FINANCE IN BANKING

TKW'S INSITITUTE OF BANKING AND FINANCE TARUN VERMA

Working capital finance is defined as the capital of a
business that is used in its day-to-day trading operations,
calculated as the current assets minus the current
liabilities.
For many companies, this is wholly comprised
of TRADE DEBTORS (that is bills outstanding)
and TRADE CREDITORS (bills the company in
question has yet to pay).
TKW'S INSITITUTE OF BANKING AND FINANCE

Types Of W.C.F
FUND BASED
 Cash Credit
 Overdraft
 Bill Discounting
NON FUND BASED
 Letter of Credit
 Bank Guarantee

Features Of W.C.F
Needs that are Short Term: Working capital is being utilized in
acquiring current assets which will be converted to cash for a short
period only.
Permanency: Although it is just a kind of short term capital,
working capital is needed by a business forever and always.
Liquidity: It is very liquid for it can be converted as cash any time
without losing anything.
Less Risky: Investments in current assets such as working capital
comes with less risk for it is just for short term.
No Need for Special Accounting System: Since working capital is a
short term asset that will last for a year only, there will be no need
for adoption of a special accounting system.

Advantages Of W.C.F
 Helps in maintaining goodwill of the firm.
 You can use the money however you see fit.
 Helps the firm in getting regular supply if raw material.
 Helps the firm in getting payment.
 Helps the firm to face the crisis.
 Helps the firm in getting loan easily from the banks.
 You are prepared to handle any financial difficulties that
may arise.

Disadvantages Of W.C.F
 Leads to unnecessary purchasing.
 Potential impacts to your credit rating.
 Higher interest rates.
 Repayment.

Bill Discounting
Bill discounting is a form of short-term borrowing
often used to improve a company's working capital and
cash flow position.
Bill discounting allows a business to draw money
against its sales invoices before the customer has
actually paid.

Features Of Bill Discounting
The finance company will charge a monthly fee for the
service, and interest on the amount borrowed against
sales invoices.
As customers pay their invoices, and new sales invoices
are raised.
Improved cash flow by releasing up to 85% of funds
against the value of outstanding invoices.
Short term sources of finance.

Advantages Of B.D
By receiving cash as soon as a sales invoice is raised, the business
will find that its cash flow and working capital position is
improved.
The business will only pay interest on the funds that it borrows.
Invoice financing can be arranged confidentially, so that customers
and suppliers are unaware that the business is borrowing against
sales invoices before payment is received.
The greatest security for a banker is that a B/E is a negotiable
instrument bearing signatures of two parties considered good for
the amount of bill; so he can enforce his claim.

Disadvantages Of B.D
 Invoice discounting is an expensive form of
financing compared to an overdraft or bank loan.
 The business has fewer assets available to use as
collateral for other forms of lending – this may make
taking out other loans more expensive or difficult.
 Exiting the agreement can be difficult.
 Refuse to give bill discounting.

Bank Guarantee
A guarantee from a lending institution ensuring that the
liabilities of a debtor will be met. In other words, if the
debtor fails to settle a debt, the bank will cover it.
A Bank Guarantee is where one Bank (the Issuing Bank)
issues an indemnity to another Bank (the Beneficiary
Bank) or directly to a Beneficiary, on behalf of its
account holder.

Features Of Bank Guarantee
 Bank Guarantees are written specifically for a purpose where an
account holder will instruct his bank to issue a guarantee to
another bank on behalf of their account holder.
 The bank will hold adequate assets of the account holder as
security for the Bank Guarantee.
 Bank Guarantees cannot be transferred to third parties unknown
to the banks.
 They cannot be bought or sold.
 They are issued for a specific time period.
 Upon Expiry, Bank Guarantees are terminated, they are not
traded.
 A Bank Guarantee has no end value and does not accumulate any
investment element or maturity value.

Types Of Bank Guarantee
There are effectively two main types of Bank Guarantees
(1) A Direct Guarantee where the account holder instructs
his bank to issue a Guarantee directly in favour of the
Beneficiary.
(2) An Indirect Guarantee where a second bank is
requested to issue a Guarantee in return for a counter-
Guarantee. In this case the Issuing Bank will
indemnify losses made by this second bank in the
event of claim against the Guarantee.

 Tender Guarantee
 Performance Guarantee
 Advance Payment Guarantee
 Retention Money Guarantee
 Payment Guarantee
 Facility Guarantee
 Maintenance Guarantee
 Customs Guarantee
 Shipping Guarantee
The most purposes for the uses of Bank Guarantees
are:

Letter Of Credit
A letter of credit is a document issued by a financial institution, or a
similar party, assuring payment to a seller of goods and/or services
provided certain documents have been presented to the bank.
These are documents that prove that the seller has performed the duties
under an underlying contract (e.g., sale of goods contract) and the
goods (or services) have been supplied as agreed. In return for these
documents, the beneficiary receives payment from the financial
institution that issued the letter of credit.
Letters of credit are used primarily in international trade for
transactions between a supplier in one country and a customer in
another.

Features Of Letter Of Credit
 Parties to a Letter of Credit are as follows: Issuing bank,
Applicant and Beneficiary.
 Gives Exporters guaranteed payment without affecting
credit limits.
 Gives Importers more control over the terms of the trade
- especially valuable with new suppliers.
 Enhances competitive position.
May enable Importers to negotiate longer credit periods
to the Exporter.

Types Of Letter Of Credit
Import/export Letter of Credit
Revocable Letter of Credit
Irrevocable LC
Confirmed LC
Unconfirmed LC
Transferrable LC
Untransferrable LC
Deferred / Usance LC
At Sight LC
Red Clause LC
Back to Back LC

Advantages Of L.O.C
 Upon presentation of the specified documents the
Buyer/Exporter is guaranteed payment.
 Importer/Buyer will receive timely delivery or the
goods because the L/C terms dictate latest acceptable
shipment date.
 Helps reduce the risk of non-performance of the
Exporter/Seller. If the Exporter/Seller doesn't ship the
goods they don't get paid.

Disadvantages Of L.O.C
 Unless currency-hedging strategies are utilized, the actual
cost of the goods can increase.
 Costs involved with issuing, negotiating, and other fees
can make L/C expensive.
 More expensive than other methods of payment
Receiving, negotiating, and other fees associated with
L/C can be expensive.
 The paperwork can be very time consuming.

Cash Credit Limit
Cash credit limit is the maximum amount sanctioned by a bank for
your short term working capital requirement. It differs from short
term loan.
A short term loan attracts interest for the entire period for which loan
is sanctioned and the principal amount is credited to your current
account. In case of CC limit the amount is not credited to your
current account. You can withdraw that amount any time and interest
will be charged only for that period for which you have used that
amount. cc limit is given only to highly credible customers of a bank.
This Loan given to meet working capital requirements of the
company on the basis on company turnover, company financials,
value of stock having by company. This loan given against collateral
security - Residence, Industrial or Commercial Property.

Features Of Cash Credit limit
 The loans are generally approved within 15 working
days of submission of complete documentation.
 The interest charged only on the utilized amount. It
will charged basics on the end of the day (closing)
balance.
 No minimum Monthly repayment required
 This loan can be used business purpose only.

FINANCE IN BANKING

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