1.Channel Financingby: Partho H. Chakraborty

2. Introduction SAP has an integrated suite of products catering to various domains such as Manufacturing, Logistics, Discreet Manufacturing, Banking, Insurance, etc. In banking one of the requirements of banks are to finance the Supply Chain called as Channel Financing. Channel Financing covers both the legs of financing. The first leg covers payments to vendors and the second leg covers the payments to the dealers. Channel Financing covers the end-to-end financing in this supply chain factoring a lot of components such as limits, regulations, crystallization of bills, documents, net banking, etc. Channel Financing is an innovative option for extending working capital finance to dealers who have business relationships with large companies. Channel Financing is the mechanism through which a Bank / Financial Institution meets the various funds related requirements along the Supply Chain at the Companys end. This thereby helps the Company in sustaining a seamless business flow and avoiding Working Capital related difficulties. By providing short term lending to clients utilizing qualified receivables as collateral, value is added to the client by way of working capital support, reduced accounts receivables and improved control of the sales/distribution channels. In addition, payables discounting serves to add value by improving supply relationships and enhancing cash-flow managementAuthor: Partho H. ChakrabortyConfidential and proprietary 3. Objective & Commercial Aim Channel Financing comes with two different flavors. These flavors are broadly categorized based on the financed party Company / Dealer. For a particular instrument (invoice) at one point of time, only one party can be financed. However, for the same invoice at different timings, two different entities can be financed. If both the Company as well as the Dealer is a Customer to the bank, both can avail the financing facility from the Bank at different timings. Once the Company avails the financing option, the exposure is transferred from the Company to the Dealer while the Bank settles the debit balance against the Company and marks a new Debit balance against the Dealer. The core objective of Channel Finance is to provide integrated commercial and financial solutions to the supply and distribution channels of a given industry. Channel Finance gives support to the commercial relationship between clients and their customers. The commercial aim of Channel Finance is to add value to supply and distribution channels by providing unique solutions that meet customers demands. Author: Partho H. Chakraborty Confidential and proprietary 4. Benefits of Channel Financing Benefits to Dealers/Distributors Steady and cheaper source of Working Capital financing. Channel partners can increase Sales through higher purchasing power. Clean facility up to certain limits. Simplicity of documentation and approval procedures. High service and delivery standards compared to current neighborhood Banker / Moneylender. Channel partners may be able to increase profitability by availing of cash discounts from Corporate. Benefits to Supplier This involves the liquidity position by availing finance at cheaper rate based on the credit assessment of manufacturer. There is no risk of non-payment by the buyer (manufacturer). No documentation or formality. Cost effective due to finer rate of interest. Supplier saves time & human resources for receivable management. Author: Partho H. Chakraborty Confidential and proprietary 5. Benefits of Channel Financing Benefits to Manufacturer / Principal customer Pre sale working capital requirement shall come down. Assured availability of Working Capital finance to their channel partners atlower than current cost of credit. Corporate can use Channel Finance as a marketing tool and strengthen theirrelationship / reward loyalty of their Channel Partners. Release of funds from the Balance Sheet resulting in improvement in financialRatios. Conversion of Balance Sheet into an Off Balance Sheet liability. Greater efficiencies in the Corporate receivable management and cashmanagement process. Ability to introduce payment discipline with their Channel Partners. Firm can concentrate more on their core competence i.e., area of production &marketing their products besides saving time & cost involved in arrangingcreditors. Author: Partho H. Chakraborty Confidential and proprietary 6. Benefits of Channel Financing Benefits to Bank Bank will have increased data & customer base. Bank can understand purchaser profile and payment history ofborrower. Simple monitoring of end use. Risk is diversified & credit exposure norms are better observed. In case of liquidity crisis these bills can be rediscounted with RBI. Author: Partho H. Chakraborty Confidential and proprietary 7. Players The Raw Material Supplier Could be one or many The Company: Buys the products from the raw material supplier and processes it to finished products The Dealer(s): Could be one or many. The Bank(s): Could be one bank or different banks Author: Partho H. ChakrabortyConfidential and proprietary 8. Role The Raw Material Supplier Supplies Raw Material or partly finished products or completely finished products. The Company: Buys the products from the raw material supplier and processes it to finished products Dealers: They purchase the finished product directly from the Company and sell it to end users. Bank: It could be the same bank of the Company and the dealer or could be different banks. They finance both the Company and The Dealers. The Company is financed by: Finance to Purchase Raw Materials in order to process it to finishedgoods Credit Extended to Dealers after Supply of Goods The Company and the Dealers get financed after receipt of goods or acceptance of documents. Author: Partho H. Chakraborty Confidential and proprietary 9. Commodity & Tenor Commodity Any type of Goods, Merchandise or Services, as long as it is not prohibited. If restricted then the all the players must have requisite licenses allowing them to deal in the same. Tenor 15 Days to 3 Years. Could be extended or reduced as per banks convenience. Tenor would normally be calculated from the Bill of Lading Date or at the discretion of the bank Author: Partho H. Chakraborty Confidential and proprietary 10. Collaterals Collateral Object Management / Asset Mgmt. Object description Calculation of safety discounts & lending ranges Collateral Management Declaration of purpose Calculations, e.g. collateral cover, lending discount, loan-to-value ratios, free collateral, shortfalls, distribution according to declaration of purpose Customer specific calculations Central source system for front- and back-end applications Process support for centralized collateral mgmt. Support of Basel II credit risk mitigation Globally applicable standard product Business support for retail and wholesale by mass processing capability as well ascollateralization support for complex projectsNote: The bank at its discretion can waive or increase the collateralsAuthor: Partho H. ChakrabortyConfidential and proprietary 11. DocumentsBank has the flexibility to define documents as per its requirements such as: Memorandum & Articles of Association in case of private companies andpartnership deeds and registration details (wherever applicable) forpartnerships. Board resolution Purchase bill discounting agreement DPN/DPN delivery letter Sales Tax registration certificate Letter of waiver from dealer waiving the notice of dishonor, noting andprotesting PAN & TAN SSI certificate, if Applicable Title documents for the outlet Last 3 Years Audited Balance Sheets, with Profit and Los Account Current Half Yearly Reports, if Applicable Licenses if dealing with Restricted or Hazardous GoodsAuthor: Partho H. ChakrabortyConfidential and proprietary 12. Transactions Various transactions can be configured such as: Both Raw Material Supplier and Dealer, bank with the same bank Either Raw Material Supplier or the Dealer, banks with some other bank Both Raw Material Supplier and the Dealer, banks with some other bank The dealer requests for more credit beyond the stipulated time as per transaction Configures Payments and Receipts Author: Partho H. Chakraborty Confidential and proprietary 13. Transactions: Both Raw Material Supplier and Dealer, bank with the same bankProcess Flow, Events & Credit Exposure Note: The tenor in step 9 is taken from Bill of Lading, which is Day 30. So we get effectiveCredit Period of 30+180=210 Days.Author: Partho H. Chakraborty Confidential and proprietary 14. Transactions: Either Raw Material Supplier or the Dealer, banks with some other bankProcess Flow, Events & Credit ExposureNote: The tenor in step 11 is takenfrom Bill of Lading, which isDay 30. So we get effectiveCredit Period of 30+180=210Days.Author: Partho H. ChakrabortyConfidential and proprietary 15. Transactions: Both Raw Material Supplier or the Dealer, banks with some other bankProcess Flow, Events & Credit Exposure Note: By giving 30 days credit given to BAW, Pepsi ensures that MSC pays it before paying BAW. Here Banks discount the invoices and pay Pepsi The tenor in step 22 is taken from Bill of Lading, which is Day 50. So we get effective Credit Period of 50+180=230 DaysAuthor: Partho H. Chakraborty Confidential and proprietary 16. Transactions: Dealer Gets Additional CreditProcess Flow, Events & Credit Exposure Note: The tenor in step 7 is taken from Bill of Lading, which is Day 30. So we get effective Credit Period of 30+180=210 Days. Also the Dealer gets credit of 60 days from the due date; i.e. 210+60=270 Days Author: Partho H. ChakrabortyConfidential and proprietary 17. Modules involved in Channel Financing process Author: Partho H. ChakrabortyConfidential and proprietary 18. Abbreviations BCA: Customer Account Management FS- CML: Financials - Loans Management FS-CMS : Financials - Collateral Management FSCM : Financial Supply Chain management FSCM-DM: Dispute Management FSCM-CLM : Cash and Liquidity Management FSCM CR: Credit Management RBD: Reserve for Doubtful Debts GRC: Governance, Risk and Compliance Author: Partho H. Chakraborty Confidential and proprietary 19. Consumer Loans Business Process Overview Business Operations Author: Partho H. Chakraborty Confidential and proprietary 20. Electronic Bill Presentment and Payment Supplement traditional billing procedures: Electronic invoicing for businesses Electronic payment for customers Integrate customer service with finance Author: Partho H. ChakrabortyConfidential and proprietary 21. Electronic Forms The entire application can be done through the net where the customer can fill up the forms and send it electronically. This helps the customer to properly fill up the form as the system will not accept errors in the form and will point out the mistakes and at the same time prompt the customer to fill ion the form. It can also accept other documents, such as List of Creditors, Debtors, etc. A provision can be made to send all documents electronically such as Balance Sheets, Profit & Loss Accounts, etc. Thus the process of Channel Finance is Paperless. A sample form is given below where The Application Form & Documents to be submitted by the Applicant for Factoring Author: Partho H. Chakraborty Confidential and proprietary 22. Sample Electronic Form Author: Partho H. Chakraborty Confidential and proprietary 23. Sample Electronic Form Author: Partho H. Chakraborty Confidential and proprietary 24. Sample Electronic Form Author: Partho H. Chakraborty Confidential and proprietary 25. Sample Electronic Form Author: Partho H. Chakraborty Confidential and proprietary 26. Sample Electronic Form Author: Partho H. Chakraborty Confidential and proprietary 27. Electronic Bill Presentment and Payment Supplement traditional billing procedures: Electronic invoicing for businesses Electronic payment for customers Integrate customer service with finance Customers can see all of their bills and credit notes in the Internet. They can display the documents as PDF or XML They can download bill data as PDF or CSV They can select various payment methods Author: Partho H. ChakrabortyConfidential and proprietary 28. Corporate Governance / SOX Framework Management of Internal Controls Process and internal controlsdocument repository Testing structure including workflow Compliance Calibrator Real-time security risk assessmentincluding segregation of duties (SOD) Detective assessment for clean-upand audits Preventive control through simulations Audit Information System Author: Partho H. Chakraborty Confidential and proprietary 29. Corporate Governance / IFRS and Basel II IFRS/IAS Accounting for Financial Instruments Hedge Accounting and Management GL Integration Basel II Credit Risk Exposure / RWA calculation Time Series Management and Analysis Disclosure and Reporting Integration with SAP Collateral Management Financial Database Common Data Model, Methods and Services Author: Partho H. Chakraborty Confidential and proprietary 30. Regulations Banned items, restricted items, hazardous items, special items can be defined with appropriate licenses, clearances and permissions Limits would be blocked automatically for any Prohibited Items or in such cases where the appropriate license/permissions are not produced Payment of government duties also can be monitored such as excise, VAT, etc. Author: Partho H. ChakrabortyConfidential and proprietary 31. Limits Limits can be defined by the bank as they want to such as: Transaction Limit Revolving Limit Limits would be configured by the system automatically such as: Formula: Limits Sanctioned Limits Utilised + Limits Replenished = Limits Available for Appropriation The limits to Company would cover:Credit to purchase raw materials and process to finished goodsCredit to dealers who would pay after a fixed tenor Author: Partho H. Chakraborty Confidential and proprietary 32. LimitsThe limits would besanctioned as per theauthority level suchas the tree structurein a bankLimit Burst would be taken care of by the RM on a case to case basisThe system would check defaults in payments and can be configured tosend notices followed by blocking of limits Author: Partho H. Chakraborty Confidential and proprietary 33. Charges The charges would be in the form of: Interest This would be calculated from the date the facility is utilized. If the limitsare used in parts then the charges would be calculated on the utilizedportion of the limits. The interest would be computed on a minimum cutoff percentage such asit could be a minimum of 15% or more, whichever is higher. There would also be a provision to utilize the limits sanctioned or aminimum part of it by a certain date say 30 days if not the unutilized partwould attract a penalty which could be a percentage say 2% of theunutilized part or a flat rate of 2% on the entire limit at the banksdiscretion. Penalty In case of delayed payments in part or full or non-utlilisation of limitsthere would be a penalty, which would be levied at banks discretion. Thiscould be a percentage of the unpaid/unutilized amount or a flat rate on thewhole amount. Author: Partho H. ChakrabortyConfidential and proprietary 34. Other Charges This would be in the form of Processing Fees Limit Set up Fees Document Handling Fees Opening Guarantees/Letter of Credit: This could be for the Company to purchase raw materialsSystem is very flexible in configuring charges, which could be atthe discretion of the bank Author: Partho H. Chakraborty Confidential and proprietary 35. Crystallisation of Bills Bills get crystallized when they get unpaid either in part or full for 30days after due date. The banks would of course take recourse to thecollaterals pledged to them. But if for some reason or the other if thebill remains unpaid for 6 months then it becomes a Non PerformingAsset (NPA). Author: Partho H. Chakraborty Confidential and proprietary 36. Dispute Management Reduce Days Sales Outstanding and increase customer profitability Identify issues and disputes earlier in the payment cycle Track and monitor reasons that drive DSO Streamline process of dispute resolutionA disputecasesummarizes andstructures all dispute-related data andcontains variousattributesAcasecanbeaccessed andprocessed byallauthorized employeesProcessors can createnotes, view an actionlog or link businessobjects to the caseThey can also createcorrespondence Author: Partho H. ChakrabortyConfidential and proprietary 37. Non Performing Assets/Bad Debts Categorized separately Classified as Substandard Doubtful D1, D2 & D3 Loss Collaterals earmarked can be liquidated and value settled against it. Can waive or write-off outstanding amount Has provision for Dunning with active monitoring the payment Author: Partho H. ChakrabortyConfidential and proprietary 38. Liquidity Pooling Netting Sweep Reverse SweepZero balance account can be maintained with the surplus being investedfor profit.Also minimum balance account can be maintained to have just that muchfunds so that no cheques get bounced Author: Partho H. ChakrabortyConfidential and proprietary 39. Accounting Entries General Ledger Legal, Segment and Management Reporting Parallel Accounting Fast Close, Closing Cockpit Cost Controlling Cost Center Accounting, Activity based Costing Profit Center Accounting One version of the truth same valuation, no inconsistency, no reconciliation Fast Close - Online Processing, real-time posting to CO Extensibility / Flexibility to add user-defined fields Leveraging ERP Platform Integration Consolidating people, financial, and operational process data Cross-functional business processes and workflows Note: All entries would leave an audit trail Author: Partho H. ChakrabortyConfidential and proprietary 40. Reports Apart from the standard reports given below, SAP BI can generate anytype of report as per banks requirement G/L Entries Limits Payments Interest Calculation Delayed Payments Amount Outstanding and so on Author: Partho H. Chakraborty Confidential and proprietary 41. Manual Overriding The system is designed to do all functions automatically. But still there would be a provision where manual intervention could waive or alter the interest, penalty, etc. Specific permissions and hierarchy with default password protection can be pit in place Author: Partho H. Chakraborty Confidential and proprietary 42. Process Flow by Customer to Open Letter of Credit Author: Partho H. Chakraborty Confidential and proprietary 43. Process Flow by Customer to Open Letter of Credit Author: Partho H. Chakraborty Confidential and proprietary 44. Sample Process Flow Author: Partho H. Chakraborty Confidential and proprietary 45. Functional Architecture Author: Partho H. Chakraborty Confidential and proprietary 46. SAP Enterprise Service Oriented Architecture (SOA) Enterprise SOA revolutionizes the design of business applications, enabling the rapid composition of business solutions. With enterprise SOA, you can encapsulate business logic and expose it as enterprise services -- smaller functionality components that can be reassembled quickly to form new innovative business solutions that meet changing business requirements. Based on SAP Net Weavers SOA platform, enterprise SOA provides you with business and industry-specific context views through enterprise services and safeguards scalability, robustness, and governance for your IT. Enterprise SOA is therefore your blueprint for an adaptable, flexible, and open IT architecture for developing services-based, enterprise-scale business solutions. Author: Partho H. ChakrabortyConfidential and proprietary 47. Role of SOA in Channel Financing Process To create new applications on top of existing enterprise solutions. To automate new or existing business processes To increase the value of your current systems. To achieve greater flexibility while controlling technology costs. To deploy innovative solutions to extend our business partner networks. To improve our ability to link other applications to SAP solutions throughSOA. The Main Use of SOA is Enterprise service bus, where it will work as acommunication channel like spoke and hub as shown in below diagram: Author: Partho H. ChakrabortyConfidential and proprietary 48. Integrating Cash, Trade, Supply Chain and Treasury through SOA Author: Partho H. ChakrabortyConfidential and proprietary 49. SOA Architecture Author: Partho H. Chakraborty Confidential and proprietary 50. Thank youPartho H. ChakrabortyA - 305, DSR Spring Beauty Apts., 124/1, ITPL Main Road,Brookefields, Kundalahalli, Bangalore - 560 037, IndiaTel: +91 80 420 50293, Cell: +91 99863 22504email: parthohc@airtelmail.in parthohc@rediffmail.comSkype: parthohc01