Documente Academic
Documente Profesional
Documente Cultură
BRIDGE FINANCE:
Commercial banks often grant bridge loans to business enterprises
to temporarily bridge the financial gap between granting of loans by
other banks and financial institutions and actual disbursement by
them
Bridge loans are sanctioned generally by the commercial banks to
meet the time gap between the closure of a public issue of equity
or other shares by a company and actual availability of funds after
completing all the formalities as required by regulatory authorities
Specially in project implementation, availment of bridge loans
becomes essential in order to avoid cost and project overrun due to
delay in getting the finance
After the funds are available to the business enterprises from the
expected source, the bridge loan is repaid
Banks have to exercise caution in granting bridge loans unless a
proper tie up with the incoming funds is made, the repayment may
cause problems
Bridge Finance, LC & BG
BANK GUARANTEES:
The non-fund based business is very profitable proposition for the
banks as it gives substantial revenue without deployment of funds
The non-fund based facilities are 100% substitute for fund-based
facilities
The contingent liability becomes a current liability if it
crystalized/paid on due dates
These are 100% risk weighted assets for which bank has to
maintain required CAR
Hence, it is important for a proper appraisal of credit proposal
It overcomes shortage of funds, increases liquidity, easy for
monitoring, facilitates international trade and achieve optimum
utilization of funds.
Bridge Finance, LC & BG
BANK GUARANTEES (Contd.):
Section 126 of Indian Contract Act defines guarantee as contract to
perform the promise or discharge liability of a third person in case
of default
There are 3 parties to the guarantee contract
i. Applicant/Principal debtor who needs the facility of issue of BG
ii. Beneficiary/Creditor
iii. Bank or Guarantor
Guarantee is a secondary contract, the primary contract being
between the applicant and the beneficiary
Business concerns who wish to participate in tenders/auctions are
required to submit BGs for a minimum stipulated amount. In turn
key projects/Civil projects which takes considerable time for
completion, the principal provides mobilization advance and as a
security against the fund provided, the contractor is often required
to submit bank guarantee
Bridge Finance, LC & BG
TYPES OF GUARANTEES:
BGs which are issued are broadly classified as
i. Performance guarantee
ii. Financial guarantee
iii. Deferred payment guarantee
The Performance Guarantees in respect of performance of a
contract or obligation. In the event of non-performance, short-
performance of the obligation, the bank (issuer) will be called upon
to make good the monetary loss arising out of non-fulfillment of
guarantee obligation Eg. Guarantee issued in lieu of custom duty
payment.
In certain contracts entered in to by the customers with
government departments/large companies, there is a provision for
payment of certain amounts of money against the BG to enable the
customer to carry out the performance of the contract. In case of
customer’s failure to perform, the guaranteed amount will be paid
by the bank for non-fulfillment. In this case, payment of guaranteed
amount for non-fulfillment is called Financial Guarantee
Bridge Finance, LC & BG
TYPES OF GUARANTEES (Contd.):
Deferred Payment Guarantees arise in the case of purchase
of machinery or capital equipment. The manufacturer
supplies machinery against cash payment of 10% and gets the
bill accepted for the balance amount by the purchasers bank
or alternatively gets the guarantee issued for the balance
amount.
The purchaser requests his banker for issue of guarantee in
favor of the seller’s bank incorporating the condition of
deferred payment sale and undertaking to accept usence
drafts by the seller on his banker and for payment thereof on
respective due dates together with future interest if any
The total amount of guarantee will be the principal amount
agreed to be paid in deferred installments including interests
BANK GUARANTAEE
THREE SPECIFICS
The guarantee is issued by the Bank in lieu of money to the beneficiary. Hence , this is a
Financial guarantee. Before issuing a guarantee, a draft of guarantee specimen
required by the beneficiary to be perused to ensure 1) The guarantee does not contain
any onerous clauses detrimental to the interest of the bank, 2) The period and the
amount of the guarantee should be specific, 3) The purpose should be genuine
commercial transaction and the applicant should be engaged in the relevant activity. The
documents to be taken are 1) Financial statements of the applicant, 2) Request letter
supported by the format of the guarantee to be issued, 3) Margin and security 4)
Counter guarantee by the applicant.
Bridge Finance, LC & BG
LETTER OF CREDIT:
Letter of Credit is a letter/document issued by a bank at the instance of
its customer favoring supplier of goods where by the issuing bank
undertake to make payment on submission of certain documents as
specified in the letter.
LCs issued by banks facilitate trade between two parties, both at
domestic and international level
The issuing bank undertakes to pay the amount of shipment to seller
provided the latter has submitted the shipping and other documents of
title as stipulated in the LC through the bank of the seller
When an LC is issued on account of international trade, the buyer is
known as importer of goods, the seller is called exporter of goods
Bridge Finance, LC & BG
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY
CREDIT (UCPDC):
Commercial banks around the globe issues LCs and the modalities
for issuing LCs are subject to provisions of UCPDC framed by
International Chamber of Commerce.
Provisions of UCPDC are common in all countries and all
commercial banks handle LC business as per the guidelines of
UCPDC
It is important to bear in mind that under LC, commercial banks
deal with documents and not the underlying goods. If the
documents are strictly in compliance with the terms of LC, the
issuing bank has to make payment to the seller’s bank irrespective
of the condition of the goods.
Lcs are widely used in international trade. Hence standardization of
terms used in LCs, the ICC, Paris has codified the practices and
published them as a set of rules called UCP 600. India has ratified
these rules.
Bridge Finance, LC & BG
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDIT
(UCPDC):
SOME IMPORTANT RULES OF UCP 600
If an LC is stated to be revocable, it is deemed to be irrevocable.
Unless an LC is stated as transferable, it is not transferable.
A bank advising an LC is supposed to have verified the authenticity
of the Lc. If the advising bank is not able to verify the authenticity,
they must state it clearly. Or else they will be responsible if the LC
turns out to be a fraudulent one.
If the advising bank is not able to recover its charges from the
beneficiary, the opening bank is responsible to pay it.
Unless the LC specifies that only ‘original documents’ are
acceptable, carbon copies or computer printouts are acceptable.
Unless prohibited in the LC, documents which are dated before the
date of the LC, can be accepted.
Bridge Finance, LC & BG
UNIFORM CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDIT (UCPDC):
SOME IMPORTANT RULES OF UCP 600
9. Export-Import / Power Sanction Letter / Pollution Control Board Certificate / FDA Clearance etc.,
10. Memorandum & Articles of association for company’s, partnership deed for partnership firm
11. Certification of Incorporation for company’s and Registration of firm for partnership firm.
12. Shareholding Pattern in case of company and profit/loss sharing ratio in case of partnership firm
13. Latest Search Report in case of company.
14. Lease Agreement/ Sale Agreement copy of shop / factory premises.
15. Sales Tax return of the firm / company
16. Month wise Sales/Purchases Debtors/Creditors during the current financial year.
17. List of Associates/Group concerns and their banking arrangements with name of the proprietor/ partners /
directors.
18. Proposed Security particulars, list of machineries, details of collateral securities.
19. Title Clearance Report on the proposed properties to be mortgaged from Bank’s Approved Advocate (to be
obtained after concurrence from us).