Remarkable progress in various Industries like Manufacturing, Food processing, Pharmaceuticals, Textile & Garments, Retail, Agro, IT & Service sector.
MSMED Act 2006, which came into force w.e.f. 02/10/2006, defines the Micro, Small, and Medium Enterprises. The following chart indicates the threshold investment levels for both Manufacturing sector (INVESTMENT IN PLANT & MACHINERY) and Services sector (INVESTMENT IN EQUIPMENT)
“An undertaking by an issuing bank, on behalf of an importer (the applicant), that payment will be made for goods and services supplied by an exporter (the beneficiary), provided that the exporter complies with all terms and conditions established by the credit”.
DC CONFIRMATION– When a bank, other than the Issuing Bank, adds its undertaking to pay under the DC is known as DC Confirmation. The political and transfer risks are mitigated from exporter’s viewpoint.
DC NEGOTIATION/DISCOUNTING– When the exporter requires funds before due date then he can discount or negotiate the LCs with the negotiating bank.
The first condition to discount an LC is that it should be a Usance LC.
The bank earns interest and charges, thus earns from LC discounting.
DOCUMENTARY COLLECTIONS Payment Collection against Bills also known Documentary Collection. Bank only acts as a medium for the transfer of documents but does not make any payment guarantee Collection of documents is subjected to the Uniform Rules for Collections published by the International Chamber of Commerce (ICC)
TYPES OF DOCUMENTARY COLLECTIONS Documents against Payment (D/P) Documents against acceptance (D/A)
The Exporter allows credit to Importer, the period of credit is referred to as Usance
Under D/A terms the importer can inspect the documents and, if he is satisfied, accept the bill for payment on the due date, take the documents and clear the goods; the exporter loses control of them.
Buyers’ credit refers to loans for payment of imports into India.
The offshore branch credits the nostro of the bank in India and the Indian bank uses the funds and makes the payment to the exporter’s bank as an import bill payment on due date.
The importer reflects the buyers credit as a loan in the balance sheet.
All documents have to be routed through banking channels i.e. no direct dispatch of documents
BENEFITS OF BUYER’S CREDIT TO THE IMPORTER
The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per cash flows.
The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
The importer can use this financing for any form of trade viz. Open account, collections or LCs.
Interest Cost: This is charged by funding bank as a financing cost (LIBOR Based).
Arrangement fees: This is charged by HSBC India for arranging the funds for the transaction.
Withholding Tax (WHT): The customer has to pay WHT on the interest amount. (The WHT is not applicable where HSBC India arranges for buyers credit from offshore offices of Indian Banks or Banks incorporated locally in Mauritius).
Avalisation is the co acceptance of usance export non LC bills by the importer’s bank
Drawee bank is not just giving an acceptance on behalf of the customer, but is co accepting the bills which mean even in the event of the importer not paying, the drawee bank will pay HSBC.
HSBC will discount up to 85-90% of the bill value upon receiving the confirmation from the drawee’s bank.
Forfeiting means to surrender ones right on something to someone else.
It refers to purchasing of an exporter’s receivables at a discount price by paying cash
Commercial contract between exporter & importer
Exporter approaches the forfeiter to ascertain the terms of forfeiting
Forfeiter estimates risk involved in it and then quotes the discount rate.
LCBD (Letter of Credit Bill Discounting) is the most preferred trade service i.e. availed by SME clients from HSBC.
SME clients are aware about Documentary Credits, Buyer’s Credit & Import payments while its other trade products like Forfeiting, Avalisation are not known to its SME clients.
Public Sector Banks State Bank of India, Punjab National Bank; and Private Sector Banks ICICI, HDFC are popular among SMEs who are also availing services from these banks along with HSBC.
The most important factor:
“Fee & charges of a bank” followed by “Documentation Process” & T.A.T. (Turn Around Time)
Least important factor
“Number of branches in the country” but when it comes to select HSBC, “Brand name” plays an important role followed by “References” & “Customer Relations”.
SME clients of HSBC are satisfied with the services of HSBC but still some of them want to shift to some other bank and those who want to shift will mostly prefer a Public Sector Bank but no foreign bank