working capital nfb for contractor and seasonal industires

8/10/2019 Working Capital NFB for Contractor and Seasonal Industires

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WORKING CAPITAL

(NON FUND BASED) ANDWORKING CAPITAL FOR

CONTRACTORS

&SEASONAL INDUSTRIES

BY

R.K.GUPTAB. Com (Hons); CAIIB; AIB (LONDON); L.L.B; MBA (Finance)

Copyright 2009-2010 R.K.Gupta.22-11-2014 1


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WHY THIS PROGRAMME?a. To provide opportunity to all the employees to improve

their knowledgeb. Improvement of knowledge creates confidence

c. Knowledge and confidence enhances efficiency andproductivity and on the other side it reduces the risk

d. Efficiency and productivity enhances wealth of theshare holders and the employees also.

e. RISKRisk can be defined as the combination of the probability ofan event and its consequences.

f. Probabilityg. Accountability

h. So mitigation through:

a. Integrity

b. System and procedure11/22/2014 2


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TOPICS FOR DISCUSSION IN

(NFB) WORKING CAPITAL

a. Definition

b. Over /under financing

c. Why non fund based limits preferred

d. Types of non fund based products

e. Factors determining Non Fund Based Working Capital

f. Types of Bank guarantees and its essentialsg. How to work out the Limits for Bank Guarantee

h. What is letter of credit and its types and essentials

i. Parties to the letter of credit

j. How to work out the Limits for Letter of Creditk. Devolvement of letter of credit

l. In what circumstances the limit can be sanctioned in

isolation

m. Value and evaluation of DP through stock statement


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DEFINITION (NFB) AND IMPORTANCE OF

ADEQUACY OF WORKING CAPITAL

a. Where the funds are not required but

b. Funds are required on the event of failure ofcommitment by the borrower/ Applicant of the Nonfund Based Limit

c. It is a contingent liability.d. CASE OF UNDER FINANCING

(liquidity crunch)

e. CASE OF OVER FINANCING

(Over Trading OR diversion of funds )


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WHY NON FUND BASED LIMITS PREFERRED?

a. Can be used to reduce cost of borrowed funds

b. Banks charge a small commission on Non fundbased products as compared to interest onFund based products

BUT

a. Usage of these tools is subject to a mutualunderstanding between the buyer and thesupplier

b. Credibility of the borrower and seller,

beneficiary & bank is the cause of suchinstruments


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NON FUNDS PRODUCTSA. BANK GUARANTEES

Bank guarantee is issued by the bank undertaking the liability ofapplicant in case of his default. Guarantees may broadly be dividedin two categories as under:

i. Financial guarantees: Guarantee to discharge financial

obligation of the applicant

ii. Performance guarantees: Guarantee for due performance of acontract by the applicant

iii. Deferred Payment Guarantee: Generally in case of Purchase of

Heavy Machineries

B. LETTER OF CREDIT

Domestic LC Foreign LCa. Documentary Letter of Credit

b. Usance Letter of Credit

i. Revolving Letter of Credit

ii. Irrevocable letter of Credit


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NON FUNDS PRODUCTSFINANCIAL GUARANTEES:

Financial guarantees are direct credit substitutes wherein a bank irrevocablyundertakesto guarantee the repayment of a contractual financial obligation.

Financial guarantees essentially carry the same credit risk as a direct extension of

credit i.e., the risk of loss is directly linked to the creditworthiness of the counterparty

against whom a potential claim is acquired. An indicative list of financial guarantees,

attracting a CCF of 100 per cent is as under:

a. Guarantees for credit facilities;b. Guarantees in lieu of repayment of financial securities;

c. Guarantees in lieu of margin requirements of exchanges;

d. Guarantees for mobilisation advance, advance money before the

commencement of a project and for money to be received in various stages

of project implementation;

e. Guarantees towards revenue dues, taxes, duties, levies etc. in favour ofTax/ Customs / Port / Excise Authorities and for disputed liabilities for

litigation pending at courts;

f. Credit Enhancements;

g. Liquidity facilities for securitisation transactions;

h. Acceptances (including endorsements with the character of acceptance);

i. Deferred payment guarantees.


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NON FUNDS PRODUCTSPERFORMANCE GUARANTEE

Performance guarantees are essentially transaction-related

contingencies that involve an irrevocable undertaking to pay a third party

in the event the counterparty fails to fulfil or perform a contractual non-

financialobligation.

In such transactions, the risk of loss depends on the event which need not

necessarily be related to the creditworthiness of the counterparty involved.An indicative list of performance guarantees, attracting a CCF of 50 per

cent is as under:

a.Bid bonds;

b.Performance bonds and export performance guarantees;

c.Guarantees in lieu of security deposits / earnest money deposits (EMD)

for participating in tenders;

d.Retention money guarantees;

e.Warranties, indemnities and standby letters of credit related to particular

transaction.


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FACTORS DETERMINING WORKING CAPITAL (NFB)

BANK GUARANTEE:

a. Amount of contract in handb. Amount of Bank Guarantee already in force

c. Amount of Contracts to be procured during the year

d. Amount of Contracts to be completed during the year

LETTER OF CREDIT:

a. Total Costs incurred on materials purchased on credit

b. The length of time which is taken for getting the goods from the

seller to the place of the buyer.

c. Time taken from arrival of the goods to send the goods to the

buyer through sale on credit or cash.

DEFERRED PAYMENT GUARANTEE:

a. What is the period of Deferred Payment.

b. Amount and tenure of Term Loan in case of Deferred Payment

Guarantee.


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IMPORTANT FACTORS (BG)

a. Approved draft matter of Bank Guarantee.

b. Name of the Applicant

c. Name of the beneficiary

d. Amount of guarantee

e. Date of operation of guarantee

f. Date of expiry of guaranteeg. Period of operation

h. Commission on Bank guarantee

i. Signatories to the Guarantees

i. Who should sign?ii. Importance of sending the intimation to RO for

issuance of each guarantee?

iii. Importance of seeking the confirmation bybeneficiary

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IMPORTANT FACTORS (BG)

j. Expired guaranteesk. Repercussion of expired guarantees

l. Reversal of guarantees

m. Notice to the beneficiary

n. Renewal of bank guaranteeso. Guarantees for unlimited period

p. RBI guidelines for invocation of guarantees

q. Monitoring of performance guarantee.

r. Monitoring of financial guarantee

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WORKING OUT THE LIMIT FOR BGAmount of contracts in hand at the opening of the quarter A

+Amount of contracts expected to be procured during thequarter

B

-Amount of contracts to be completed during the quarter C

Balance of amount of contracts in hand at the close of the

quarter

A+B-C

Amount of BG outstanding on account of amount A D

Amount of BG outstanding on account of amount B E

Amount of BG outstanding on account of amount C which

are expected to be reversed

F

Amount of BG limit for consideration D+E-F

Margin in shape of Cash/ Term Deposit 0-100%

Collateral Security amount 0-100%


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Working capital in case of construction

contractors & seasonal Industries

a. What is the nature of stock?

b. What is the nature of security in case of working capitalfinance

c. Requirement of funds depends on:

i. Period of completion of the project

ii. Period of book debt realization

iii. Neither MPBF nor Turnover method is applicable in

such like cases

iv. Cash Budget method is the only alternate.

v. But again the question is what is the principal

security to the Bank.d. What steps a Bank should take to mitigate its risk.

e. Assignment of debts if so

i. How in case of firm and

ii. How in case of company.

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Working capital in case of seasonal Industries

a. What is the meaning of seasonal industries ?

i. Rice Shellerii. Food processing units

iii. Sugar industries

b. Requirement of funds depends on:

i. Period of availability of raw material.

ii. In such like cases, the date of expiry of the product is

most important.

iii. The goods manufactured be sold before the next

season arrived to have safety from price fluctuation.

iv. Cash Budget method is the best method for thepurpose.

v. How the cash budget method is applied.

vi. DP is to be worked out on the basis of stock

available.

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NON FUND PRDUCTS LETTER OF CREDIT

A documentissued by a financial institution whichprovides an irrevocable payment undertaking to abeneficiaryagainst complying documents as stated inthe credit.

i. Documentation

ii. All documentation should be in accordance with theinstructions of the applicant and any deviation may placethe bank at default/risk

iii. Goods are on Trust as such documentation for Loanagainst Trust Receipt to be got executed

iv.Revolving Letter of Credit.v. Stipulation of reinstatement of LC.

vi.Limits of Cash Credit (Hyp) or (Pledge)

vii.Stock Statement to be examined for Drawing Power.


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OTHER IMPORTANT POINTS APPLICANT:

The buyer /importer of goods: This person has to make

payment of letter of credit to the issuing bank if the

documents are in accordance with the terms and

conditions of LC.

ISSUING BANK:

Importers or buyers bank who lends its name or credit

is issuing Bank. It is liable for payment of LC in case the

documents are received by it from the nominated or

negotiating bank and the documents are in terms ofletter of credit. This bank gets 5 days to check the

documents.


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OTHER IMPORTANT POINTSAdvising Bank

Issuing bank branch or correspondent in exportercountry to whom the letter of credit is sent for onward

transmission to the seller or beneficiary, after

authentication of genuineness of the credit.

Where it is unable to verify the authenticity, it can seek

instructions from the opening bank or can advise the LCto the beneficiary, without any liability on its part. This

bank has no obligation to negotiate the document.

Beneficiary:

The party to whom the credit is addressed i.e. seller orthe exporter or the supplier of the goods. It gets payment

against documents as per LC from the nominated bank

within validity period of negotiation maximum 21 days

from date of shipment.


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OTHER IMPORTANT POINTSNegotiating bank:

The bank to whom the beneficiary presents the documents fornegotiation. It claims payment from the reimbursing bank or opening

bank and gets 5 banking days to check the documents.

Reimbursing Bank:

Third bank which repays, settle or funds the negotiating bank at the

request of its principal, the issuing bank .

Confirming Bank:

The bank adding confirmation to the credit, which undertakes theresponsibility of payment by the issuing bank and on his failure to

pay the confirmation, is added on request of the opening bank.


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Assessing Limit for Working Capital under L/C

L/C facility can be assessed in the following manner:

Rs. (In Lacs) Total purchases 1000

Purchase under L/C (say 60%) 600

Period under L/C (days) 90

Lead time under L/C (days)

(Only in case of Offsite) 30

L/C Requirement (600 x (90 + 30)/365) 197.26


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OTHER IMPORTANT POINTSa. No LC be opened in name of sister/allied/group

concern/frontal firms or companies floated in name of

employees of the promoters.b. No LC be opened to facilitate the accommodation bills

c. Limit should not be opened in isolation.

d. In what circumstances the limit can be sanctioned in isolation

e. LC sanctioned for WC should not be used for LC for capitalgoods.

f. LC for capital goods be backed by TL whereas LC for WC be

backed by working capital limits.

g. LC should be in consonance with the goods dealt with by the

buyer and seller.

h. Contract in respect of type, quantity, value, payment terms,

mode of transport be examined before opening LC as LC is to

be opened in accordance with the terms of contract--------


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OTHER IMPORTANT POINTSi. Frequent LC in name of one personKYC, CR, CIBIL

report, nature and type of business, constitution andrelation with LC opening firm be examined to avoid

kite flying/accommodation bills

j. Liquidity aspect at the time of payment be thoroughly

examined.

k. It may be at one time of building margin slowly toensure honour the LC on due date.

l. Value and evaluation of DP through stock statement

m. When L/C is to be treated as devolved?

n. Steps to be taken at the time of devolvement of LC Notice

Drawing power

Penal interest


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THANK YOU

R.K.GUPTA

www.rkguptafinance.in

[email protected]
http://www.rkguptafinance.in/mailto:[email protected]:[email protected]://www.rkguptafinance.in/

working capital nfb for contractor and seasonal industires

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