international short term finance
TRANSCRIPT
International short term finance
Presented by:Aman Singhal
Short term finance
Budgeting and making financial plans for periods of one year or less.
These funds are usually for businesses to run their day-to-day operations including payment of wages to employees, inventory ordering and supplies.
Importance
–Marketing –
•For deciding whether to finance the firm's funds requirements aggressively or conservatively.
Accounting
•Cash conversion cycle, management of inventory, accounts receivables, payables, receipts and disbursements of cash.
Management
•Sales will be affected by the availability of credit to purchasers, sales will be affected by the inventory management
Management
Essence of short term financial management
Minimize the working capital needs consistent with other policies.
Raise short term funds at the minimum possible cost and deploy short term cash surpluses at the maximum possible rate of return consistent with the firm's risk preferences and liquidity needs.
Short term borrowing
Commercial papers Banker's
acceptances
Short term bank deposits Certificat
e of deposite
InstrumentsInstrum
ent
Currency
Location of
financial centre
Tax related issues
Principal dimensio
ns
Key Factors
• 1)Maximize local financing.2)Faced with confiscation or currency controls, fewer assets at risk.
• a) Offset foreign assets with foreign liabilities
• b) Borrow where no exposure increases exchange risk
• a)Yes. Currency is irrelevant.• b)No. Cover costs may differ -added
risk may mean the forward premium/discount does not offset interest rate differentials.
• a. If yes :trade-off required between cost and exchange risk
• b. If no : costs are same everywhere
Deviations from
Int'l Fisher Effect?
Does Interest
Rate Parity Hold?
Political Risk: If high,
Exchange Risk
Investing surplus funds Fixed term money market deposits such as CDs- A CD
bears a maturity date, a specified fixed interest rate and can be issued in any denomination. The term of a CD generally ranges from one month to five years.
Commercial paper- An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Maturities - rarely range any longer than 270 days.
Considerations
Yield – Total ROI
Marketability- Liquidity
Exchange rate risk
Price risk
Transaction costs
ExampleConsider the case of a Treasurer who has a surplus of $180,000 for 90 days. 90 day USD CDs are attractive instrument offering a return of 10% but the denomination is $100,000 per CD. The Treasurer can purchase one CD and invest $80,000 in a bank deposit earning 6% or borrow $20,000 via an overdraft facility at 13% and purchase 2 CDs. Which course of action is preferable?
Soln: Let M=minimum size of investment instrument S=surplus funds i=interest rate on instrument d=interest rate on the bank deposit b=interest rate on borrowing or overdraft
Breakeven size= M x i – (M – S*) x b = S* x d
S*= M[(b-i) / (b-d)]
If excess funds on hand exceed S*, money should be borrowed to invest in the money market instrument otherwise excess funds should be left in a bank deposit.
M= $100,000i= 0.10d=0.06b= 0.13
Breakeven size= 100,000[(0.13-0.10) / (0.13-0.06) = 42,857.14
Since the treasurer has $80,000 excess, it is preferable to borrow $20,000 and purchase 2 CDs.
CODI rates Reported by Federal Reserve Board
2014 MoneyCafe.comSource: Derivation of Rates Reported by Federal Reserve Board
2014 MoneyCafe.comSource: Derivation of Rates Reported by Federal Reserve Board
Financing short term deficits
Objective- Minimize overall borrowing requirement consistent with the firm's liquidity needs and to fund these at the minimum possible all-in-cost.
Suppose a treasurer determines that he has a requirement of USD 60,000 for 30 days. An overdraft facility would cost him 12% while 30 day term loan is available at 9% but the minimum amount is USD 100,000. Surplus funds can be kept in a deposit earning 5%.
Centralized Cash Management
Centralized cash management:-In centralized system of cash management collection of cash and payment of cash is made to and by Head office only instead of different-different branches of the company. In this system, to have efficient cash management there is two steps:-
Prompt Payment by Customer:- one way to ensure prompt payment by customers is prompt billing. What the customer has to pay, the period of payment etc. should be notified
Accurately and in advance.
The use of mechanical devices for billing along with the enclosure of a self-addressed return envelope will speed up payments by customers. Another and more important technique to encourage prompt payment by customers is the practice of offering trade discounts.
EARLY CONVERSION OF PAYMENT INTO CASH:-
Once the customer makes the payment by writing a cheque in favour of the firm, the collection can be expedited by prompt encashment of the cheque. It will be recalled that there is lag is between the time a cheque is prepared and mailed by the customer and the time the funds, are included in the cash reservoir of the firm.
NTAGES OF CENTRALIZED CASH MANAGEMADVAENT.
Helps in maintaining minimum cash balance during the year.
Helps the companies to generate maximum possible returns by investing all cash resources optimally.
Helping the companies to take complete advantage of multinational netting, so as to minimize transaction cost and currency exposure.
Optimally, utilizes the various ledging strategies so as to minimize the mncs foreign exchange exposure.
Achieve maximum utilization of the transfer pricing mechanism so as to enhance the profitability and growth of the firm.
DISADVANTAGE OF CENTRALIZED CASH MANAGEMENT.
Local managers may loose motivation to control cash flows adequately. When the cash management and finance function are in the hand of headquarter the co-ordination between the financial disciplines and the local knowledge may more easily is frustrated.
Moreover, a centralized cash system requires a highly formalized cash balance control system, thus rising regulative, administrative, and information costs. Finally, internalizing and recognizing the cash balance may disturb relationship of subsidiaries with local banks.
The disadvantage of centralized European cash management, however decline. Moreover, netting and pooling of cash positions gain attractiveness and trend towards centralized treasuries is already apparent. In fact, even non European MNCs have recognized their European treasuries operations along pan European lines.
DECENTRALIZED CASH MANAGEMENT.
Decentralized cash:-this system of cash management means that the collection and payment of cash is maintained by the branches of large enterprise to complete the objectives of minimizes the cost of collection and reduction in the period of collection of cash. under this system ,overall there are two techniques used by large enterprise:
Concentration banking- a concentration bank is one which the firm has major account usually a disbursement. Hence, this arrangement is referred to as concentration banking.
Lock box system:-Under this arrangement, firms hire a post office box at the important collection centers. The customers are required to remit payments to collection centers or lock box. The lock banks of the firm, at the respective places are authorized to open the box and pick up the(cheque) received from the customers.
MIBOR
MIBOR is the interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market.
MIBOR is calculated everyday by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of banks, on funds lent to first-class borrowers. The MIBOR was launched on June 15, 1998 by the Committee for the Development of the Debt Market, as an overnight rate.
MIBOR
The NSEIL launched the 14-day MIBOR on November 10, 1998, and the one month and three month MIBORs on December 1, 1998.
Further, the exchange introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays with effect from June 6, 2008 in addition to existing overnight rate.
Thus, we can say that MIBOR is is arrived now a days by FIMMDA and NSE, based on inputs from PS Banks, Private Sector Banks, Primary Dealers and Foreign Banks .
LIBOR
Originally, in 1986 LIBOR was published for three currencies ie USD, GBP and JPY. Later on other currencies were added and after merger of some currencies in 2000 into Euro, now Libor rates are calculated for 10 currencies and 15 borrowing periods ranging from overnight to one year. These are published daily at 11:30 am (London time).
The rates are published for period ranging from 1 day to 12 months (i.e. 1 day, 1 week, 2 weeks, 1 month, 2 month ...... upto 12 months at monthly intervals)
LIBOR
LIBOR is calculated and published by Thomas Reuters on behalf of British Bankers' Association (BBA) for currencies like (1) US Dollar, (2) GB Pound (GBP), (3) Euro (EUR), (4) Swiss Franc (CHF), (5) Canadian dollar (CAD), (6)Japanese Yen (JPY), (7) Danish Krone (DKK), (8) Swedish Korna (SEK), (9) Australian Dollar (AUD), (10) New Zealand Dollar (NZD). MIBOR is the benchmark for overnight interest rates for Indian Rupee (INR).
Importance of LIBOR and MIBOR
The Libor is widely used as a reference rate / bench mark for many financial instruments in both financial markets and commercial fields. In 2012, it was estimated that at least US$ 350 trillion in derivatives and other financial products were tied to the LIBOR. Thus, for banks and other financial institutions, huge number of transactions are valued based on the current trend of LIBOR.
The MIBOR (alongwith MIBID) rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits in Indian markets.
Products that are popular linked to LIBOR
Some products which are linked / bench marked / reference rated to LIBOR include, Forward Rate Agreements, Interest Rate Futures, Interest Rate Swaps, Swap options, Overnight Index Swaps, Interest Rate Options, Floating Rate Notes, Range Accrual Notes.
LIBOR ScandalWe have seen above that LIBOR is the average rate (declared on daily basis) and is calculated based on the rates submitted by major international banks in London. We have also seen that huge amount of transactions / deals, specially derivative deals, are benchmarked or have reference to LIBOR. Thus, the daily mark to market valuation of such deals depends on the LIBOR and even settlement among banks / government is done by banks based on LIBOR. In case LIBOR is manipulated, it will impact the valuation / settlement amount of huge volume of transactions across the world as LIBOR is widely used.
On 27th June 2012, Barclays admitted to misconduct and thus UK's FSA imposed a 59.5 million pound penalty. US Department of Justice and Commidity Futures Trading Commisison too imposed fines worth 102 and 128 million pound penalties . Thus Barclays paid total of about 290 million pound as penalty.
On 31st July, 2012, Deutsche Bank confirmed that a "limited number" of staff were involved in the LIBOR rate rigging scandel, but it cleared the senior management of the charges.
On 19 December 2012, UBS agreed to pay regulators $1.5bn ($1.2bn to the US Department of Justice and the Commodity Futures Trading Commission, £160m to the UK Financial Services Authority and 60m CHF to the Swiss Financial Market Supervisory Authority) for its role in the scandal.
Early estimates are that the rate manipulation scandal cost U.S. states, counties, and local governments at least $6 billion in fraudulent interest payments, above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation.
The British Bankers’ Association said on 25 September that it would transfer oversight of Libor to UK regulators, as proposed by Financial Services Authority Managing Director Martin Wheatley and CEO-designate of the new Financial Conduct Authority. On 28 September, Wheatley's independent review was published, recommending that an independent organization with government and regulator representation, called the Tender Committee, manage the process of setting Libor under a new external oversight process for transparency and accountability
The FSA announced final proposals for new regulations on how financial market benchmarks are calculated, tightening requirements that information be more transparent.
Types of Risk
Preshipment - Shipment - Postshipment
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The Trade Cycle and Risk
7
The Trade Cycle
The Transaction over Time
Contract
Production
Land Transport
Port of Departure Sea Transport
Port of Destination
Customs!
Land Transport and Delivery
Final Payment
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35
Initial Contact
Contract
Production Process
Transport
To Port
Port Entry
Pre-shipment Risks
LOADINGSHIP
PORT
EXPORTCUSTOMS
Transport to Port
36
By rail mode
By air mode
By ground mode
THE PORT
37
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LOADING THE SHIP
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40
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LOADEDSHIP
Ocean Freight is most common mode
of transport
PERILS OF THE SEA
Shipment Risks
PortOf
Departure
PortOf Arrival
Shipment Risks
Perils of the SeaEngine Trouble
Ramming
Jettison
Running Aground
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Post-Shipment Risk
44
PortOf
Arrival
CUSTOMSIMPORTER’SWAREHOUSE
FINALPYMT
Transit to Importer
PAYMENT TERMS
I. PAYMENT TERMS
Four Principal Means:
1. Cash in advance
2. Open Account
3. Letter of Credit
4. Drafts
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PAYMENT TERMS
A. Cash in Advance
1. Minimal risk to exporter
2. Used where there is
a. Political unrest
b. Goods made to order
c. New and unfamiliar customer
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PAYMENT TERMS
B. OPEN ACCOUNT
1. Creates a credit sale
2. To importer’s advantage
3. More popular lately because
a. major surge in global trade
b. credit information improved
c. more global familiarity with exporting.
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PAYMENT TERMS
4.Benefits of Open Accounts:
a. greater flexibility in making a trade
b. lower transactions costs
5.Major disadvantage:
-Slow payment
-highly vulnerable to government currency controls.
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PAYMENT TERMSC. Letter of Credit (L/C)
1. A letter addressed to seller
a. written and signed by
buyer’s (importer) bank
b. promising to honor seller’s
(exporter) drafts.
c. Bank substitutes its own
commitment
d. Seller must conform to terms
e. Protects in case of discrepancies 4
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PAYMENT TERMS
2. Advantages of an L/C to Exporter
a. eliminates credit risk and
b. pre-shipment risk of order cancellation
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PAYMENT TERMS
3. Advantages of L/C to Importer
a. shipment by exporter assured
b. documents inspected ensure the correct order
c. may allow better sales terms
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PAYMENT TERMS
4. Safest type of L/Cs
a. documentaryincludes bill of lading and commercial invoice
b. irrevocable99% of the time
c. confirmed
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PAYMENT TERMS
D. DRAFTS
1. Definition:
- unconditional order in writing
- exporter’s order for importer to pay
- at once (sight draft) or
- in future (time draft) 53
PAYMENT TERMS
2. Three Functions of Drafts
a. clear evidence of financial obligation
b. reduced financing costs
c. Can be a financial product for investors
(i.e. A time draft may be converted to a banker’s acceptance)
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PAYMENT TERMS
3. Types of Drafts
a. sight
b. time
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DOCUMENTS
II. DOCUMENTS USED IN INT’L TRADE
Three most used documents
1. Bill of Lading (most important)
2. Commercial Invoice
3. Insurance Certificate
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DOCUMENTSA. Bill of Lading
Three functions:
1.Acts as a contract to carry the goods.
2.Acts as a shipper’s receipt
3. Establishes ownership over goods if negotiable type. 5
7
DOCUMENTS
B. COMMERCIAL INVOICE
Purpose:
1.Lists full details of goods shipped with INCOTERMS
2.Names of importer/exporter given
3.Identifies payment terms in a specific currency
4.List charges for transport and insurance. 5
8
INCOTERMSA codification of international rules for the uniform interpretation of common contract clauses in export/import transactions.
EXW: at exporter’s warehouse; importer has most liability
FAS: along side the ship
FOB: after shipment is loaded on
board
DDP: Delivered duty paid-exporter has most liability
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DOCUMENTS
C. INSURANCE
1. Marine Insurance-
same name whether ocean or air freight.
2. Insurance Certificate-
issued per trip to show proof of insurance
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A “Small” Container Ship
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Insurance Principle: GENERAL AVERAGE
An ocean marine loss that occurs through the voluntary sacrifice of a part of the vessel or cargo, or an expenditure, to safeguard the vessel and its remaining cargo from a common peril.
If the sacrifice is successful, all interests at risk contribute to the loss borne by owner of the sacrificed property based on their respective saved values.
A party can insure their portion of such a loss under an ocean marine policy. 6
2
Example of General Average
Liability AssignedIf only shipper A’s container is jettisoned at a loss of $250,000, what is shipper B and C liable for?
Total
Co. Containers % Value Liability
A 1 5 $250,000 0
B 4 20 $20,000 $50,000
C 15 75 $150,000 $187,500
Total: 20 containers at risk when ship set sail.
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SHORT-TERM FINANCING
TECHNIQUESIII.FINANCING TECHNIQUES
A. Four Types:
1. Bankers’ Acceptances
2. Discounting the draft
3. Factoring
4. Forfaiting
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BANKERS’ ACCEPTANCES
1. Bank created acceptances
a. Creation: Time drafts accepted by bank
b. Terms: Payable at maturity to holder
c. Sale in the money market: Bankers acceptance
d. Highly liquid market
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DISCOUNTING2. Discounting
a. Converts exporters’ time drafts to cash
minus interest to maturity and
commissions.
b. Low cost financing with few fees
c. May be:
with recourse (exporter still liable) or
without recourse(bank takes
liability for nonpayment)
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FACTORING3. Factoring
firms sell accounts receivable to another firm known as the factor.
a. Discount charged by factor
b. Non-recourse basis: Factor
assumes all payment risk.
c. When used:
1.) Occasional exporting
2.) Clients geographically dispersed. 6
7
FORFAIT
4. Forfaiting
a. Definition:
discounting at a fixed rate without recourse for medium-term accounts receivable
b. Use: Large capital purchases
c. Most popular in W. Europe
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GOVERNMENT SOURCES
IV. GOVERNMENT SOURCES OF EXPORT
FINANCING AND CREDIT INSURANCE
A. Export-Import Bank of the U.S.
-known as Ex-Im Bank
-finances and facilitates U.S. exports only.
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GOVERNMENT SOURCES
1. Ex-Im Bank Programs:
a. Direct loans to exporters
b Loan guarantees
c. Risk Insurance: Political and commercial insurance
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GOVERNMENT SOURCES
2. Ex-Im Restrictions: At least 51% U.S. content No armaments Must be environmentally friendly to both
countries
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COUNTERTRADEV. COUNTERTRADE
A. Three Specific Forms:
1. Barter
direct exchange in kind
2. Counterpurchase
sale/purchase of unrelated
goods but with currencies
3. Buyback
repayment of original purchase through sale of a related product.7
2
COUNTERTRADE
B. When to Use Countertrade
1. with “soft-currency” developing countries
2. when tariffs or quotas prevent
trade.
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The Reserve Bank of India (RBI) is the nation’s central bank. Since 1935, when it began itsoperations, it has stood at the centre of India’s financial system, with a fundamental commitmentto maintaining the nation’s monetary and financial stability.Main FunctionsMonetary Authority
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.Regulator and supervisor of the financial systemPrescribes broad parameters of banking operations within which the countrys banking and financial system functions.
Objective: maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public.Manager of Foreign ExchangeManages the Foreign Exchange Management Act, 1999
Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.Issuer of currency: ∑ Issues and exchanges or destroys currency and coins not fit for circulation.
As a prudential measure aimed at better risk management and avoidance of concentration of credit risks, the Reserve Bank of India has advised the banks to fix limits on their exposure to specific industry or sectors and has prescribed regulatory limits on banks’ exposure to individual and group borrowers in India
The exposure ceiling limits would be 15 percent of capital funds in case of a single borrower and 40 percent of capital funds in the case of a borrower group.
Credit exposure to a single borrower may exceed the exposure norm of 15 percent of the bank's capital funds by an additional 5 percent (i.e. up to 20 percent) provided the additional credit exposure is on account of extension of credit to infrastructure projects. Credit exposure to borrowers belonging to a group may exceed the exposure norm of 40 percent of the bank's capital funds by an additional 10 percent (i.e., up to 50 percent), provided the additional credit exposure is on account of extension of credit to infrastructure projects
Bills discounted under Letter of Credit (LC)In cases where the bills discounting/purchasing/negotiating bank and LC issuing bank are different entities, bills purchased/discounted/negotiated under LC (where the payment to the beneficiary is not made ‘under reserve’), will be treated as an exposure on the LC issuing bank and not on the third party / borrower. However, in cases where the bills discounting/purchasing/negotiating bank and LC issuing bank are part of the same bank, i.e. where LC is issued by the Head Office or branch of the same bank, then the exposure should be taken on the third party/borrower and not on the LC issuing bank. In the case of negotiations ‘under reserve’, the exposure should be treated as on the borrower.
Exemptions Rehabilitation of Sick/Weak Industrial UnitsThe ceilings on single/group exposure limits are not applicable to existing/additional credit facilities (including funding of interest and irregularities) granted to weak/sick industrial units under rehabilitation packages.Food creditBorrowers, to whom limits are allocated directly by the Reserve Bank for food credit, will be exempt from the ceiling.Guarantee by the Government of IndiaThe ceilings on single /group exposure limit would not be applicable where principal and interest are fully guaranteed by the Government of India.
Loans against Own Term DepositsLoans and advances (both funded and non-funded facilities) granted against the security of a bank’s own term deposits may not be reckoned for computing the exposure to the extent that the bank has a specific lien on such deposits.
ExposureExposure shall include credit exposure and investment exposure . The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit.
Measurement of Credit Exposure of Derivative ProductsFor the purpose of exposure norms, banks shall compute their credit exposures, arising on account of the interest rate & foreign exchange derivative transactions and gold, using the 'Current Exposure Method', as detailed below. While computing the credit exposure banks may exclude 'sold options', provided the entire premium / fee or any other form of income is received / realised.Credit ExposureCredit exposure comprises the following elements:(a) all types of funded and non-funded credit limits.(b) facilities extended by way of equipment leasing, hire purchase finance and factoring services.
Investment Exposurea) Investment exposure comprises the following elements:(i) investments in shares and debentures of companies.(ii) investment in PSU bonds(iii) investments in Commercial Papers (CPs).b) Banks’ / FIs’ investments in debentures/ bonds / security receipts / pass-through certificates (PTCs) issued by an SC / RC as compensation consequent upon sale of financial assets will constitute exposure on the SC / RC. In view of the extraordinary nature of the event, banks / FIs will be allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-case basis.
Credit Exposure to Industry and certain Sectors
Fixing of Sectoral LimitsApart from limiting the exposures to an individual or a Group of borrowers, as indicated above, banks may also consider fixing internal limits for aggregate commitments to specific sectors, e.g. textiles, jute, tea, etc., so that the exposures are evenly spread over various sectors. These limits could be fixed by the banks having regard to the performance of different sectors and the risks perceived. The limits so fixed may be reviewed periodically and revised, as necessary.Unhedged Foreign Currency Exposure of CorporatesTo ensure that each bank has a policy that explicitly recognises and takes account of risks arising out of foreign exchange exposure of their clients, foreign currency loans above US $10 million, or such lower limits as may be deemed appropriate vis-à-vis the banks’ portfolios of such exposures, should be extended by banks only on the basis of a well laid out policy of their Boards with regard to hedging of such foreign currency loans. Further, the policy for hedging, to be framed by their boards, may consider, as appropriate for convenience, excluding the following:Where forex loans are extended to finance exports, banks may not insist on hedging but assure themselves that such customers have uncovered receivables to cover the loan amount.Where the forex loans are extended for meeting forex expenditure.
Exposure to Real Estate(i) Banks should frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/group exposure limits for such loans, margins, security, repayment schedule and availability of supplementary finance and the policy should be approved by the banks' Boards.(ii) While appraising loan proposals involving real estate, banks should ensure that the borrowers have obtained prior permission from government / local governments / other statutory authorities for the project, wherever required. In order that the loan approval process is not hampered on account of this, while the proposals could be sanctioned in the normal course, the disbursements should be made only after the borrower has obtained requisite clearances from the government authorities. The exposure of banks to entities for setting up Special Economic Zones (SEZs) or for acquisition of units in SEZs which includes real estate would be treated as exposure to commercial real estate sector for the purpose of risk weight and capital adequacy from a prudential perspective. Banks would, therefore, have to make provisions, as also assign appropriate risk weights for such exposures, as per the existing guidelines.
Banks have been permitted to undertake leasing, hire purchase and factoring activities departmentally. Where banks undertake these activities departmentally, they should maintain a balanced portfolio of equipment leasing, hire purchase and factoring Their exposure to each of these activities should not exceed 10 percent of total advances
Banks are allowed to extend credit/non-credit facilities (viz. letters of credit and guarantees) to Indian Joint Ventures/Wholly-owned Subsidiaries abroad and step-down subsidiaries which are wholly owned by the overseas subsidiaries of Indian Corporates
The above exposure will, however, be subject to a limit of 20 percent of banks
loan will be granted only to those joint ventures where the holding by the Indian company is more than 51%.While extending such facilities, banks will have to comply with Section 25 of the Banking Regulation Act, 1949, in terms of which the assets in India of every banking company at the close of business on the last Friday of every quarter shall not be less than 75 percent of its demand and time liabilities in India.
Banks' capital market exposures would include both their direct exposures and indirect exposures. The aggregate exposure (both fund and non-fund based) of banks to capital markets in all forms would include the following:direct investment in equity shares, convertible bonds, convertible debentures and units of equity-oriented mutual funds the corpus of which is not exclusively invested in corporate debt;advances against shares/bonds/debentures or other securities or on clean basis to individuals for investment in shares (including IPOs/ESOPs), convertible bonds, convertible debentures, and units of equity-oriented mutual funds;advances for any other purposes where shares or convertible bonds or convertible debentures or units of equity oriented mutual funds are taken as primary security;advances for any other purposes to the extent secured by the collateral security of shares or convertible bonds or convertible debentures or units of equity oriented mutual funds i.e. where the primary security other than shares/convertible bonds/convertible debentures/units of equity oriented mutual funds does not fully cover the advances;secured and unsecured advances to stockbrokers and guarantees issued on behalf of stockbrokers and market makers;
Statutory limit on shareholding in companiesIn terms of Section 19(2) of the Banking Regulation Act, 1949, no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 percent of the paid-up share capital of that company or 30 percent of its own paid-up share capital and reserves
Advances against shares to individualsLoans against security of shares, convertible bonds, convertible debentures and units of equity oriented mutual funds to individuals from the banking system should not exceed the limit of Rs.10 lakh per individual if the securities are held in physical form and Rs. 20 lakhs per individual if the securities are held in demat form. Such loans are meant for genuine individual investors and banks should not support collusive action by a large group of individuals belonging to the same corporate or their inter-connected entities to take multiple loans in order to support particular scrips or stock-broking activities of the concerned firms. Such finance should be reckoned as an exposure to capital market.
Margins on advances against shares/ issue of guaranteesA uniform margin of 50 per cent shall be applied on all advances / financing of IPOs / issue of guarantees on behalf of stockbrokers and market makers. A minimum cash margin of 25 per cent (within the margin of 50%) shall be maintained in respect of guarantees issued by banks for capital market operations. These margin requirements will also be applicable in respect of bank finance to stock brokers by way of temporary overdrafts for DVP transactions.
Banks may extend finance to stockbrokers for margin trading. The Board of each bank should formulate detailed guidelines for lending for margin trading, subject to the following parameters:The finance extended for margin trading should be within the overall ceiling of 40% of net worth prescribed for exposure to capital market.A minimum margin of 50 per cent should be maintained on the funds lent for margin trading.The shares purchased with margin trading should be in dematerialised mode under pledge to the lending bank. The bank should put in place an appropriate system for monitoring and maintaining the margin of 50% on an ongoing basis.The bank’s Board should prescribe necessary safeguards to ensure that no "nexus" develops between inter-connected stock broking entities/ stockbrokers and the bank in respect of margin trading. Margin trading should be spread out by the bank among a reasonable number of stockbrokers and stock broking entities.
Banks' Exposure to Commodity MarketsIn terms of extant instructions, banks may issue guarantees on behalf of share and stock brokers in favour of stock exchanges in lieu of margin requirements as per stock exchange regulations. While issuing such guarantees banks should obtain a minimum margin of 50 percent. A minimum cash margin of 25 percent (within the above margin of 50 percent) should be maintained in respect of such guarantees issued by banks. The above minimum margin of 50 percent and minimum cash margin requirement of 25 percent (within the margin of 50 percent) will also apply to guarantees issued by banks on behalf of commodity brokers in favour of the national level commodity exchanges, viz., National Commodity & Derivatives Exchange (NCDEX), Multi Commodity Exchange of India Limited (MCX) and National Multi-Commodity Exchange of India Limited (NMCEIL), in lieu of margin requirements as per the commodity exchange regulations.
Banks’ exposure in respect of Currency Derivatives segmentThe provisions with respect to capital market exposure including the related provisions with regard to maintenance of 50% margin as well as intra-day monitoring are not applicable to banks’ exposure to brokers under the currency derivatives segment. Limits on exposure to unsecured guarantees and unsecured advances2.9.1 The instruction that banks have to limit their commitment by way of unsecured guarantees in such a manner that 20 percent of the bank’s outstanding unsecured guarantees plus the total of outstanding unsecured advances do not exceed 15 percent of total outstanding advances has been withdrawn to enable banks’ Boards to formulate their own policies on unsecured exposures. Simultaneously, all exemptions allowed for computation of unsecured exposures also stand withdrawn.