Commercial paper, Inter Corporate Deposits, Bridge Financing, Hire purchase Finance

GROUP 3

COMMERCIAL PAPER MARKET• In CP market, the issuers of CP create supply while the subscribers to

CP create demand for these papers.

• The interaction between supply and demand for CP promotes the commercial paper market.

• The main issuers are corporate and the main subscribers to the CP are the banking companies.

• Issued by the issuers at a discount to face value.

• The face value of CP is in the denomination of Rs. 5 lakh and multiples thereof.

• Maturity period ranges between minimum of 15 days and maximum of 1 year from the date of issue.

• The other issuers are Primary dealers and All India Financial Institutions. The other investors or subscribers are individuals, Non-Resident Indians and Foreign Institutional Investors.

COMMERCIAL PAPER AND CREDIT RATING AGENCIES

• Since CP is unsecured debt instrument in Indian money market, the issuers are required to maintain relatively higher Credit rating.

• According to RBI norms, the issuers are eligible to issue CP only if they have P2 or equivalent credit rating from any of the credit rating agencies in India.

• The main agencies are – Credit Rating Information Services of India Limited (CRISIL).– Credit Analysis and Research Limited (CARE)– Investment Information and Credit Rating Agency of India Limited

(ICRA).

• This credit rating is essential for the issue because a CP is not backed by any collateral and so only corporate with high-quality credit ratings will easily find buyers without having to offer a substantial discount (higher cost) for the issue of CP.

ISSUERS OF COMMERCIAL PAPER• The issuers of Commercial papers in Indian money market are

broadly classified into:– Leasing and Finance Companies– Manufacturing companies– Financial Institutions

70%

15%

15%

Total issue of Commercial Paper for the decade of 2000-01 to

2010-11.

leasing and finance com-paniesmanufacturing companiesfinancial institu-tions

GROWTH OF COMMERCIAL PAPER MARKET IN INDIA

• Commercial Paper market had relatively higher growth from 1997-98 onward.

• On October 15 1997, total outstanding amount on CP transaction in Indian money market was Rs. 3377 crore.

• This outstanding amount increased substantially to Rs. 1,28,347 crore on July 15, 2011.

• The growth of CP mainly started after the financial year 2007-08.

• Due to the financial crisis, RBI reduced Repo rate drastically from 9% to 4%, also the prime rate of commercial banks remained 12%.

• But, The discounting rate on CP was in the range of 6.5% to 10%.

• The cost of borrowing working capital through CP transaction became relatively lower for the corporate companies in comparison to the cost of borrowing through cash credit facility from the commercial banks.

• The obvious result was an absolute growth of the CP market in India, particularly, after 2007-08 onward.

Inter-Corporate Deposits

Features of ICDs

• Short-Term• Risk Involved• ICD Market• Primary dealers cannot lend• Participants• Total amount

Types of ICDs

3 month deposit

6 month deposit

Call Deposit

Other types of ICDs

• Fixed Rate ICDs with – 1.) Put Option 2.) Call Option• Floating rate ICDs with – 1.) Put Option 2.) Call Option

Why Co.’s borrow and lend in this market ?

• No Legal hassles• Secrecy• Personal Contacts

Advantages to the Investor

• Interest Rates• Increases yield on investment• More liquid

• Requirement for short maturity funds• Put/Call Option

Advantages to the Corporate borrowing

BRIDGE FINANCING

• It is a method of financing, used to maintain liquidity while waiting for an anticipated and reasonably expected inflow of cash.

• Usually for a period less than 12 months.

• Examples

TYPES

• CLOSED BRIDGING

• OPEN BRIDGING

TERMS USED IN BRIDGE FINANCING

• Costs involved• Intrest rates• Points• First charge• Second charge

BRIDGE LOANS

• Calculation

• In Real Estate

• In Corporate Finance

Hire Purchase

• Hire purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase.

• Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid.

• The hire purchase system is regulated by the Hire Purchase Act 1972.

• Many kinds of business asset are suitable for financing using hire purchase or leasing including:

-Plant and machinery, Business cars, Commercial vehicles, Agricultural equipment, Hotel equipment, Medical and dental equipment, Computers, including software package, Office equipment.

Hire Purchase Act 1972• This Act defines a hire purchase as “an agreement under which goods are

let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:

• The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic installments.

• The property in the goods is to pass to such person on the payment of the last of such installments, and

• Such person has a right to terminate the agreement at any time before the property so passes.

CHARACTERISTICS OF HIRE PURCHASE

• Possession

• Ownership upon the full payment

• Installment buying

• Social Innovation

• Expands economy

THE HIRER'S RIGHTS

• To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each jurisdiction has a different formula for calculating the amount of this rebate)

• To return the goods to the owner — this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value

• With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating

• Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

THE OWNER'S RIGHTS

• The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner:

• To forfeit the deposit.

• To retain the installments already paid and recover the balance due.

• To repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid).

• To claim damages for any loss suffered.

HIRE PURCHASE COST

• Hire purchase finance provides a high interest of income to hire purchase

companies. They earn double the nominal interest rates applicable for normal lending. In hire purchase agreements, the interest rates charged are much higher compared to loans provided by banks and other financial institutions. This provides huge profit to financers.

• Under the various systems of consumer credit, interest is calculated on the nominal rate that is added to the cash price of the asset purchased.

• The amount of installment is determined by dividing the purchase price with number of months of credit provided by the financer.

• Interest liability remains the same through out the period of credit as interest is calculated on fixed cost price of the asset. Nominal interest to be paid the lender is calculated on the cost price of the asset which he is purchasing, and is uniform throughout the period of hire purchase agreement.

ELIGIBILITY • People with a regular and stable income, and capacity to pay installments

from the current income.

• The person must be competent to enter into a contract. Minors are not eligible.

• Foreigners and people not having permanent residence in the country are disqualified for availing hire purchase.

OPERATION OF HIRE PURCHASE TRANSACTION

• The Finance company purchases the equipment from the supplier and gives it on hire. After the hirer and the lender enter into hire purchase agreement, the hirer gets the required asset from the supplier and gives it to the purchaser.

• The hirer is required to pay a down payment of 20 – 25 % of the cost and pay the balance amount along with interest in advance or arrears over a time period of 36 – 48 months.

• For the balance amount, hirer has to deposit an equal amount as a fixed deposit with the finance company which provides entire finance of hire purchase terms.

• Deposits and the accumulated interest is returned to the hirer after fulfilling the hire purchase agreement terms.

• The interest on each hire purchase installment is computed on the basis of flat rate of interest and is applied to the declining balance of original loan amount.

NSIC AND HIRE PURCHASE

• Small scale firms can acquire industrial machinery, office equipment, vehicles, etc., without making full payment through "Hire Purchase".

• Now several agencies like "National Small Industries Corporation (NSIC)" provide machinery and equipment to small scale units on hire purchase basis and on lease basis.

• NSIC follows the following Hire Purchase procedure and Hire Purchase Scheme for financing plant and machinery to small scale units.

Advantages• No immediate cash • Easy possession • Economic growth • Relief to buyer

Disadvantages• Reputed buyers• May lead to bankruptcy• Buyer has to mortgage his

property• Buyer may incur loss• May lose paid installments in

the event of default• It is expensive• Loss to seller in the event of

default by the buyer.

THANK YOU

• Commercial Paper – Tirup Patel & Aashray Lal• Inter-Corporate Deposits – Vivek Jhala• Bridge Financing – • Hire Purchase Financing –