Free assignment on Corporate Banking that can be used for submitting assignments to SMUDE or to any other MBA offering course university.
Ques1:Corporate Banking represents the wide range of banking and financial services provided to domestic and international operations of large local corporates and local operations of multinationals corporations. Write a detailed note on evolution of corporate banking.
Ans1: Corporate Banking represents the wide range of banking and financial services provided to domestic and international operations of large local corporates and local operations of multinationals corporations. Services include access to commercial banking products , including working capital facilities such as domestic and international trade operations and funding , channel financing and overdrafts , as well as domestic and international payments. INR term loans (including external commercial borrowings in foreign currency) , letters of guarantee.
Corporate banking refers to doing banking business with industrial and business entities-mostly corporates and business entities , multinationals , domestic business houses and prime public sector companies. Every bank promises to provide superior product delivery , industry benchmark levels and strong customer orientation.
EVOLUTION OF CORPORATE BANKING:
Traditionally , banks focused on retail segments while wholesale banks were in separate existence. However due to competitive pressures the role that of banks has undergone a vast change. While they continue to be involved in commercial loans , corporate banking entities are no longer just credit providers , but a fee based service intermediately. All commercial banks now have their own corporate banking segments for all categories of customers. However , there was a huge challenge to be faced by each bank. The challenge being large product bounqets being brought about by each bank. Further , the cost of the conflicting demands and competitive pressures has created the need to find new sources of revenue. Technology aided services , customer-centricity and hard core relationship management have become the prime differentiators. In this scenario , corporate bankers had two basic chices-either ensure their current position at peak efficiency so as to effectively meet its customers needs , or develop alternative strategies outside their current operations environment. Corporate banking has evolved through time and some significanbt changes.
Corporate customers are now altering the nature of the relationship , which was previously dictated by banks , selecting business and imposing charges at will. Most corporates are looking at reducing their dependence on banks and assuming greater control over their financies. Corporates have now begun to set up their own finance departments as ‘in-house banks’ to provide cash pooling services. normally supplied by external banks. Many set up ‘payment centers’ or ‘shared service centers’ to rationalise the payment settlement process , enabling them to profit from cash reserves to an unprecedented extent.
All of the above changes have incurred against the backdrop of corporate world’s relentless balance-sheet leveraging , continued deregulation of key industries and the ongoing globalisation of investment resources , trading partners and operations.
Ques2. The supply bills are not bills of exchange and do not enjoy the status of being a negotiable instrument. What are supply bills? What is the procedure to be followed by a bank in making advances against such bills?
Ans2:
Bills drawn on government or semi-government department or bodies for the supply of goods and other materials or for the performance of certain contracts as per the accepted tenders are referred to as ‘supply bills’. A party or contactor whose tender is acepted by the concerned authority of the government may draw the bill on supply of goods or performance of contract , which may be partial or whole as permitted under the terms of the tender. Once the goodssupplied are found to be in conformance with the tender/contract , or the contractwork , in part or whole , is found to be completed in accordance with the terms of thecontract , an acceptance/ inspection note is issued by the authorised representativeof the concerned entity.
Procedure to be followed:
Supplier sends the goods and then produces documents like railway receipt or billof lading as evidence of dispatch of goods. •
Goods are inspected by an appropriate authority and an acceptance/ inspectionnote is issued. In case of work contracts , an engineer’s certificate with regard to thework done is issued to the supplier.
Supplier/ contractor prepares bill for payment. The inspection/ acceptance note orthe engineer’s certificate has to accompany the bill.
The bill along with such documents as above is submitted to the concerned entitythrough a banker. Supplier/ contractor requests the banker for an advance againstsuch bills.
In case of railway receipts , the receipt if directly sent to the department concerned , but the number and other particulars of the receipt are entered in the supply bill.
The assignment of the supply bill is made on the bill itself. The bill is endorsed forpayment to the bank and is receipted on a revenue stamp.
It is to be noted that supply bills are not bills of exchange and do not enjoy the statusof being a negotiable instrument. They are in the nature of debts which can beassigned in favour of the banker for payment , after affixing a revenue stamp forhaving received the amount. The banker should also obtain a letter from the supplieror contractor requesting the appropriate department to make the payment directly tothe banker. Advances made against supply bills are considered to be clean advances as thebank holds no charge on any security. Bank may also not get full payment , because of the possibility ofcounter claim or right of set-off by the government agency , as the charge is only byway of an assignment. Dueto this reason , banks , to safeguard their interest , have to ensure that such advancesare made to very integral parties only.
Ques3. Assume yourself as a banker and discuss the measures to be taken by the bank to monitor working capital limits sanctioned?
Answer :
Working capital (abbreviated WC) is a financial metric which represents operating liquidity available to a business , organization or other entity , including governmental entity. Along with fixed assets such as plant and equipment , working capital is considered a part of operating capital. Net working capital is calculated as current assets minus current liabilities. Banks , as a matter of policy , and on the basis of RBI guidelines , assess the working capital requirements of units , by following this method where fund based working capital limits upto Rs. 4 crore is to be sanctioned. The following are RBI’s guidelines in this regard:
a) Twenty percent of their projected annual gross sales turnover may be considered as minimum working capital finance by banks.
b) In order to ensure that a minimum margin supports the working capital needs of a borrower , a five percent contribution is given by the promoters.
c) Guideline for the turnover method is framed , assuming an average operating cycle of three months. If the cycle is more than three months , the borrower should bring in a proportionately higher stake in relation to his requirement of the bank finance.
d) Drawing power is calculated through stock statements. Unpaid stocks are not to be financed , as it would result in double financing.
The critical issue in the turnover method is the determination of the projected annual gross sales or turnover.
Permissible Bank Finance
As mentioned earlier , banks do not finance total working capital requirements of a business unit. The owners of the unit have to necessarily contribute a part of the working capital from their own resources which is known as the margin. The amount of limit to be sanctioned is arrived at by deducting the adequate margin from each component of the working capital. Margins vary depending on the nature of the component and type of goods. Margins on raw materials are lower than on work-in-process and finished goods. Bankers normally stipulate a margin of 25-50% of the goods pledged/hypothecated.
Working capital requirements are basically met by three sources i. e. trade credit , advance payments received against orders and liquid surplus available as per the balance sheet (i. e. net working capita).
Ques4. As a trader in order to be competitive and successful , how can you address some risks that are peculiar to foreign trade like commercial risks and political risks?
Answer.
Two major risks in foreign trade are: (a) risk of loss or damage to the goods , and (b) risk of non-realisation of export proceeds. The former is a risk which is covered by general insurers (under marine insurance). The latter risk is the financial risk or credit risk which is not covered by general insurance. In India , the Exports Risks Insurance Corporation (ERIC) was set up by the Government of India to undertake this function. Consequently , ERIC was transformed into Export Credit and Guarantee Corporation Ltd. (ECGC).
ECGC is a company wholly owned by the Government of India. It functions under the administrative control of the Ministry of Commerce and is managed by a Board of Directors representing Government , banking , insurance , trade , industry etc.
Standard Policies
Standard policies issued by ECGC are meant to provide cover for shipments on short-term credit on whole turnover basis. The risks covered may be broadly categorised into (a) commercial risks and (b) political risks.
Commercial risks covered include insolvency of buyer , buyers protracted default to pay for goods accepted by him and buyers failure to accept goods subject to certain conditions. Political risks covered include imposition of restrictions on remittances by the government in the buyers country or any government action which may block or delay payment of the exporter; war , revolution or civil disturbances in the buyers country; new import licensing restrictions or cancellation of a valid import licence in the buyers country; cancellation of export licence or imposition of new export licensing restrictions in India; payment of additional handling , transport or insurance charges occasioned by interruption or diversion of voyage which cannot be recovered from the buyer; and any other cause of loss occurring outside India , not normally insured by commercial insurers , and beyond the control of the exporter and/or the buyer.
The policy issued may cover risks from the date of shipment or from the date of contract. In either case , the policy may cover both political and commercial risks (comprehensive policy) or it may cover only political risks. The types of policies are:
Shipment (comprehensive risks) policy
Shipment (political risks) policy
Contract (comprehensive risks) policy
Contract (political risks) policy
Ques5. The arrangement in which short term domestic receivables on sale of goods or services are sold to an agency (known as the factor) is called Factoring. Write a detailed note on factoring and its benefits.
Answer:
The arrangement in which short term domestic receivables on sale of goods or services are sold to an agency (known as the factor) is called Factoring. The financial intermediary such as a bank or a financial institution is the Factor. The factor performs the functions such as purchase of receivables , maintaining the sales or receivables ledgers , submitting sales account to the creditors , collection of debt on due dates , after collection , to return the reserve money to the seller and provide consultancy services to the customer in respect of marketing , finance and production.
It is a structured working capital finance solution that includes finance against domestic or export receivables , collection of receivables on due date , credit protection and credit advisory services. It is an internationally accepted financing solution that allows the customer to convert his accounts receivables to cash , thereby releasing the cash generation potential of the business.
In simple words , it is the conversion of credit sales into cash. In factoring , a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80% (rarely up to 90%) of the amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring. We will see different types of factoring in this article. The account receivable in factoring can either be for a product or service. Examples are factoring against goods purchased , factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly) , factoring against medical insurance etc.
Benefits of Factoring
1. Helps raise cash instantly - Factoring enables a customer/business to raise instant cash against the invoices. Banks can pay up to 90% of the value of eligible invoices within a day of submission of invoice and the delivery documents.
2. No Collateral Security required -No Collateral Security needed to avail finance. Further , customer has to pay interest only on the actual funds utilization in the account.
3. Enables focussing on core business -Collection of receivables is also managed by the bank enabling customer to concentrate on his core business activities.
Q6. What role does RBI play in ensuring that the guidelines are adhered to by banks as per RBI Act 1934 and Banking Regulation Act 1949?
Answer:
RBI controls the activities of all commercial banks , NBFCs and other financial institutions by virtue of powers vested in it as per the RBI Act 1934. Further , the Banking Regulation Act , 1949 , has awarded certain powers to RBI as the central bank , to control and supervise the activities of commercial banks in India. Together , these laws provide the legal framework for the prudential regulation and supervision of all banks , NBFCs and financial institutions by RBI.
RBIs department of supervision carries on-site and off-site monitoring tasks periodically to ensure that all guidelines are complied with. While the on-site monitoring focuses on statutorily mandated areas of solvency , liquidity and operational health of the banks , the off-site monitoring task focuses on the financial health of the banks between on-site inspections , identifying banks which show financial deterioration that could be a source of supervisory concern. This helps in taking timely remedial action as required.
RBI also works at strengthening the corporate governance and internal controls in the banking system. This is done through various mechanisms such as concurrent audit , constitution of audit committee independent of the board , appointment of RBI nominees on the boards of banks , creation of the post of a compliance officer etc.
Following are some areas of supervision and control exercised by RBI by virtue of powers vested in it by the laws as stated above:
No commercial bank can commence business without obtaining licence from it.
It has the discretion to withdraw given licence if it finds that the banks affairs are not managed as desired.
Exercises control over banks lending portfolios. This will be dealt with in further detail in forthcoming section.
Can prevent commercial banks from entering into particular types of transactions.
Power of Selective Credit Control allows it to determine the credit policy of banks in general or even of a single bank in particular.
It can issue directions with regard to purpose of advances , margins , rate of interest and other terms of advances.
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