Class 8

Class 8

Corporate Banking = Whole-Sale Banking = Company Finance = Suits the demand of a specific customer which is corporate here

Operating cycle for a manufacturing company is more than the service company

Working Capital – Fund to finance Current asset requirement

Trade Finance –

· Domestic – Only affected by domestic interest rates

· Export Oriented – Exports are supported by reduced interest rates for lending

Bill discounting – Foreign bank giving loan to their country’s company

Buyer’s Credit – Domestic bank giving loan to foreign company

High Contingent liability attracts further Capital

Fund Based Services - Working Capital Finance

Line of Credit

1. OD (Over-Draft)

a. Can / Can’t be secured

b. Types

i. Clean OD

1. Except signed promissory note of customer

2. Example – To pay advance tax

ii. Collateralized OD

2. Cash Credit

a. Fully secured by merchandize. Stocks / goods, WIP, finished goods as security

b. Inventory can be drawn after payment to the bank

3. Bill Finance

a. Sale on credit becomes receivable. Bank gives loans on such bills which act as collaterals

b. Bill of Exchange – Unconditional order, made by drawer to pay a certain sum of money to payee in advance

Diversion

· Short term current liabilities is used to build long term asset

· Amount given for long term assets used for Working Capital requirement

Bill of exchange (BOE) – Self liquidating investment

· Demand BOE – Payable on demand

ü Clean Demand BOE. Example - Cheque

ü Documentary Demand BOE. Example – As and when amount is paid, shipping documents are handed over.

· Usance BOE – Payment takes place after sometime

ü Clean BOE – Example – Hundi (Merchant lend among themselves without documents)

ü Documentary BOE – Example

§ Delivery of documents given without payment (high credit worthiness of buyer)

§ Delivery against payment

Bill Purchase – For Demand bill

Bill Discounted – For usance bill

Other Services offered by Bank

Non Fund based facility - It is one where there is no direct immediate involvement of fund (unlike loan). Example – Letter of credit, bank guarantee.

Payment & settlement system act – RTGS can take place across border; administered by central banks. Debit and credit of bank accounts by RBI on real time basis; no refund is allowed. Must have a minimum quantum to be transferred

Example – Purchase center immediately receives money from different shops across country.

CMS (Cash Management Services) – Example – Salary Credit (where cash is required)

Channel Financing / Supplier or vendor financing – Based on creditworthiness of the firm, banks finances the vendors of the business firm. Example - P&G

Money Market Desk – Credit balance in over-draft account is passed on to buy T-bills (by banks) for 3 days to earn interest for corporate. Also, banks float commercial papers of corporate and in turn, get money for them

Employee Trust – ESOPS given to trust, who then pass on to eligible employees.

Cash Surplus Corporate – Excess cash with corporate (in OD account) are deposited in overnight deposit

Tax Collection – Banks collects tax on behalf of government