Final Project

5/22/2018 Final Project

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Foreign Exchange and Corporate Finance

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CHAPTER 1 - INTRODUCTION

1.1 BANKING IN INDIA

Banking in India originated in the last decades of the 18th century. The first banks

were The General Bank of India, which started in 1786, and Bank of Hindustan, which started

in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of

India, which originated as the Bank of Calcutta in June 1806, which almost immediately

became the Bank of Bengal. This was one of the three presidency banks, the other two being

the Bank of Bombay and the Bank of Madras, all three of which were established under

charters from the British East India Company. For many years the Presidency banks acted as

quasi-central banks, as did their successors. The three banks merged in 1921 to form the

Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The

Comptoired'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay

in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC

established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly

due to the trade of the British Empire, and so became a banking centre.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established

in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in

Lahore in 1895, which has survived to the present and is now one of the largest banks in

India.The period between 1906 and 1911, saw the establishment of banks inspired by the

Swadeshi movement. The Swadeshi movement inspired local businessmen and political

figures to found banks of and for the Indian community. A number of banks established then

have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of

Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in

Dakshina Kannada and Udupi district which were unified earlier and known by the name

South Canara ( South Kanara ) district. Four nationalised banks started in this district and also

a leading private sector bank. Hence undivided Dakshina Kannada district is known as

"Cradle of Indian Banking".


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The Reserve Bank of India was nationalized on January 1, 1949 and serves as the

nations central banking authority since then; having the authority to regulate, control and

inspect the banks as well as the financial policies of India. Many banks were nationalized

since then, including 16 commercial banks in 1969 and 6 commercial banks in 1980. As of

now, there are 27 nationalized banks; of which State Bank of India is the largest and followed

by Punjab National Bank, Bank of Baroda and Bank of India.

STRUCTURE OF BANKING SECTOR IN INDIA

Reserve

Bank of India

Scheduled

Banks

Commercial

Banks

Public sector

banks

Private

sector Banks

Foreign

banksRegional

rural banks

Co-operative

Banks

Urban

Cooperative

State

Cooperatives


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1.2 PROFILE: CENTRAL BANK OF INDIA

Established in 1911, Central Bank of India was the first Indian commercial bank which was

wholly owned and managed by Indians. The establishment of the Bank was the ultimaterealisation of the dream of Sir SorabjiPochkhanawala, founder of the Bank. Sir Pherozesha

Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride

felt by Sir SorabjiPochkhanawala that he proclaimed Central Bank of India as the 'property of

the nation and the country's asset'. He also added that 'Central Bank of India lives on people's

faith and regards itself as the people's own bank'.

During the past 99 years of history the Bank has weathered many storms and faced many

challenges. The Bank could successfully transform every threat into business opportunity and

excelled over its peers in the Banking industry.

A number of innovative and unique banking activities have been launched by Central Bank of

India and a brief mention of some of its pioneering services are as under:

1921 Introduction to the Home Savings Safe Deposit Schemeto build saving/thrift

habits in all sections of the society.

1924 An Exclusive Ladies Department to cater to the Bank's women clientele.

1926 Safe Deposit Locker facility and Rupee Travellers' Cheques.

1929 Setting up of the Executor and Trustee Department.

1932 Deposit Insurance Benefit Scheme.

1962 Recurring Deposit Scheme.

Subsequently, even after the nationalisation of the Bank in the year 1969, Central

Bank continued to introduce a number of innovative banking services as under:


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1976 The Merchant Banking Cell was established.

1980 Centralcard, the credit card of the Bank was introduced.

1986 'Platinum Jubilee Money Back Deposit Scheme' was launched.

1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with its

headquarters at Bhopal in Madhya Pradesh.

1994 Quick Cheque Collection Service (QCC) & Express Service was set up to

enable speedy collection of outstation cheques.

Further in line with the guidelines from Reserve Bank of India as also the Government of

India, Central Bank has been playing an increasingly active role in promoting the key thrust

areas of agriculture, small scale industries as also medium and large industries. The Bank also

introduced a number of Self Employment Schemes to promote employment among the

educated youth.

Among the Public Sector Banks, Central Bank of India can be truly described as an All India

Bank, due to distribution of its large network in 27 out of 29 States as also in 3 out of 7 Union

Territories in India. Central Bank of India holds a very prominent place among the Public

Sector Banks on account of its network of 3967 branches and 27 extension counters at

various centres throughout the length and breadth of the country.

Customers' confidence in Central Bank of India's wide ranging services can very well be

judged from the list of major corporate clients such as ICICI, IDBI, UTI, LIC, HDFC as also

almost all major corporate houses in the country.


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1.3 CORPORATE VISION

To emerge as a strong, vibrant and pro-active Bank/Financial Super Market and to positively

contribute to the emerging needs of the economy through consistent harmonization of human,

financial and technological resources and effective risk control systems.

1.4 CORPORATE MISSION

To transform the customer banking experience into a fruitful and enjoyable one.

To leverage technology for efficient and effective delivery of all banking services.

To have bouquet of product and services tailor-made to meet customers aspirations.

The pan-India spread of branches across all the state of the country will be utilized to

further the socio economic objective of the Government of India with emphasis on

Financial Inclusion.


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1.5 OBJECTIVE OF THE STUDY

To find out the practical aspect of foreign exchange and corporate finance.

To know the actual procedure of credit appraisal in Central Bank of India other than

the theoretical knowledge.

To enhance the knowledge of Small and Medium Scale Enterprises.

To understand the Credit policy, Regulatory Framework, Credit Monitoring etc.

To enhance knowledge about finance available for import and export


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2 FOREIGN EXCHANGE

2.1 FEMA

The Foreign Exchange Management Act(FEMA) was an act passed in the winter session of

Parliament in 1999 which replaced Foreign Exchange Regulation Act. This act seeks to make

offenses related to foreign exchange civil offenses. It extends to the whole of India.

MAIN FEATURES

Activities such as payments made to any person outside India or receipts from them, along

with the deals in foreign exchange and foreign security is restricted. It is FEMA that gives the

central government the power to impose the restrictions.

Restrictions are imposed on people living in India who carry out transactions in

foreign exchange, foreign security or who own or hold immovable property abroad.

Without general or specific permission of the Reserve Bank of India, FEMA restricts

the transactions involving foreign exchange or foreign security and payments from

outside the country to India the transactions should be made only through an

authorised person.

Deals in foreign exchange under the current account by an authorised person can be

restricted by the Central Government, based on public interest.

Although selling or drawing of foreign exchange is done through an authorised

person, the RBI is empowered by this Act to subject the capital account transactions

to a number of restrictions.

People living in India will be permitted to carry out transactions in foreign exchange,

foreign security or to own or hold immovable property abroad if the currency, security

or property was owned or acquired when he/she was living outside India, or when it

was inherited to him/her by someone living outside India.

Exporters are needed to furnish their export details to RBI. To ensure that the

transactions are carried out properly, RBI may ask the exporters to comply to its

necessary requirements


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THE DIFFERENCES BETWEEN FERA AND FEMA ARE AS FOLLOWS:

Sr.

NoDIFFERENCES FERA FEMA

1PROVISIONS FERA consisted of 81 sections, and

was more complex

FEMA is much simple, and consist

of only 49 sections.

2

FEATURES Presumption of negative intention

(Mens Rea ) and joining hands in

offence (abatement) existed in FEMA

These presumptions of Mens Rea

and abatement have been

excluded in FEMA

3

NEW TERMS INFEMA

Terms like Capital AccountTransaction, current Account

Transaction, person, service etc. were

not defined in FERA.

Terms like Capital AccountTransaction, current account

Transaction person, service etc.,

have been defined in detail in

FEMA

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DEFINITION OF

AUTHORIZED

PERSON

Definition of "Authorized Person" in

FERA was a narrow one ( 2(b)

The definition of Authorized

person has been widened to

include banks, money changes, off

shore banking Units etc. (2 ( c )

5

MEANING OF

"RESIDENT" AS

COMPARED

WITH INCOME

TAX ACT.

There was a big difference in the

definition of "Resident", under FERA,

and Income Tax Act

The provision of FEMA, are in

consistent with income Tax Act, in

respect to the definition of term "

Resident". Now the criteria of "In

India for 182 days" to make a

person resident has been brought

under FEMA. Therefore a person

who qualifies to be a non-resident

under the income Tax Act, 1961

will also be considered a non-

resident for the purposes of

application of FEMA, but a person

who is considered to be non-

resident under FEMA may not

necessarily be a non-resident

under the Income Tax Act, for


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instance a business man going

abroad and staying therefore a

period of 182 days or more in a

financial year will become a non-

resident under FEMA.

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PUNISHMENT Any offence under FERA, was a

criminal offence , punishable with

imprisonment as per code of criminal

procedure, 1973

Here, the offence is considered to

be a civil offence only punishable

with some amount of money as a

penalty. Imprisonment is

prescribed only when one fails to

pay the penalty.

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QUANTUM OF

PENALTY.

The monetary penalty payable under

FERA, was nearly the five times the

amount involved.

Under FEMA the quantum of

penalty has been considerably

decreased to three times the

amount involved.

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APPEAL An appeal against the order of

"Adjudicating office", before " Foreign

Exchange Regulation Appellate Board

went before High Court

The appellate authority under

FEMA is the special Director (

Appeals) Appeal against the order

of Adjudicating Authorities and

special Director (appeals) lies

before "Appellate Tribunal for

Foreign Exchange." An appeal

from an order of Appellate Tribunal

would lie to the High Court. (sec

17,18,35)

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RIGHT OF

ASSISTANCE

DURING LEGAL

PROCEEDINGS.

FERA did not contain any express

provision on the right of on impleaded

person to take legal assistance

FEMA expressly recognizes the

right of appellant to take

assistance of legal practitioner or

chartered accountant (32)

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POWER OF

SEARCH AND

SEIZE

FERA conferred wide powers on a

police officer not below the rank of a

Deputy Superintendent of Police to

make a search

The scope and power of search

and seizure has been curtailed to

a great extent


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2.2 NON RESIDENT INDIAN

An Indian Citizen who stays abroad for employment/carrying on business or vocation outside

India or stays abroad under circumstances indicating an intention for an uncertain duration of

stay abroad is a non-resident. (Persons posted in U.N. Organisations and Officials deputed

abroad by Central/State Governments and Public Sector undertakings on temporary

assignments are also treated as non-residents). Non Resident foreign citizens of Indian

Origin are treated on par with non-resident Indian Citizens (NRIs) for the purpose of certain

facilities.

Main categories of NRIs

The following are the main three categories of NRIs:-

(i) Indian citizens who stay abroad for employment or for carrying on a business or Vocation

or any other purpose in circumstances indicating an indefinite period of stay abroad.

(ii) Indian citizens working abroad on assignment with foreign government agencies like

United Nations Organisation (UNO), including its affiliates, International Monetary Fund

(IMF), World Bank etc.

(iii) Officials of Central and State Government and Public Sector undertaking deputed abroad

on temporary assignments or posted to their offices, including Indian diplomat missions,

abroad.

Provisions regarding Resident and Non-Resident under Income Tax Act and Foreign

Exchange Regulation Act

The residential status of a person is decided under two different Acts, one under Income Tax

Act, 1961, ( I.T. Act) and another under Foreign Exchange Regulation Act, 1973 (FERA).The concept of Non-Resident under FERA is different as compared to that under Income Tax

Act. Under Income Tax Act, the residential status of a person is determined on the basis of

number of days he stays in India whereas under FERA, it is the intention of a person to be in

India or outside India would be an important factor determining his residential status.


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2.2.1 PROVISIONS UNDER THE I.T. ACT

The residential status for the Income Tax Act is determined in section 6 as under:

1. An individual will be treated as a resident in India in any previous year if he fulfills any of

the following two conditions:

(a) he/she is in India in that year for period or periods amounting in all to 182 days or more,

OR

(b) Having within the four years preceding that year been in India for a period or periods

amounting in all to 365 days or more, and has been in India for 60 days or more in that year.

2. Under Explanation to section 6 (1) of the Income-tax Act, the residential status of an

individual who is rendering service outside India and who visits India during leave or

vacations in any previous year or an individual who is outside India and who comes on a visit

to India in any previous year will be determined as under :

(a) An Indian citizen who leaves India in any previous year for the purpose of employment

outside India or as a crew member of an Indian ship would be treated as a resident in India if

he stays in India in that year for 182 days or more [instead of 60 days as stated in 1 (b)

above]. Conversely, if he stays in India for less than 182 days, he will be treated as non-

resident for that year and his foreign income would not attract tax liability.

Further, w.e.f. 1stApril, 1999, a crew member will be treated as non-resident in India if he is

on board such ship outside the territorial water of India for 182 days or more during any year.

(b) An Indian citizen or a person of Indian origin who resides outside India and who comes

on a visit to India in any previous year will be treated as resident in India if he stays in India

in that year for 182 days or more [instead of 60 days as stated in 1 (b) above.]

Conversely, he will be treated as non-resident if he stays in India in that year for less than 182

days.


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(3) An individual (whether Indian citizens or not) who is outside India and who comes on a

visit to India in any previous year will be treated as "non-resident" in India if he stays in India

in that previous year less than 182 days subject to the condition that during the preceding four

previous years his stay in India does not amount to 365 days or more.

An Individual who fulfills any of the conditions mentioned in section 6(1) is treated as

resident in India. But in order to become an "ordinarily resident", he must satisfy the

following two conditions as laid down under section 6(6) (a) of the Income-tax Act, 1961:

(i) He should have been resident in India in nine out of the ten previous years preceding the

previous year in which he is resident within the meaning of section 6(1); and

(ii) He should have been in India for a period or periods amounting in all to 730 days or more

during the seven years preceding that previous year.

If he does not fulfill any of the above conditions, he will be treated as "not ordinarily

resident".

(4) An individual who does not satisfy both the conditions as mentioned above as laid down

in section 6 (1) will be treated as "non-resident" in that previous year.

(5) A Hindu undivided family, firm or other association of persons will be treated as "non

resident" in India in any previous year if the control and management of its affairs is situated

wholly outside India during that year.

(6) A company will be treated as "non-resident" in India in any previous year if it is not an

Indian company and also the control and management of its affairs is not situated wholly in

India in that year.


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2.2.2 THE PROVISIONS UNDERFOREIGN EXCHANGE

MANAGEMENT ACT (FEMA) :

(i) a citizens of India ,who has, at any time after the 25 thday of March, 1947, been staying in

India, but does not include a citizens of India who has gone out of, or stays outside, India in

either case-

(a) For or on taking up employment outside India, or

(b) For carrying on outside India a business or vocation outside India, or

(c) For any other purpose, in such circumstances as would indicate his intention to stay

outside India for an uncertain period.

(ii) a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b) or

paragraph (c) of sub-clause (i) to be resident in India, return to, or stays in, India, in either

case-

a) For or on taking up employment in India, or

b) For carrying on in India a business or vocation in India, or

c) For any other purposes, in such circumstances as would indicate his intention to stay in

India for an uncertain period.

(iii) A person, not being a citizen of India, who has come to, or stays in India, in either case-

a) For or on taking up employment in India, or

b) For carrying on in India a business or vocation in India, or

c) For any other purpose, in such circumstances as would indicate his intention to stay in

India for an uncertain period.

(iv) A Citizen of India, who not having stayed in India at any time after the 25 thday of

March, 1947, comes to India for any of the purpose referred to in paragraphs (a), (b), and (c)

of the sub-clause (iii) or for the purpose and in the circumstances referred to in paragraph (d)

of that sub-clause or having come to India stays in India for any such purpose and in such

circumstances.

Explanation.- A person, who has, by reason only of paragraph (a) or paragraph (b) or

paragraph (d) of sub-clause (iii) been resident in India, shall, during any period in which he is

outside India be deemed to be not resident in India.


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Clarification:

(A) It has been clarified in the Exchange Control Manual (ECM) that Indian Citizens who

proceed abroad for business visits, medical treatment, study which do not indicate their

intention to stay outside in India for an indefinite period will be considered as "person

resident in India" during their temporary absence from India.

(B) An office or a branch situated in India, of any business, whether carried on by a body

corporate or otherwise, whether Indian or Foreign, is treated for all purpose of FERA as

"person resident of India".2 (q) "person resident outside India" means a person who is not

resident in India . Thus the term "non-resident" is synonymous with the term, "person

resident outside India".


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2.3 TYPE OF ACCOUNTS:

2.3.1 NON-RESIDENT ORDINARY RUPEE ACCOUNT (NRO ACCOUNT)

NRO accounts may be opened / maintained in the form of current, savings, recurring or fixed

deposit accounts.

Savings Account - Normally maintained for crediting legitimate dues /earnings / income

such as dividends, interest etc. Banks are free to determine the interest rates.

Term Deposits - Banks are free to determine the interest rates. Interest rates offered by

banks on NRO deposits cannot be higher than those offered by them on comparable domestic

rupee deposits.

Account should be denominated in Indian Rupees.

Permissible credits to NRO account are transfers from rupee accounts of non-resident

banks, remittances received in permitted currency from outside India through normal banking

channels, permitted currency tendered by account holder during his temporary visit to India,

legitimate dues in India of the account holder like current income like rent, dividend, pension,interest, etc., sale proceeds of assets including immovable property acquired out of

rupee/foreign currency funds or by way of legacy/ inheritance.

Eligible debits such as all local payments in rupees including payments for investments as

specified by the Reserve Bank and remittance outside India of current income like rent,

dividend, pension, interest, etc., net of applicable taxes, of the account holder.

NRI/PIO may remit from the balances held in NRO account an amount not exceeding USD

one million per financial year, subject to payment of applicable taxes.

The limit of USD 1 million per financial year includes sale proceeds of immovable

properties held by NRIs/PIOs.

The accounts may be held jointly with residents and / or with non-resident Indian.

The NRO account holder may opt for nomination facility.


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NRO (current/savings) account can also be opened by a foreign national of non-Indian

origin visiting India, with funds remitted from outside India through banking channel or by

sale of foreign exchange brought by him to India. The details of this facility are given in the

FAQs on Accounts opened by Foreign Nationals and Foreign Tourists available on the RBI

website.

Loans to non-resident account holders and to third parties may be granted in Rupees by

Authorized Dealer / bank against the security of fixed deposits subject to certain terms and

conditions.

2.3.2 NON-RESIDENT (EXTERNAL) RUPEE ACCOUN

(NRE ACCOUNT)

NRE account may be in the form of savings, current, recurring or fixed deposit accounts.

Such accounts can be opened only by the non-resident himself and not through the holder of

the power of attorney.

NRIs as defined in Notification No. FEMA 5/2000-RB dated May 3, 2000 may be

permitted to open NRE account with their resident close relatives (relative as defined in

Section 6 of the Companies Act, 1956) on former or survivor basis. The resident close

relative shall be eligible to operate the account as a Power of Attorney holder in accordance

with the extant instructions during the life time of the NRI/PIO account holder.

Account will be maintained in Indian Rupees.

Balances held in the NRE account are freely repatriable.

Accrued interest income and balances held in NRE accounts are exempt from Income tax

and Wealth tax, respectively.

Authorised dealers/authorised banks may at their discretion/commercial judgement allow

for a period of not more than two weeks, overdrawings in NRE savings bank accounts, up to

a limit of Rs.50,000 subject to the condition that such overdrawings together with the interest


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payable thereon are cleared/repaid within a period of two weeks, out of inward remittances

through normal banking channels or by transfer of funds from other NRE/FCNR accounts.

Savings-Banks are free to determine the interest rates.

Term depositsBanks are free to determine the interest rates of term deposits of maturity

of one year and above. Interest rates offered by banks on NRE deposits cannot be higher than

those offered by them on comparable domestic rupee deposits.

Permissible credits to NRE account are inward remittance to India in permitted currency,

proceeds of account payee cheques, demand drafts / bankers' cheques, issued against

encashment of foreign currency, where the instruments issued to the NRE account holder are

supported by encashment certificate issued by AD Category-I / Category-II, transfers from

other NRE / FCNR accounts, sale proceeds of FDI investments, interest accruing on the funds

held in such accounts, interest on Government securities/dividends on units of mutual funds

purchased by debit to the NRE/FCNR(B) account of the holder, certain types of refunds, etc.

Eligible debits are local disbursements, transfer to other NRE / FCNR accounts of person

eligible to open such accounts, remittance outside India, investments in shares /

securities/commercial paper of an Indian company, etc.

Loans up to Rs.100 lakh can be extended against security of funds held in NRE Account

either to the depositors or third parties.

Such accounts can be operated through power of attorney in favour of residents for the

limited purpose of withdrawal of local payments or remittances through normal banking

channels to the account holder himself.


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2.3.3 FOREIGN CURRENCY NON RESIDENT (BANK) ACCOUNT

FCNR (B) ACCOUNT

FCNR (B) accounts are only in the form of term deposits of 1 to 5 years All debits / credits permissible in respect of NRE accounts, including credit of sale

proceeds of FDI investments, are permissible in FCNR (B) accounts also.

Account can be in 6 freely convertible currency. They are:-

1. U.S. Dollar

2. Canadian Dollar

3. Singapore Dollar

4. Euro

5. Sterling Pound

6. Japanese Yen

Loans up to Rs.100 lakh can be extended against security of funds held in FCNR (B)

deposit either to the depositors or third parties.

The interest rates are stipulated by the Department of Banking Operations and

Development, Reserve Bank of India. Interest shall be paid within the ceiling rate of

LIBOR/SWAP rates plus 125 basis points for the respective currency/corresponding

maturities. On floating rate deposits, interest shall be paid within the ceiling of SWAP

rates for the respective currency/maturity plus 125 basis points. For floating rate

deposits, the interest reset period shall be six months.

When an account holder becomes a person resident in India, deposits may be allowed

to continue till maturity at the contracted rate of interest. Or the deposit of FCNR B

account can be transferred to RFC account, as desired by the depositor.

Premature withdrawal:-

No interest is paid if the premature withdrawal is made before completion of 1 year

Bank can levi penalty of 1 percent for premature withdrawal to cover its swap cost

If the conditions of premature withdrawal is not given to the depositor at the time of

deposit than the Bank has to bear the penalty


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2.3.4FOREIGN CURRENCY ACCOUNT

A person resident in India who has gone abroad for studies or who is on a visit to a

foreign country may open, hold and maintain a Foreign Currency Account with a

bank outside India during his stay outside India, provided that on his return to India,

the balance in the account is repatriated to India. However, short visits to India by the

student who has gone abroad for studies, before completion of his studies, shall not be

treated as his return to India.

A person resident in India who has gone out of India to participate in an

exhibition/trade fair outside India may open, hold and maintain a Foreign Currency

Account with a bank outside India for crediting the sale proceeds of goods on display

in the exhibition/trade fair. However, the balance in the account is repatriated to India

through normal banking channels within a period of one month from the date of

closure of the exhibition/trade fair.

2.3.5 RESIDENT FOREIGN CURRENCY ACCOUNT

Returning NRIs /PIOs may open, hold and maintain with an authorised dealer in India a

Resident Foreign Currency (RFC) Account to transfer balances held in NRE/FCNR(B)accounts.

Proceeds of assets held outside India at the time of return can be credited to RFC account.

The funds in RFC accounts are free from all restrictions regarding utilisation of foreign

currency balances including any restriction on investment in any form outside India.

RFC accounts can be maintained in the form of current or savings or term deposit accounts,

where the account holder is an individual and in the form of current or term deposits in all

other cases.

RFC accounts are permitted to be held jointly with the resident close relative(s) as defined in

the Companies Act, 1956 as joint holder (s) in their RFC bank account on former or survivor

basis. However, such resident Indian close relative, now being made eligible to become joint

account holder shall not be eligible to operate the account during the life time of the resident

account holder.


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2.4 FACILITIES TO NRI

1. UNIQUE HEALTH INSURANCE SCHEME FOR NRI CUSTOMERS AND

FAMILY MEMBERS:

If you are maintaining Non-Resident (External) Account with our bank, you are eligible for a

special package Health Insurance Scheme for you and your family members residing in India

or abroad.

Family member consists of spouse and upto three children of below 25 years of age.

This scheme covers for Health, Personal Accident, Travel related, and Fire risk for property

in India.

This is a special offer for our existing customers who are maintaining NRE account and for

our new customers who open NRE account with us.

Our bank under a special tie up arrangement with M/s. Cholamandalam MS General

Insurance Co Ltd is offering this value added insurance cover.

Our Non-Resident customers may please contact the nearest branch of our bank for more

details about premium to be paid and the operational features of this insurance scheme.

2.OPERATION OF THE ACCOUNTS THROUGH PA HOLDERS

Non Resident Indians can execute Power of Attorney in favour of Resident Indians to operate

their accounts in their absence,

But Power of Attorney holders are not allowed to open or close the accounts. Power of

Attorney holders are not allowed to raise loans against non resident deposits.

3. STANDING INSTRUCTIONS FOR UTILITY PAYMENTS AND FOR FAMILY

MAINTENANCE EVERY MONTH

Non-Resident account holders can provide mandate or standing instructions to our bank to

pay their uitility bills in India on due dates. Account holder can provide standing instruction

to transfer a specific amount from his account to the family member every month for the

family maintenance in India.


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4. LOCKER FACILITIES

We provide locker facilities to Non-Resident customers at our branches to safe keep their

valuables / documents.

5. FACILITY TO BOOK FORWARD CONTRACT FOR NRI CUSTOMERS

The scheme will provide interest on FCNR-B deposit plus benefit from the forward premium

in Foreign exchange market to the depositor. This product will be available only till rate of

interest on FCNR-B / NRE deposits is low and the forward premium of USD vs. INR is high.

The amount in NRE Rupee funds (Minimum amount INR 5.00 lacs) are to be invested for a

period of 366 days (1 year and 1 day). The NRE Rupee funds will be converted to FCNR-B

deposit in Foreign Currency having high forward premium in the market. A forward contract

will be booked for the maturity amount and on the maturity date, the maturity amount will be

converted to NRE Rupee Account again.


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2.6 LETTER OF CREDIT

DEFINITION:

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time

and for the correct amount. In the event that the buyer is unable to make payment on the

purchase, the bank will be required to cover the full or remaining amount of the purchase.

Letters of credit are often used in international transactions to ensure that payment will be

received. Due to the nature of international dealings including factors such as distance,

differing laws in each country and difficulty in knowing each party personally, the use of

letters of credit has become a very important aspect of international trade. The bank also acts

on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid

until the bank receives a confirmation that the goods have been shipped.

2.6.1 PARTICIPANTS IN LC PROCESS

Applicant (Opener):Applicant which is also referred to as account party is normally

a buyer or customer of the goods, who has to make payment to beneficiary. LC is

initiated and issued at his request and on the basis of his instructions.

Issuing Bank (Opening Bank):The issuing bank is the one which create a letter of

credit and takes the responsibility to make the payments on receipt of the documents

from the beneficiary or through their banker. The payments has to be made to the

beneficiary within seven working days from the date of receipt of documents at their

end, provided the documents are in accordance with the terms and conditions of the

letter of credit. If the documents are discrepant one, the rejection thereof to be

communicated within seven working days from the date of of receipt of documents at

their end.

Beneficiary : Beneficiary is normally stands for a seller of the goods, who has to

receive payment from the applicant. A credit is issued in his favour to enable him or

his agent to obtain payment on surrender of stipulated document and comply with the

term and conditions of the L/c.

If L/c is a transferable one and he transfers the credit to another party, then he isreferred to as the first or original beneficiary.


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Advising Bank :An Advising Bank provides advice to the beneficiary and takes the

responsibility for sending the documents to the issuing bank and is normally located

in the country of the beneficiary.

Confirming Bank: Confirming bank adds its guarantee to the credit opened byanother bank, thereby undertaking the responsibility of payment/negotiation

acceptance under the credit, in additional to that of the issuing bank. Confirming bank

play an important role where the exporter is not satisfied with the undertaking of only

the issuing bank.

Negotiating Bank: The Negotiating Bank is the bank who negotiates the documents

submitted to them by the beneficiary under the credit either advised through them or

restricted to them for negotiation. On negotiation of the documents they will claim the

reimbursement under the credit and makes the payment to the beneficiary provided

the documents submitted are in accordance with the terms and conditions of the letters

of credit.

Reimbursing Bank: Reimbursing Bank is the bank authorized to honor the

reimbursement claim in settlement of negotiation/acceptance/payment lodged with it

by the negotiating bank. It is normally the bank with which issuing bank has an

account from which payment has to be made.

Second Beneficiary: Second Beneficiary is the person who represent the first or

original Beneficiary of credit in his absence. In this case, the credits belonging to the

original beneficiary is transferable. The rights of the transferee are subject to terms of

transfer.


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2.6.2 STEPS IN THE LETTER OF CREDIT PROCESS

I. Buyer and seller agree to terms including means of transport, period of credit offered

(if any), and latest date of shipment acceptable.

II. Buyer applies to bank for issue of letter of credit. Bank will evaluate buyer's credit

standing, and may require cash cover and/or reduction of other lending limits.

III. Issuing bank issues LC, sending it to the Advising bank by airmail or electronic

means such as telex or SWIFT.

IV. Advising bank establishes authenticity of the letter of credit using signature books or

test codes, then informs seller (beneficiary).

V. Seller should now check that LC matches commercial agreement and that all its terms

and conditions can be satisfied.

VI. Seller ships the goods, then assembles the documents called for in the LC (invoice,

transport document, etc.).

VII. The Advising bank checks the documents against the LC. If the documents are

compliant, the bank pays the seller and forwards the documents to the Issuing bank.

VIII. The Issuing bank now checks the documents itself. If they are in order, it reimburses

the seller's bank immediately.

IX. The Issuing bank debits the buyer and releases the documents (including transport

document), so the buyer can claim the goods from the carrier.


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After a contract is concluded between buyer and seller, buyer's bank supplies a letter of

credit to seller. Seller consigns the goods to a carrier in exchange for a bill of lading.

Seller provides bill of lading to bank in exchange for payment. Seller's bank exchanges

bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of lading for

payment from the buyer. Buyer provides bill of lading to carrier and takes delivery of

goods.


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2.7 BUYERS CREDIT

Buyers Credit refers to loans for payment of imports into India arranged on behalf of the

importer through an overseas bank. The offshore branch credits the nostro of the bank in

India and the Indian bank uses the funds and makes the payment to the exporter bank as an

import bill payment on due date. The importer reflects the buyers credit as a loan on the

balance sheet.

2.7.1 BENEFITS OF BUYERS CREDIT:

The benefits of buyers credit for the importer is as follows:

The exporter gets paid on due date; whereas importer gets extended date for making

an import payment as per the cash flows

The importer can deal with exporter on sight basis, negotiate a better discount and use

the buyers credit route to avail financing.

The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on

the choice of the customer.

The importer can use this financing for any form of trade viz. open account,

collections, or LCs.

The currency of imports can be different from the funding currency, which enables

importers to take a favourable view of a particular currency.

2.7.2 BUYERS CREDIT PROCESS FLOW:

Indian customer imports the goods either under DC / LC, DA / DP or Direct

Documents.

Indian customer requests the Buyers Credit Consultant before the due date of the bill

to avail buyers credit finance.

Consultant approaches overseas bank for indicative pricing, which is further quoted to

Importer.

If pricing is acceptable to importer, overseas bank issues offer letter in the name of

the Importer.

Importer approaches his existing bank to get letter of undertaking / comfort (LOU /

LOC) issued in favour of overseas bank via swift.


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On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will

either funds existing banks Nostro account or pays the suppliers bank directly

Existing bank to make import bill payment by utilizing the amount credited (if the

borrowing currency is different from the currency of Imports then a cross currencycontract is utilized to effect the import payment)

On due date existing bank to recover the principal and Interest amount from the

importer and remit the same to Overseas Bank on due date

2.7.3 COST INVOLVED:

The cost involved in buyers credit is as follows:

Interest cost: This is charged by overseas bank as a financing cost. Normally it is

quoted as say 3M L + 350 bps, where 3M is 3 Month, L is LIBOR, & bps is Basis

Points (A unit that is equal to 1/100th of 1%). To put is simply: 3M L + 3.50%. One

should also check on what tenure LIBOR is used, as depending on tenure LIBOR will

change. For example as on day, 3 month LIBOR is 0.33561% and 6 Month LIBOR is

0.50161%

Letter of Comfort / Undertaking: Your existing bank would charge this cost for

issuing letter of comfort / Undertaking

Forward / Hedging Cost

Arrangement fee: Charged by Buyers Credit Agents / Brokers how is arranging

buyers credit for you.

Other charges: A2 payment on maturity, For 15CA and 15CB on maturity,

Intermediary bank charges etc.

Withholding Tax(WHT): The customer has to pay WHT on the interest amount

remitted overseas to the Indian tax authorities.


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2.8 PRESHIPMENT CREDIT/PACKING CREDIT

Pre Shipment Finance is issued by a financial institution when the seller want the payment of

the goods before shipment. The main objectives behind preshipment finance or pre export

finance is to enable exporter to:

Procure raw materials.

Carry out manufacturing process.

Provide a secure warehouse for goods and raw materials.

Process and pack the goods.

Ship the goods to the buyers.

Meet other financial cost of the business.

TYPES OF PRE SHIPMENT FINANCE:

Packing Credit

Advance against Cheques/Draft etc. representing Advance Payments.

PRESHIPMENT FINANCE IS EXTENDED IN THE FOLLOWING FORMS :

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)

REQUIRMENT FOR GETTING PACKING CREDIT:

This facility is provided to an exporter who satisfies the following criteria

A ten digit importerexporter code number allotted by DGFT.

Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL (Open General Licence), the exporter

should have the required license /quota permit to export the goods.


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Packing credit facility can be provided to an exporter on production of the following

evidences to the bank:

1. Formal application for release the packing credit with undertaking to the effect that

the exporter would be ship the goods within stipulated due date and submit the

relevant shipping documents to the banks within prescribed time limit.

2. Firm order or irrevocable L/C or original cable / fax / telex message exchange

between the exporter and the buyer.

3. Licence issued by DGFT if the goods to be exported fall under the restricted or

canalized category. If the item falls under quota system, proper quota allotment proof

needs to be submitted.

The confirmed order received from the overseas buyer should reveal the information about

the full name and address of the overseas buyer, description quantity and value of goods

(FOB or CIF), destination port and the last date of payment.

ELIGIBILITY:

Pre shipment credit is only issued to that exporter who has the export order in his own name.

However, as an exception, financial institution can also grant credit to a third party

manufacturer or supplier of goods who does not have export orders in their own name.

In this case some of the responsibilities of meeting the export requirements have been out

sourced to them by the main exporter. In other cases where the export order is divided

between two more than two exporters, pre shipment credit can be shared between them

QUANTUM OF FINANCE:

The Quantum of Finance is granted to an exporter against the LC or an expected order. The

only guideline principle is the concept of NeedBased Finance. Banks determine the

percentage of margin, depending on factors such as:

The nature of Order.

The nature of the commodity.

The capability of exporter to bring in the requisite contribution.


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2.8.1 DIFFERENT STAGES OF PRE SHIPMENT FINANCE

1. Appraisal and Sanction of Limits

Before making any an allowance for Credit facilities banks need to check the different

aspects like product profile, political and economic details about country. Apart from these

things, the bank also looks in to the status report of the prospective buyer, with whom the

exporter proposes to do the business. To check all these information, banks can seek the help

of institution like ECGC or International consulting agencies like Dun and Brad street etc.

The Bank extended the packing credit facilities after ensuring the following"

i. The exporter is a regular customer, a bona fide exporter and has a goods standing in

the market.

ii. Whether the exporter has the necessary license and quota permit (as mentioned

earlier) or not.

iii. Whether the country with which the exporter wants to deal is under the list of

Restricted Cover Countries(RCC) or not.

2. Disbursement of Packing Credit Advance

Once the proper sanctioning of the documents is done, bank ensures whether exporter has

executed the list of documents mentioned earlier or not. Disbursement is normally allowed

when all the documents are properly executed.Sometimes an exporter is not able to produce

the export order at time of availing packing credit. So, in these cases, the bank provide a

special packing credit facility and is known as Running Account Packing.

Before disbursing the bank specifically check for the following particulars in the submitted

documents"

i. Name of buyer

ii. Commodity to be exported

iii. Quantity

iv. Value (either CIF or FOB)

v. Last date of shipment / negotiation.

vi. Any other terms to be complied with


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The quantum of finance is fixed depending on the FOB value of contract /LC or the domestic

values of goods, whichever is found to be lower. Normally insurance and freight charged are

considered at a later stage, when the goods are ready to be shipped.

In this case disbursals are made only in stages and if possible not in cash. The payments are

made directly to the supplier by drafts/bankers/cheques.

The bank decides the duration of packing credit depending upon the time required by the

exporter for processing of goods.

The maximum duration of packing credit period is 180 days, however bank may provide a

further 90 days extension on its own discretion, without referring to RBI.

3. Follow up of Packing Credit Advance

Exporter needs to submit stock statement giving all the necessary information about the

stocks. It is then used by the banks as a guarantee for securing the packing credit in advance.

Bank also decides the rate of submission of this stocks.

Apart from this, authorized dealers (banks) also physically inspect the stock at regular

intervals.

4. Liquidation of Packing Credit Advance

Packing Credit Advance needs be liquidated out of as the export proceeds of the relevant

shipment, thereby converting preshipment credit into postshipment credit.

This liquidation can also be done by the payment receivable from the Government of India

and includes the duty drawback, payment from the Market Development Fund (MDF) of the

Central Government or from any other relevant source.

In case if the export does not take place then the entire advance can also be recovered at a

certain interest rate. RBI has allowed some flexibility in to this regulation under which

substitution of commodity or buyer can be allowed by a bank without any reference to RBI.

Hence in effect the packing credit advance may be repaid by proceeds from export of the

same or another commodity to the same or another buyer. However, bank need to ensure thatthe substitution is commercially necessary and unavoidable.


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5. Overdue Packing

Bank considers a packing credit as an overdue, if the borrower fails to liquidate the packing

credit on the due date. And, if the condition persists then the bank takes the necessary step to

recover its dues as per normal recovery procedure.

SPECIAL CASES

1. Packing Credit to Sub Supplier

Packing Credit can only be shared on the basis of disclaimer between the Export Order

Holder (EOH) and the manufacturer of the goods. This disclaimer is normally issued by the

EOH in order to indicate that he is not availing any credit facility against the portion of the

order transferred in the name of the manufacturer.

This disclaimer is also signed by the bankers of EOH after which they have an option to open

an inland L/C specifying the goods to be supplied to the EOH as a part of the export

transaction. On basis of such an L/C, the subsupplier bank may grant a packing credit to the

subsupplier to manufacture the components required for exports.

On supply of goods, the L/C opening bank will pay to the sub supplier's bank against theinland documents received on the basis of the inland L/C opened by them.

The final responsibility of EOH is to export the goods as per guidelines. Any delay in export

order can bring EOH to penal provisions that can be issued anytime.

The main objective of this method is to cover only the first stage of production cycles, and is

not to be extended to cover supplies of raw material etc. Running account facility is not

granted to subsuppliers.

In case the EOH is a trading house, the facility is available commencing from the

manufacturer to whom the order has been passed by the trading house.

Banks however, ensure that there is no double financing and the total period of packing credit

does not exceed the actual cycle of production of the commodity.


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2. Running Account facility

It is a special facility under which a bank has right to grant preshipment advance for export to

the exporter of any origin. Sometimes banks also extent these facilities depending upon the

good track record of the exporter. In return the exporter needs to produce the letter of credit /

firms export order within a given period of time.

3. Preshipment Credit in Foreign Currency (PCFC)

Authorised dealers are permitted to extend Preshipment Credit in Foreign Currency (PCFC)

with an objective of making the credit available to the exporters at internationally competitive

price. This is considered as an added advantage under which credit is provided in foreign

currency in order to facilitate the purchase of raw material after fulfilling the basic export

orders.

The rate of interest on PCFC is linked to London Interbank Offered Rate (LIBOR).

According to guidelines, the final cost of exporter must not exceed 0.75% over 6 month

LIBOR, excluding the tax.

The exporter has freedom to avail PCFC in convertible currencies like USD, Pound, Sterling,

Euro, Yen etc. However, the risk associated with the cross currency truncation is that of the

exporter.

The sources of funds for the banks for extending PCFC facility include the Foreign Currency

balances available with the Bank in Exchange, Earner Foreign Currency Account (EEFC),

Resident Foreign Currency Accounts RFC(D) and Foreign Currency(NonResident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under Escrow

account and Exporters Foreign Currency accounts. It ensures that the requirement of funds by

the account holders for permissible transactions is met. But the limit prescribed for

maintaining maximum balance in the account is not exceeded. In addition, Banks may

arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas bank

for the purpose of grant of PCFC to exporters, without the prior approval of RBI, provided

the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR.


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4. Packing Credit Facilities to Deemed Exports

Deemed exports made to multilateral funds aided projects and programmes, under orders

secured through global tenders for which payments will be made in free foreign exchange,

are eligible for concessional rate of interest facility both at pre and post supply stages.

5. Packing Credit facilities for Consulting Services

In case of consultancy services, exports do not involve physical movement of goods out of

Indian Customs Territory. In such cases, Preshipment finance can be provided by the bank to

allow the exporter to mobilize resources like technical personnel and training them.

6. Advance against Cheque/Drafts received as advance payment

Where exporters receive direct payments from abroad by means of cheques/drafts etc. the

bank may grant export credit at concessional rate to the exporters of goods track record, till

the time of realization of the proceeds of the cheques or draft etc. The Banks however, must

satisfy themselves that the proceeds are against an export order.


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2.9 POST SHIPMENT FINANCE

INTRODUCTION

Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or

seller against a shipment that has already been made. This type of export finance is granted

from the date of extending the credit after shipment of the goods to the realization date of the

exporter proceeds. Exporters dont wait for the importer to deposit the funds.

2.9.1 Basic Features

The features of postshipment finance are:

Purpose of Finance

Postshipment finance is meant to finance export sales receivable after the date of

shipment of goods to the date of realization of exports proceeds. In cases of deemed

exports, it is extended to finance receivable against supplies made to designated

agencies.

Basis of Finance

Postshipment finances is provided against evidence of shipment of goods or supplies

made to the importer or seller or any other designated agency.

Types of Finance

Postshipment finance can be secured or unsecured. Since the finance is extended

against evidence of export shipment and bank obtains the documents of title of goods,

the finance is normally self liquidating. In that case it involves advance against

undrawn balance, and is usually unsecured in nature.

Further, the finance is mostly a funded advance. In few cases, such as financing of

project exports, the issue of guarantee (retention money guarantees) is involved and

the financing is not funded in nature.


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Quantum of Finance

As a quantum of finance, postshipment finance can be extended up to 100% of the

invoice value of goods. In special cases, where the domestic value of the goods

increases the value of the exporter order, finance for a price difference can also be

extended and the price difference is covered by the government. This type of finance

is not extended in case of preshipment stage.Banks can also finance undrawn balance.

In such cases banks are free to stipulate margin requirements as per their usual

lending norm.

Period of Finance

Postshipment finance can be off short terms or long term, depending on the payment

terms offered by the exporter to the overseas importer. In case of cash exports, the

maximum period allowed for realization of exports proceeds is six months from the

date of shipment. Concessive rate of interest is available for a highest period of 180

days, opening from the date of surrender of documents. Usually, the documents need

to be submitted within 21days from the date of shipment.

FINANCING FOR VARIOUS TYPES OF EXPORT BUYER'S CREDIT

Physical exports: Finance is provided to the actual exporter or to the exporter in

whose name the trade documents are transferred.

Deemed export: Finance is provided to the supplier of the goods which are supplied

to the designated agencies.

Capital goods and project exports: Finance is sometimes extended in the name of

overseas buyer. The disbursal of money is directly made to the domestic exporter.

SUPPLIER'S CREDIT

Buyer's Credit is a special type of loan that a bank offers to the buyers for large scale

purchasing under a contract. Once the bank approved loans to the buyer, the seller shoulders

all or part of the interests incurred.


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2.9.2 TYPES OF POST SHIPMENT FINANCE

1. Export Bills purchased/discounted.

2. Export Bills negotiated

3. Advance against export bills sent on collection basis.

4. Advance against export on consignment basis

5. Advance against undrawn balance on exports

6. Advance against claims of DutyDrawback.

1. Export Bills Purchased/ Discounted.(DP & DA Bills)

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted orpurchased by the banks. It is used in indisputable international trade transactions and the

proper limit has to be sanctioned to the exporter for purchase of export bill facility.

2. Export Bills Negotiated (Bill under L/C)

The risk of payment is less under the LC, as the issuing bank makes sure the payment. The

risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of

the inborn security available in this method, banks often become ready to extend the finance

against bills under LC.

However, this arises two major risk factors for the banks:

1. The risk of nonperformance by the exporter, when he is unable to meet his terms and

conditions. In this case, the issuing banks do not honor the letter of credit.

2. The bank also faces the documentary risk where the issuing bank refuses to honour its

commitment. So, it is important for the for the negotiating bank, and the lending bank

to properly check all the necessary documents before submission.

3. Advance Against Export Bills Sent on Collection Basis

Bills can only be sent on collection basis, if the bills drawn under LC have some

discrepancies. Sometimes exporter requests the bill to be sent on the collection basis,

anticipating the strengthening of foreign currency.

Banks may allow advance against these collection bills to an exporter with a concessional
http://www.eximguru.com/drawback-rates/default.aspxhttp://www.eximguru.com/drawback-rates/default.aspx


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rates of interest depending upon the transit period in case of DP Bills and transit period plus

usance period in case of usance bill.The transit period is from the date of acceptance of the

export documents at the banks branch for collection and not from the date of advance.

4. Advance Against Export on Consignments Basis

Bank may choose to finance when the goods are exported on consignment basis at the risk of

the exporter for sale and eventual payment of sale proceeds to him by the consignee.

However, in this case bank instructs the overseas bank to deliver the document only against

trust receipt /undertaking to deliver the sale proceeds by specified date, which should be

within the prescribed date even if according to the practice in certain trades a bill for part of

the estimated value is drawn in advance against the exports.In case of export throughapproved Indian owned warehouses abroad the times limit for realization is 15 months.

5. Advance against Undrawn Balance

It is a very common practice in export to leave small part undrawn for payment after

adjustment due to difference in rates, weight, quality etc. Banks do finance against the

undrawn balance, if undrawn balance is in conformity with the normal level of balance left

undrawn in the particular line of export, subject to a maximum of 10 percent of the export

value. An undertaking is also obtained from the exporter that he will, within 6 months from

due date of payment or the date of shipment of the goods, whichever is earlier surrender

balance proceeds of the shipment.

6. Advance Against Claims of Duty Drawback

Duty Drawback is a type of discount given to the exporter in his own country. This discount

is given only, if the inhouse cost of production is higher in relation to international price. This

type of financial support helps the exporter to fight successfully in the international markets.

In such a situation, banks grants advances to exporters at lower rate of interest for a

maximum period of 90 days. These are granted only if other types of export finance are also

extended to the exporter by the same bank.After the shipment, the exporters lodge their

claims, supported by the relevant documents to the relevant government authorities. These


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claims are processed and eligible amount is disbursed after making sure that the bank is

authorized to receive the claim amount directly from the concerned government authorities.

CRYSTALLIZATION OF OVERDUE EXPORT BILLS

Exporter foreign exchange is converted into Rupee liability, if the export bill purchase /

negotiated /discounted is not realize on due date. This conversion occurs on the 30th day after

expiry of the NTP in case of unpaid DP bills and on 30th day after national due date in case

of DA bills, at prevailing TT selling rate ruling on the day of crystallization, or the original

bill buying rate, whichever is higher.


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3.0 CORPORATE FINANCE

3.1 MSME

The Micro Small and Medium enterprises (MSMEs) have been accepted as the engine of

economic growth and play an important role in the equitable economic development of

country.

The major advantage of the sector is its employment potential at low capital cost. The

labour intensity of the MSME sector is much higher than that of the large enterprises.

The MSMEs constitute over 90% of total enterprises in most of the economies and are

credited with generating the highest rates of employment growth and account for a

major share of industrial production and exports.

MSMEs have been established in almost all-major sectors in the Indian industry

Food Processing

Agricultural Inputs

Chemicals & Pharmaceuticals

Engineering; Electrical, Electronics

Electro-medical equipment

Textiles and Garments

Leather and leather goods

Meat products

Bio-engineering

Sports goods

Plastics products

Computer Software, etc.


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INDUSTRY SCENARIO

1. In India, the MSMEs play a pivotal role in the overall industrial economy of thecountry.

2. MSMEs always represented the model of socio-economic policies of Government of

India which emphasized judicious use of foreign exchange for import of capital goods and

inputs; labour intensive mode of production; employment generation; non concentration of

diffusion of economic power in the hands of few (as in the case of big houses); discouraging

monopolistic practices of production and marketing ; and finally effective contribution to

foreign exchange earning of the nation with low import-intensive operations. It was also

coupled with the policy of de-concentration of industrial activities in few geographical

centers.

3. In recent years the MSME sector has consistently registered higher growth ratecompared to

the overall industrial sector. With its agility and dynamism, thesector has shown admirable

innovativeness and adaptability to survive the recenteconomic downturn and recession.

4. As per available statistics (4th Census of MSME Sector), this sector employs anestimated

59.7 million persons spread over 26.1 million enterprises. It is estimated that in terms of

value, MSME sector accounts for about 45% of the manufacturingoutput and around 40% of

the total export of the country.


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3.1.1 OBJECTIVE

The basic objectives of the MSE Loan Policy are: -

Our Bank has shown growth of MSE credit from Rs.9317 crore as on 31.03.2010 toRs.12444

crore as on 31.03.2011 representing an increase of 33.56%. The principalobjective of this

policy is to improve our portfolio of MSE credit to Rs.17000 crore by31.03.2012 and

Rs.49800 crore by 31.03.2016. In addition to above our other objectivesare as under.

1. Banks positive commitment to its MSE customers to provide easy,speedy and transparent

access to banking services in their day to dayoperations and in times of financial difficulty.

2. Positive thrust to MSE sector.

3. Hassle free credit to Micro and Small Enterprises.

4. Description of MSE sector.

5. Proper appraisal and evaluation of advances proposal.

6. Achievement of different parameters prescribed by Government of India /Reserve Bank of

India.

7. Cluster Based approach for financing MSE.

8. Increased Coverage under credit guarantee scheme of CGTMSE.

9. Complete adherence to BCSBIs Code of Banks commitment to Microand Small

Enterprises.

10. Generation of large number of youth entrepreneur.

11. The policy strives to ensure that the socio economic obligations cast on thebank are fully

met.

12. The policy document ensures compliance of all the directives/guidelinesissued by the

Government/RBI and all other regulatory requirements on MSE.

13. With regard to guidelines issued from time to time by the authorities, theBank would

follow them in all their aspects. However, if these permitvarying interpretations, the Bank

will adopt a reasonable interpretation, asdetermined by the Credit Risk Management

Committee without deviatingfrom the spirit behind the guidelines.


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MICRO, SMALL & MEDIUM ENTERPRISES DEVELOPMENT (MSMED)ACT,

2006

The Government of India has enacted the Micro, Small and Medium EnterprisesDevelopment(MSMED) Act, 2006 on June 16, 2006 which was notified on October 2,2006. With the

enactment of MSMED Act 2006, the paradigm shift that has taken placeis the inclusion of the

services sector in the definition of Micro, Small & Mediumenterprises, apart from extending

the scope to medium enterprises. The MSMED Act,2006 has modified the definition of

micro, small and medium enterprises engaged inmanufacturing or production and providing

or rendering of services. The Reserve Bankas notified the changes to all scheduled

commercial banks.

3.1.2 DEFINITION OF MICRO, SMALL AND MEDIUM ENTERPRISES

(a) Enterprises engaged in the manufacture or production, processing orpreservation of

goods as specified below:

i. A micro enterprise is an enterprise where investment in plant andmachinery does not

exceed Rs. 25 lakh;

ii. A small enterprise is an enterprise where the investment in plant andmachinery is more

than Rs. 25 lakh but does not exceed Rs. 5 crore;

iii. A medium enterprise is an enterprise where the investment in plant and machinery is

more than Rs.5 crore but does not exceed Rs.10 crore.


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(b) Enterprises engaged in providing or rendering of services and whose investmentin

equipment (original cost excluding land and building and furniture, fittings and otheritems

not directly related to the service rendered or as may be notified under the MSMEDAct,

2006) are specified below.

i. A micro enterprise is an enterprise where the investment in equipmentdoes not exceed

Rs. 10 lakh;

ii. A small enterprise is an enterprise where the investment in equipment ismore than Rs.10

lakh but does not exceed Rs. 2 crore

iii. A medium enterprise is an enterprise where the investment in equipmentis more than

Rs. 2 crore but does not exceed Rs. 5 crore.


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3.1.3 TARGETS FOR DOMESTIC COMMERCIAL BANKS

The domestic commercial banks are expected to enlarge credit to priority sector andensure

that priority sector advances (which include the micro and small enterprises(MSE) sector)

constitute 40 per cent of Adjusted Net Bank Credit (ANBC) or creditequivalent amount of

Off Balance Sheet Exposure, whichever is higher.

In terms of the recommendations of the Prime Ministers Task Force on MSMEs,banks are

advised to achieve a 20 per cent year on year growth in credit to micro andsmall enterprises

and a 10 per cent annual growth in the number of micro enterpriseaccounts.

In order to ensure that sufficient credit is available to micro enterprises within theMSE sector,

banks should ensure that:

a) 40 per cent of the total advances to MSE sector should go to micro(manufacturing)

enterprises having investment in plant and machinery up to Rs. 5lakh and micro (service)

enterprises having investment in equipment up to Rs. 2lakh;

b) 20 per cent of the total advances to MSE sector should go to micro(manufacturing)

enterprises with investment in plant and machinery above Rs. 5lakh and up to Rs. 25 lakh,

and micro (service) enterprises with investment inequipment above Rs. 2 lakh and up to Rs.

10 lakh. Thus, 60 per cent of MSEadvances should go to the micro enterprises.

c) While banks are advised to achieve the 60% target as above, in terms of

therecommendations of the Prime Ministers Task Force, the allocation of 60% ofthe MSE

advances to the micro enterprises is to be achieved in stages viz. 50% inthe year 2010-11,

55% in the year 2011-12 and 60% in the year 2012-13.


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3.2 PRODUCTS OFFERED BY CENTRAL BANK OF INDIA TO MSME


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3.3 ASSESSMENT OF CREDIT FOR MSE UNITS

In tune with the liberalized environment, our Bank has adopted the following system for

assessment of working capital requirements of the borrower.

1 Turnover Method: This method should be used for assessing fund based working capital

requirements enjoyed from the banking system up to Rs.5.00 crore.

2 Traditional Method: Fund based working capital requirements under this method should

be assessed under Method II of Tandon Committee for borrowers enjoying fund based

working capital limits of above Rs.5.00 crore but less than Rs.50.00 crore.

3 Cash Budget Method:

This method would be applicable to borrowers who are

i. Falling under Cyclical Industries like Tea, Sugar etc.

ii. Borrowers availing Fund Based Working Capital limits of Rs.50 crore and above fromthe

banking system.


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3.4 TERM LOAN ASSESSMENT

A term Loan is an advance given for a fixed period with provision for repaymentaccording to

agreed term. A term loan may be required to finance the following purposes:

I. For Financing Specific Asset;

II. For Financing modernization programme;

III. For Financing expansion programme;

IV. For Financing diversification programme;

V. For Financing New Project;

VI. For Financing Rehabilitation Project.

Term loans can be classified as under:

i. Short term loanwhere repayment period does not exceed 1 year;

ii. Medium term loanwhere repayment period is over 1 year and up to 5 years;

iii. Long term loan - where repayment period exceeds 5 years.

Whatever be the purpose of term loan, it is to be always ensured that theactivity/asset

financed must be capable of generating adequate cash profit so that itis sufficient to repay the

term loan installments.

While assessing a term loan proposal the following may be taken into account:

a. Technical Feasibility;

b.Commercial Viability;

c. Managerial Competence;d.Economic Feasibility;

e. Financial Feasibility;

f. Cost of Project and Means of Finance;

g.Break-Even Analysis;

h.Debt-Service Coverage Ratio;

i. Pay-back period on discounted cash flow consideration;

j. Internal Rate of Return.


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The appraisal of a term loan proposal needs consideration of all or some of the

aboveparameters.

Independent TEV study should be carried out in respect all the Term Loan Proposals.Forproposals up to Rs.5.00 crore TEV report from an outside agency may not be insistedupon.

Empanelment of external consultants for the Techno-economic study would becarried out by

Credit Policy Department at Central Office as per the procedure approvedby the Board.

3.4.1 SANCTION OF TERM LOAN AND WORKING CAPITAL TOGETHER:

Term loans and workingcapital facilities to be sanctioned at the same time and pro rata share

to be taken incase of Consortium/Multiple Banking.

A composite loan limit of Rs.1 crore can be sanctioned by banks to enable theMSE

entrepreneurs to avail of their working capital and term loan requirementthrough Single

Window.

Combined Level of stocks and receivables: CC/OD against stock andreceivables to be

allowed under one facility.

Sanctioning Powers for combined limit: Full lending power for the combinedlimit up to

Rs.300 lac subject to lending power delegated under loan policy. However no separate book

debt facility is permissible, ifcombined limit is sanctioned.

Rejection/Curtailment of credit limit to be approved by next higher authorities.

There should not be case where Term Loan has been sanctioned but sanction of

Working Capital facility is awaited.

Margin: The margin on combined limit up to Rs.300 lac may be at 25% andreceivables up to

180 days can be reckoned for book debt financing.For loansunder Government sponsored

schemes and Banks special credit schemes, marginwill be obtained as stipulated in the

scheme even if it is different from the levelsindicated above.


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3.4.2 RATIOS

Current Ratio: 1.33

Debt-Equity Ratio: 3:1

Debt Service Coverage Ratio (Average): 1.50

Interest Coverage Ratio: 1.50:1

Asset Coverage Ratio: 1.33:1

Net Worth to Bank Borrowings ratio: 1:4

However, deviation up to 1:6 can be allowed by next higher authority not below the rank of

Zonal Manager in case of Manufacturing & Trading accounts.

LIMITS RATES

BASE RATE

(a)

SPREAD

(b)

EFFECTIVE RATE

(a+b)

UP TO 10 LACS 10.50 0.50 11.00

ABOVE 10 LACS

UPTO 100 LACS

10.50 1.00 11.50

B) MICRO & SMALL ENTERPRISES: (LIMITS ABOVE Rs 1 CRORE):

FOR WORKING CAPITAL AND TERM LOAN UPTO 1 YEAR

RATING CATEGORY

OF THE BORROWER

MANUFACTURING & SERVICE

BASE RATE (a) SPREAD (b) EFFECTIVE RATE

(a+b)

A++ / CBI-1 10.50 1.50 12.00

A+ / CBI-2 10.50 2.00 12.50

A / CBI-3 10.50 2.50 13.00

B+ / CBI-4 10.50 2.75 13.25

B / CBI-5 & 6 10.50 3.00 13.50

C+ / CBI-7 10.50 3.50 14.00

C / CBI-8 10.50 4.00 14.50

D+ / CBI-9 10.50 4.50 15.00


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C] FOR TERM LOANS ABOVE 1 YEAR:

TENOR PREMIUM :


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3.5 RATING:

As per Reserve Bank of India, in case of advances up to Rs.2 crore toMicro and Small

Enterprises (MSE) sector Bank should implement scoring modeland information required for

the scoring model should be incorporated in theapplication form itself. Accordingly Bank has

formulated two separate scoring models, for all advances upto Rs.2 crore falling under MSE

sector.

After taking into consideration all these above factors, the credit appraisal of the

corporate is done and the amount of loan sanctioned is decided. A credit rating estimates the

credit worthiness of an individual, corporation. It is an evaluation made by bank of a

borrowers overall credit history. A poor credit rating indicates a high risk of defaulting on a

loan, and thus leads to high interest rates or the refusal of a loan by the creditor.

Central Bank of India calculates its credit rating score an individual's credit score,

along with his or her credit report, affects his or her ability to borrow money through

financial institutions such as banks. The rate of interest decided by the bank depends on a lot

of factors including the credit rating of the company. Generally banks decide on rate of

interest on the basis of credit rating and accordingly charge spread over and above BPLR.

MANUAL SCORING MODEL FOR MICRO AND SMALL ENTERPRISES (Existing

Borrowers) WITH CREDIT EXPOSURE UPTO 2 CRORES

SR.

NO.

PARAMETER WEIGHTAGE

(SCORE)

1 Compliance of all terms and conditions of sanction 5

Non-compliance due to non-cooperation by borrower -5

2 Current ratio 1.33 and above 5

Current ratio between 1.20 to 1.32 4




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Current ratio less than 1 0

3 Debt Equity Ratio (DER) upto 2 consistently for the past 2

years

10

DER above 2 and upto 3 for the past 2 years 8



DER above 5 for the past 2 years 0

4 Net sales growth rate over 20% for past 3 years 10

Net sales growth rate over 15% upto 20% for past 3 years 8

Net sales growth rate over 10% upto 15% for past 3 years 5

Net sales growth rate positive for past 3 years 3

Net sales growth rate negative for past 3 years 0

5 PAT/Net Sales over 15% 10

PAT/Net Sales over 10% upto 15% 8

PAT/Net Sales over 5% upto 10% 5

PAT/Net Sales positive 3

PAT/Net Sales negative -5

6 QIS / Stock Statement / Renewal Data

Timely submission 10

Delayed irregular submission 5

Non submission -5

7v Prompt service of interest / Installments and qualifying for

classification under standard assets

If interest/installment is serviced within 1 month after its

application

10


application

8


application

5

If interest/installment is serviced after 3 month after its

application

0


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8 Inventory Norms

Fair Compliance (Deviation upto 15%) 5

Compliance (Deviation over 15% upto 30%) 3

9 Compliance to bills culture 5

10 Payment of bills on due date 10

With delay upto 15 days 5

Instances of overdues for more than 3 months -5

11 Timely submission of necessary documents to enable review

of limits (within 3 months of due date of review)

5

12 Prompt ulfillment of LC/LG commitments on due dates 5*

Devolvement of LCs/Invocation of BGs -5,-10

13 Providing substantial ancillary business/deposits/overall

association with bank

10

TOTAL SCORE

MANUAL SCORING MODEL FOR MICRO AND SMALL ENTERPRISES (NEW

UNITS) WITH CREDIT EXPOSURE UPTO 2 CRORES

SR.

NO.

PARAMETER WEIGHTAGE

(SCORE)

1 Projected average net sales growth over 15% for first 3 years 15

Projected average net sales growth over 10% upto 15% 10

Projected average net sales growth over 5% upto 10% 5

Projected average net sales growth below 5% 0

2 PAT/Net sales over 15% average for first 3 years 15

PAT/Net sales over 10% average for first 3 years 10

PAT/Net sales over 5% average for first 3 years 5

PAT/Net sales positive for first three years 3

3 Projected Debt Equity Ratio upto 2 for first 3 years 10

Projected Debt Equity Ratio above 2 upto 3 8

Projected Debt Equity Ratio above 3 upto 4 5


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4 Access to inputs (labour/raw material/power) locally

available/tied up

10

Access to inputs not locally available but source identified 5

Access to inputs not available locally nor source identified 0

5 Access to market for products-Locally available/tied up 10

Access to market for products not locally available but

identified

5

Access to market for products not locally available nor

identified

0

6 Experience of promoters in industry-qualified and

experienced

10

Qualified/ trained but not exper