chapter 11- overdraft faascility

7/23/2019 Chapter 11- Overdraft Faascility

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• OVERDRAFT FACILITY

• It is a short term financing option for exporter which is granted by the bankunder a current account where the customer is allowed to withdraw his account up to an amountagreed upon.

• It is available to the exporters to finance the purchase of raw materials,manufacturing or other overhead expenses.

• The facility is granted on a clean basis guaranteed by third parties or secured

against collateral.• Interest is charged on the amount overdrawn and for the period of its use.

However, a commitment fee is levied on any unutilised portion of the facility approved. Theinterest is calculated on an average daily balance and debited and payable on a monthly basis.The charge varies based on the types of borrowers, the kind of business, security offered andthe directives from the Central bank as well as the market trend.

• 2 types of overdraft facility offered by banks temporary !"# and permanent!"#

• In the case where the goods take longer than expected time to reach to the

importer. It will cause delayed payment and exporters who need cash urgently may seek short$term loan.

• !"# is a facility where the bank allows its banking customer to withdraw more

than his"her available balance in the bank account.• %anks charge fees for taking up !"# facility. The excessive amount withdrawn

is considered as a loan amount and interest rate is charged accordingly.

Term Loan• It is an advanced granted to a customer for a fixed period with a pre$

determined repayment scheduled. The loan is normally given for import of capital goods for thebusiness or to finance or undertake specific pro&ects.

• It is disbursed either in one lump sum or progressively. ' progressive

disbursement is often made contingent upon the completion of certain stage of the pro&ectundertaken by the customer.

• The interest and principal are calculated either on monthly, (uarterly, semi$

annually or yearly basis.• The nature of repayment is dependent on the purpose for which the loan is

given, the repayment ability of the borrower and the repayment period.• )ometimes, the term loan is repaid in one lump sum upon its maturity. It is

normally given to a borrower who expects to receive a lump sum payment in the future.

Bill Discounting

• *efers to a form of financing when exporters are getting loans from the bank.

• To obtain this facility, the exporters are re(uired to send in all the exportdocuments to the bank and the bank will decide whether to purchase the documents uponinspection.



• %ank will purchase the export documents from exporter and will collect the

payment from importer instead of the exporter.• It+i i s important that bank to hold the titles of the goods, which means to

possess full control of the goods it guarantees the payment from importer.• To possess the full control over the goods, bank will have to get all the original

bill of ladings %!-s from the exporter.• If not all %!-s are submitted, bank is running the risk of non$payment from the

importer as bank has no full control on the goods.• In the case of the default at the importer+s side, the bank could still sell the

goods off for cash if banks take the full control of the goods.• /rior granting this facility, bank will re(uire the exporter to provide a list of pre$

approved drawees importers, for the following reasons0• %ank needs to do a background check on the creditworthiness of the drawees

on the ability to make payments.• 1ood track records eg0 financial reports of drawees provide a level of security

to the bank in terms of payment.

• Hence, exporters will need to make sure they are dealing with importers withgood credit records before re(uiring this facility from the bank.

Process:

• 'fter shipment of goods, the exporter will present the usance %! and other

relevant documents to his bank for acceptance by the importer.• 3hen the importer accepts the bill, it becomes negotiable and the exporter can

obtain cash by discounting the bill with his bank instead of waiting till the maturity date.• The bank will pay the exporter the value of the %! after deducting the

discount charges.• 4pon maturity, the bank will present the bill to the importer for payment.

• However, bank is having the right of recourse to the exporter in the event of

default by the importer.

Advances against Documentary Collection

• exporter to obtain advances from banks against teco!!ection doc"ments especia!!# bi!! of excange $%OE&'

• Te co!!ection doc"ments are "sed as a form of sec"rit# tog"arantee f"t"re pa#ment to te !ending bank'

• (en te exporter for)arded te %OE to bank* bank )i!!co!!ect te proceeds from te importers on bea!f of te exporter'

•

%ank gives on!# a certain + of te %OE amo"nt' Te portionof borro)ings is based on o) bank satisf# )it te ,nancia! stat"s of teimporter - co"ntr#'

Banks’ Negotiation• xporter will sign the negotiation contract with the bank which gives bank the

authority to deal with the documents.



• %ank p"rcases doc"ments and %OE from exporter and toco!!ect te proceeds from importer in its o)n name'

• %ank gives f"!! advances based on .//+ of te %OE va!"e'• If importer fai!s to pa#* bank as te reco"rse to debit te

importer0s acco"nt )it an# "npaid items'

Bankers’ Acceptance (BA)

It is dra)n )en te exporter dra)s a "sance %OE of te importer'• It is a time bill drawn by exporter to bank as a promise to pay in a future date.• 4sually, exporter draws the banker+s acceptance to borrow funds from bank in

which the lending is based on the financial and credit status.• Te exporter can dra) a banker0s acceptance on is o)n favo"r to

te bank* )ere e is te dra)er and pa#ee'• The acceptance of %' is an undertaking by the accepting bank to honour

payment on maturity date. !nce it is accepted, the %' becomes negotiable and may betransferred by endorsement.

Process: • Te exporter ma# arrange te credit faci!ities )it is bank'• 'fter shipment of the goods, the exporter will present the usance %! to the

bank together with other relevant documents.• The exporter draws %' on the bank for an agreed portion of the face value of

the %!.• If the bank satisfied, bank will accept the %' $ %' complies with the terms and

conditions of the credit .• 'fter acceptance, the %' is discounted and paid to the exporter.

• The original %! and other relevant documents then are sent to the importer+sbank for collection of payment from the importer.

• However, bank is having the right of recourse to the exporter in the event of default by the importer.

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Te bank $factor& )i!! p"rcase te exporter0s receivab!es ata disco"nt or debts and administer te co!!ection and te debtor0s !edgerfor te exporter'

• Factoring is idea! for companies tat are invo!ves ins"bstantia! export b"sinesses'

• It is done on a non1reco"rse basis* )ereb# te factorass"mes a!! te credit and po!itica! risks'

• Te advance cas is "p to 5/+ of te receivab!es va!"e'• A =at processing fee is carged b# te factor'• Te c!ients of te exporter )i!! be noti,ed or te

arrangement and are re>"ested to pa# teir debts direct!# to te factor'• Once te exporter as so!d is acco"nt receivab!es* e )i!!

not be )orried abo"t maintaining and monitoring te pa#ment from teimporters' %esides* te exporter gets immediate pa#ment and e is freefrom risk pertaining to co"ntries'

oraiting

• It is granted by bank to the exporters who are re(uired to sell on deferred

credit terms with payment spread out over a period of time.

•

The term‘forfait’

comes from a 5rench word meaning 6to surrender a right7.This facility is widely used in urope especially in )wit8erland and 1ermany.

• It norma!!# invo!ves te sa!e of capita! goods to overseas andb"#ers prefer to pa# in deferred pa#ment in ? monts "p to 5 #ears' Tepa#ment is tro"g te iss"ance of promissor# notes or b# accepting aseries of %OE'

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• In tis arrangement* te importer )i!! obtain a g"aranteefrom is bank' Te g"arantee )i!! be for)arded to te forfeiter )o isanoter bank in te exporter0s co"ntr#'

• Te forfeiter "s"a!!# a rep"tab!e ,nancia! instit"tion )i!! iss"eits g"arantee of pa#ment'

• Forfeiting a!!o)s te exporter to se!! at disco"nt te debtob!igation $promissor# notes b# te importer& )ito"t reco"rse' If teimporter defa"!ts* te importer bank and te forfeiter are ob!iged to makepa#ment'

• 3orma!!# te transactions invo!ve "nder tis arrangement is!arger and te disco"nt rate is a!so iger tan te factoring'

• Te p"rcase b# te bank is )ito"t reco"rse to te exporter@ te bank ass"mes comp!ete responsibi!it# in te case of defa"!t pa#mentb# te importer'

chapter 11- overdraft faascility

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