Institutional: Refinancing

Institutional Refinancing

- PRIYANKA CHATTA

Why Refinancing 

Total amount with banks = 100%. Reserves (SLR & CRR) = - 33.5%



A bank can lend



= 66.5%

But, this amount is not sufficient.

Institutions

SIDBI

NABARD

NHB

IDBI

EXIM

Functions of banks: 



Acceptance of deposits . Lending.

Sectors          

Venture capital financing. Agricultural financing. Priority sector financing . Project financing. Debt financing. House financing. Working capital financing. Seed financing. Infrastructure financing. Export-import finance.

FINANCING Overdraft.  Demand loan.  Cash credit advances.  Inland letter of credit.  Guarantee. 

Overdraft An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance - a person can be said to have gone "overdrawn".

Reasons for overdraft Intentional short-term loan.  ATM overdraft.  Failure to maintain an accurate account register.  Unexpected electronic withdrawals. 





Bank Error. Returned check deposit.

Reasons for overdraft  Bank fees . 

Victimization.



Intraday overdraft.

 Merchant error 

Playing the Float.

History Introduced by “The Royal Bank of Scotland” in 1728 to merchant William Hog.

Overdraft  Agreed

overdraft limit.  How Interest is charged.  Reserved limit.  Subject to status.  Instant online overdraft facility.  Written application and promissory note.  It can discontinued

Bank loan and Overdraft  Current

account.  Loan only on overdrawn account.  Can control amount within limits.  Easy Cash flow planning in Loan.  Interest is lower in case of loan.  Fixed amount for fixed term and repayment.

Demand loan A loan which is repayable on demand without prior notice, on a specific date.

Features  No

fixed date of termination.  Repaid anytime.  Called for repayment.  Interest charged.  No prepayment penalty.  Understanding.  Default.  Recession.

Demand loan agreement  Demand

loan.  Interest.  Payable on demand.  Monthly payments.  Costs and expenses.  Entire agreement.  Assignment.

Cash credit. It is an arrangement or contract by which a banker allows the customer to borrow money up to certain limit.

Points to discuss Favored method of lending (70%).  Cash credit limit.  Against security (Collateral or personal) or guarantee.  Withdrawal as well as deposit.  Interest charged.  “Roll over” a period of time.  Banks keep adequate cash balance.  Commitment charge. 

Advantages  

Flexibility. Operative convenience.

Disadvantages. 6. 7. 8.

Fixation of limits. Bankers inability to verify end use. Lack of proper management of funds.

Bank Guarantee It is a contract to perform the promise, or discharge the liability of a third person in case of default.

Issued to:  Govt.

departments for fulfillment of contract.  Railway and airline for payment of Freight.  Shipping companies for delivery of goods without production of BOL.  Collector of Excise/customs for payment excise/customs duty .

Types 1. Performance Guarantee. 2. Financial Guarantee.

Performance Guarantee. Those which secure performance of contract not involving loan transactions or financial obligations.

It includes:  Construction.  Plant

/ machinery up to agreed level of capacity.  Supply of raw material.  Advance payment.

Financial Guarantee The guarantees given to secure loan transactions or financial obligations whereby bank undertakes to make payment to beneficiary.

It includes:  Payment

of determined liabilities.  Payment of disputed liabilities

Precautions  Appraisal

and assessment of guarantee.  Reimburse the bank in case the guarantee is invoked.  In case of Performance Guarantee, customer should be capable.  Go through Terms and condition of contract.  Guarantee should be for specific amount and for genuine business or trade.