements

• Payment data taken directly from client’s accounting system in

a single file download and transmitted to the bank for

processing





Banker’s Cheques and Demand Drafts

• Instructions can be given through bank’s internet banking

platform

• Payments can be made at bank’s branch locations and

through the correspondent bank network





SALARY PAYMENT

3.





Salary Payment

• Services to offer payroll solutions in a 24 x 7 environment

Benefits to Corporates Benefits to Corporates

•Efficient Salary Disbursal

•Web Upload

Benefits to Employees Benefits to Employees

•No minimum balance requirement

•Unparalleled Access

•At par cheque books

• International debit cum ATM cards

•Online Banking

•Depository Services

•Employee Reimbursement accounts

•Preferential pricing on loan products and credit cards and other products and services





DEBTORS MANAGEMENT

4.





Services

• Receivables Management

– Collection Services

• Paper Collection: Local and outstation cheques

• Local/Outstation Clearing Solutions: Lodgment for clearing

• Updating of account receivables

– Invoice Management

– Accounts Receivable matching solutions

– Electronic Collections: Collection of receivables through funds

transfers and other electronic modes such as RTGS, NEFT etc





Benefits to Clients

Reduced Collection cycle

Reduced Collection cycle

Quicker availability of clear funds

Quicker availability of clear funds

Zero Settlement Risk

Zero Settlement Risk

Elimination of float

Elimination of float

Certainty in funds receipt Certainty in

funds receipt Enhanced turnover Enhanced turnover

Paperless transactions

Paperless transactions

Reduced operational risk

Reduced operational risk

Faster realisation of receivables

Faster realisation of receivables

Savings in Interest costs

and bank charges

Savings in Interest costs

and bank charges

Online querying on receivables

Online querying on receivables

Automated bank reconciliation

Automated bank reconciliation

Outsourcing of debtor’s

reconciliation

Outsourcing of debtor’s

reconciliation





FACTORING AND FORFAITING

5.





Factoring

• An arrangement in which receivables arising out of sale of

goods/services are sold by the firm (client) to a factor as a

result of which the title to the goods/services represented by

the receivables passes to the factor

• Factor becomes responsible for all credit control, sales

accounting and debt collection





Mechanism

Sale of Goods - Agreements

•Buyer Negotiates terms of purchase with seller

•Seller sells goods to Buyer according to the Memorandum of Understanding or contract with the buyer

•At the same time, but independently, the factor enters into an agreement with the seller for rendering factoring service

Sale of Goods - Agreements

•Buyer Negotiates terms of purchase with seller

•Seller sells goods to Buyer according to the Memorandum of Understanding or contract with the buyer

•At the same time, but independently, the factor enters into an agreement with the seller for rendering factoring service

Physical Transfer

•Buyer Receives delivery of goods with copies of invoice, delivery challan, MoU/contract and instructions by the seller to make payment to the factor on due date

Physical Transfer

•Buyer Receives delivery of goods with copies of invoice, delivery challan, MoU/contract and instructions by the seller to make payment to the factor on due date

Payments

•By Factor: 75-80% of price of the debt to the seller on receipt of the sale documents

•By Buyer: Payment on due date

•Factor remits balance 20-25% on receipt of payment to seller

Payments

•By Factor: 75-80% of price of the debt to the seller on receipt of the sale documents

•By Buyer: Payment on due date

•Factor remits balance 20-25% on receipt of payment to seller





Functions of a Factor

• Maintenance of Sales Ledger

• Collection of accounts receivable (Considered to be the most important

function of the factor)

• Financing facility of trade debts

• Assumption of credit risk and credit protection

• Provision of advisory services

– Buyer’s perception of client’s deliverables, marketing strategies etc

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

sales returns

– Introduction to Banks and FIs dealing with leasing, hire purchase, investment banking,

and so on





Types of Factoring

Based on Recourse

available to Factor

Based on Recourse

available to Factor

Recourse

Non-Recourse

•Full Factoring/Old Line Factoring

Based on time of Payment

Based on time of Payment

Advance/Bank Participation

Maturity/Collection

Based on secrecy clause

Based on secrecy clause

Disclosed

Undisclosed

Based on nature of transaction

Based on nature of transaction

Domestic

Export/Two Factor System





Factoring vs. Bills Discounting

Factoring Bills Discounting

May be with/without recourse Always with recourse

Factor takes on the responsibility if collection

Seller collects receivables and pays to the financing entity

Factor maintains the sales ledger and also provides advisory services

Envisages only provision of finance

Factored debts can only be refinanced Bills discounted can be rediscounted several times

Represents assignment of debts Not the case





Kalyansundaram Committee Report

• Late 1980s

• RBI constituted the committee to recommend the future

direction of factoring business in India

• Recommended

– Encouragement of factoring for SME units

– Undertaking of factoring business departmentally by banks





FORFAITING

6.





Process

Exporter sells goods on deferred payment basis Exporter sells goods on deferred payment basis

Importer draws promissory notes in favour of exporter/Exporter draws series of bills on the importer Importer draws promissory notes in favour of exporter/Exporter draws series of bills on the importer

Bills or notes sent to exporter after being guaranteed by a bank(aval) Bills or notes sent to exporter after being guaranteed by a bank(aval)

Exporter enters into forfaiting arrangement with a bank – Avalised notes/bills are sold to the forfaiter, without recourse, at a discount Exporter enters into forfaiting arrangement with a bank – Avalised notes/bills are sold to the forfaiter, without recourse, at a discount

Forfaiter may hold the notes/bills till maturity or securitise and sell them in secondary market Forfaiter may hold the notes/bills till maturity or securitise and sell them in secondary market





Forfaiting vs. Export Factoring

Forfaiting Export Factoring

Discounting of entire value of note/bill Advances to the extent of 75-80%. Rest is treated as factor reserve

Protected by Avalling Bank Credit risk on the factor

Pure finance arrangement Includes ledger maintenance, collection, etc.

Long Term Credit Short Term Finance

Forfaiters take on exchange rate risk and charge premium for the service

Factors do not cover exchange rate risk





TRUSTEESHIP SERVICES

7.





Services

• Act as trustees for

– Public, charitable, religious and other trusts

– Trustees of a Settlement

– Trustees of a minor’s legacy

– Custodian trustee of properties – pension, provident and gratuity fund

• Counseling and drafting of trust deeds

• Safe keeping of trust property and payment of income to beneficiaries on due

dates as per the instructions of the settlers

• Making payments and undertaking other activities as per the mandate

• Undertake private settlements related to formation of focused, specific period

trusts for benevolent purposes





DEBENTURE TRUSTEESHIP

8.





Services

• Accept debenture trusteeship of debentures/bonds issued under

private placement

• Advisory on the following activities related to the issue:

– Obtaining a rating from CRISIL, ICRA etc

– Appointment of arrangers – a SEBI registered investment bank

– Guidance on structured payment mechanism

– Clarification on legal/statutory matters in issue of debentures/bonds

– Documentation process – preparation of all kinds of related documents

– Creation of charge, registration and compliance of legal and statutory

requirements in this respect





SECURITY TRUSTEESHIP

9.





Services

• Entire procedure of security creation

• Ensures execution of documents for creation of security

• Enforcement of security in case of default

Appointed with the consent of all the lenders at the cost of the

borrower.





Value addition by Banks

• Availability of standard format of documents

• Expertise, experience and specialization in handling security related

transactions

• Backup of specialized software

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

professionals

• Nationwide network of branches that facilitates lender/borrower to

execute documents at the place of their convenience and choice





ATTORNEYSHIP

10.





Services

• Power of Attorney service

• To execute the client’s instructions regarding their

investments promptly and meticulously





CUSTODIAL SERVICES

11.





Custodian Services

Securities Lending and Other Value Added Services

Global Custody Services

Core Custody Services

• Securities Lending

• Performance Measurement

• Risk Measurement

• Compliance Monitoring

• Core Custody Services

• Executing ForEx transactions

• Processing Tax Reclaims

• Usually has sub-custodians in each market

• Settlement of Trades

• Investment of Cash Balances

• Collection of Income

• Processing Corporate Actions

• Pricing Security Positions

• Record keeping and reporting services





Risks associated with Custody Services

•Current and prospective risk to earnings or capital from fraud, error and the inability to deliver products or services, maintain a competitive position, and manage information

•Encompasses product development and delivery, transaction processing, systems development, computing systems, complexity of products and services and the internal control environment

Transaction Risk Transaction Risk

•Current and prospective risk to earnings or capital arising from violations of, or non-conformance with laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards.

•Exposes the institution to fines, civil money penalties, payment of damages, voiding of contracts, diminished reputation, reduced franchise value, limited business opportunities, reduced expansion potential, and inability to enforce contracts

Compliance Risk Compliance Risk

•Current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the bank or otherwise to perform as agreed

Credit Risk Credit Risk

•Current and prospective risk to earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes

Strategic Risk Strategic Risk

•Current and prospective risk to earnings or capital arising from negative public opinion

Reputation Risk Reputation Risk





BUSINESS ADVISORY

12.





Services

• To assist clients in:

– Strategizing for growth and consolidation

– Introducing new operational practices and business approaches

– Market diversification and planning, strategies for restructuring and

revival, product planning, financial management and business process

restructuring





OFFSHORE BANKING SERVICES

13.





Offshore Banking

• International banking business involving foreign currency

denominated assets and liabilities

• Offshore banking units(OBU) are virtually foreign branches of

Indian banks but located in India

• Usually set up in Special Economic Zones

• Special features of OB products:

– Security, liquidity and convertibility

– Dealing in major currencies – USD, GBP, Euro, JPY





Products

Interest bearing Foreign Currency

Call Deposit Account

Interest bearing Foreign Currency

Call Deposit Account

Foreign Currency Fixed Deposit

Account

Foreign Currency Fixed Deposit

Account

Foreign Currency Rolling Deposit

Account

Foreign Currency Rolling Deposit

Account

Foreign Currency Switch Deposit

Account

Foreign Currency Switch Deposit

Account

Foreign Currency Trading Deposit

Account

Foreign Currency Trading Deposit

Account

International Money Transfer

International Money Transfer

Foreign Exchange and Derivative Transactions

Foreign Exchange and Derivative Transactions





Other Products

International Trade Finance Instruments

International Trade Finance Instruments

• Collection of clean or trade bills

• Issuance of LC, various guarantees

• Bill discounting or negotiation of documentary collections

Credit Facilities Credit Facilities

• Finance in all major currencies

• Short Term/Medium Term working capital or assets finance

• Long Term Finance

• ECB

• Syndication of loans or lines of credit

• Structured Finance





FOREX SERVICES

14.





ForEx Services Offered

Foreign Currency Travellers

Cheques (FCTCs)

Foreign Currency Travellers

Cheques (FCTCs)

Foreign Currency Cash


Foreign Currency Demand Drafts


Deposit of FC Cheques


Remittances Remittances Cash to Master Cash to Master Advance

Remittance Advance

Remittance Direct

Remittance Direct

Remittance

Import Collection Import Collection Letters of Credit Letters of Credit Export Collection Export Collection Export Advance

Payment Export Advance

Payment

Miscellaneous Outward

Remittances

Miscellaneous Outward

Remittances





Foreign Currency Travellers Cheques (FCTCs)

• Can be encashed when needed against holder’s signature

• Loss can be reported easily

• Amounts are refundable to the holder/buyer

• Offered in major currencies – USD, GBP, Euro, CAD, AUD and

JPY.






• Foreign currency notes

• Major currencies – USD, GBP, Euro, AUD and CAD






• For various expenses such as:

– Payment of university fees abroad

– Making gift remittance

– Payment of application fees for exams like TOEFL, GMAT etc

– Payment for medical treatment abroad

– All other permitted purposes as per RBI guidelines

• Normally issued in 7 currencies: USD, GBP, JPY, AUD, CAD, NZD

and Euro






• Can be done directly into the current or saving accounts

• Once funds are honoured the account is credited in Indian

rupees

• Normally cheques are accepted for USD, GBP, Euro, JPY, AUD,

CAD, AED, Honk Kong Dollars and Swiss Francs

• Collection period may vary from 2-15 days depending upon

currency





Remittances

- Send and receive money to and from relatives and friends

abroad

- Executed through SWIFT





Cash to Master

• For foreign ships travelling through the country

• Cash provided to captain of the ship for covering wages of the

crew or other expenses on board the ship

• Master of the ship has to approach the designated branch of

an authorised with his passport and application form

• Only in USD, GBP and Euros





Advance Remittance

• Overseas exporter seeking advance payment

• Banks make foreign currency remittance on behalf of the

importer





Direct Remittance

• Documents are sent directly to the client who then

approaches the bank for effecting the payment





Import Collection

Overseas exporter/exporter’s bank sends documents to client’s bank on collection

Overseas exporter/exporter’s bank sends documents to client’s bank on collection

Bank intimates the importer about receipt of documents Bank intimates the importer about receipt of documents

Importer authorizes the bank to debit his account and remit to exporter’s bank

Importer authorizes the bank to debit his account and remit to exporter’s bank

- In case of sight bill documents and debit authority collected from importer, amount remitted to Exporter’s bank and documents released to importer

- In case of usance bill acceptance letter taken from importer and documents released. On due date amount is remitted to exporter’s bank by debiting the importer’s account





Letters of Credit

• Facilitates purchase of goods in international and domestic

trading operations

• LCs issued by major Indian Banks are accepted worldwide





Export Collection

• Payment for goods exported by the bank’s client

• Through a network of correspondent banks Indian banks

ensure a faster collection process for all export bills





Export Advance Payment

• Indian exporter might seek advance payment

• Importer requested to send payment to the exporter’s bank

through the correspondent bank network





Miscellaneous Outward Remittances

• Can be effected to any part of the world using SWIFT through

a network of correspondent banks

• All transactions are subject to FEMA regulations





Do you have any questions or queries or some feedback to give?

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CAIIB – Super-Notes © M S Ahluwalia Sirf Business For more Super-Notes: Click Here

M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New

Delhi, India.

To know more about him you may visit his blog-site: Estudiante De La Vida

















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