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A Case Study on HDFC Bank – Business Banking Business Banking service bouquet for SMEs As one of the fast est developi ng pr ivat e ban ks it self , HDFC rela tes best wi th the resour ces requirements of SMEs during the evolution and sustenance phase. The Bank has proactively put in  place a separate business group viz Business Banking Group to cater to the banking requirements of Small and Medium Enterprise (SME) sector in line with the RBI guidelines. The extant guidelines are issued by RBI vide its circular RPCD.PLNFS.BC .No.6/06.02.31/2007-08 dated July 2, 2007. The high level of professional expertise and experience in trade services coupled with networks of over 500  branches and correspondent relationship with banks worldwide enables them to meet the various  business requirements. This group offers a bouquet of customised products /services (secured and unsecured) suited to the various requirements of the SME customer. These products cater to the entire working capital cycle including trade finance products like LCs/ Bank Guarantees/ bills discounting facilities, export finance, term loans, current account services and other financing requirements including forex risk management  products in a simplified manner to the SME sector. For running an establishment, two types of capital are required: Classification of Capital Fixed Capital: Cash required for acquiring fixed assets such as land, equipments building, etc. Working Capital: Cash for  purchasing /stocking for raw materials, payment of operational expenses; for  financing the interval  between the supply of goods and receipt of payment post sales i.e. during the operating cycle

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A Case Study on HDFC Bank – Business Banking

Business Banking service bouquet for SMEs

As one of the fastest developing private banks itself, HDFC relates best with the resources

requirements of SMEs during the evolution and sustenance phase. The Bank has proactively put in place a separate business group viz Business Banking Group to cater to the banking requirements of 

Small and Medium Enterprise (SME) sector in line with the RBI guidelines. The extant guidelines are

issued by RBI vide its circular RPCD.PLNFS.BC .No.6/06.02.31/2007-08 dated July 2, 2007. The high

level of professional expertise and experience in trade services coupled with networks of over 500

 branches and correspondent relationship with banks worldwide enables them to meet the various

 business requirements.

This group offers a bouquet of customised products /services (secured and unsecured) suited to the

various requirements of the SME customer. These products cater to the entire working capital cycle

including trade finance products like LCs/ Bank Guarantees/ bills discounting facilities, export finance,

term loans, current account services and other financing requirements including forex risk management

 products in a simplified manner to the SME sector.

For running an establishment, two types of capital are required:

Classification of Capital

Fixed Capital: Cash

required for acquiring fixedassets such as land,

equipments building, etc.

Working Capital: Cash for   purchasing /stocking for raw

materials, payment of operational

expenses; for  financing the interval  between the supply of goods and

receipt of payment post sales i.e.

during the operating cycle

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V.A. Product and Services Bouquet

The products offered can be broadly classified into Fund based and Non-Fund based

V.A.1 Fund Based

The lending of funds can be by way of Demand Loan repayable on demand or Term Loan repayable

over a period of time at agreed intervals .It can also be by the way of Overdraft where the credit limit

up to the amount to be lent is set in the current account or a Cash Credit account, where against the

security of stocks or receivables a limit up to sanctioned level of lending is made available to the

 borrower in the form of running account allowing withdrawals up to the limit of the requirement

.Lending can also take the form of Bill Discounting where the bank lends against bill of exchange

drawn in favour of the borrower but payable at future date by placing the amount of the bill less

discount charges at the disposal of the borrower by discounting the bill .

V.A.1.1) Overdraft:

When a customer maintaining a current account is allowed by the bank to draw more than the credit

  balance in the account, such a facility is called an “overdraft “facility .At the request and the

requirement of customers temporary overdrafts are also allowed .However, against certain securities,

regular overdraft limits are sanctioned .Salient features of this type of account are as follows.

• Overdraft is a running account and hence debits and credits are freely allowed

• Interest is applied on daily product basis and debited to the account on monthly basis.

• Overdrafts are generally granted against the security of government securities, shares &

debentures, LIC policies and bank’s own deposits etc and also on unsecured basis.

• Temporary overdrafts should be allowed only on written request of the customer. A letter of 

recording should be obtained from a customer when a temporary overdraft is granted to him.

However, temporary overdrafts should be granted sparingly to meet the short term requirements

of customers.

• In case it is decided to withdraw/reduce overdraft facility to the customer sufficient notice of 

the same should be given to the customer.

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V.A.1.2) Cash Credit

A Cash Credit is an arrangement to extend short term working capital under which the bank establishesa credit limit and allows the customers to borrow money up to a certain limit .The bank sanctions a

limit called the cash-credit limit to each borrower up to which he is allowed to borrow against the

security of stipulated tangible assets i.e. stocks, book debts etc .The customer need not draw at one the

whole of the credit limit sanctioned but can withdraw from his cash-credit amount as and when he

needs the funds and deposit the surplus cash/funds proceeds of sale etc. , into the account. Besides this,

the facility of frequent and unrestricted transactions is available .Salient features of cash-credit system

are as under:

• Sanction of the limit: Cash-Credit limit is sanctioned after taking into account several factors

detailed later in the product note. The drawings are restricted upto the sanctioned limits or 

available Drawing Power (whichever is lower) and should be only for the purposes for which

the limit has been sanctioned.

• Running Account: A Cash-Credit account is an active running account. There are no restrictions

as regards number of debit and / or credit transactions in the account. It is expected that all the

sales /purchase /other transactions of the borrower should be routed through this account. In fact

a healthy churn rate in the account to be encouraged, the account may move freely between

debit and credit balances as well.

• Repayment: Cash-Credit facility is technically repayable on demand and there is no specific

date of repayment. Quarterly behaviour scoring shall indicate the health of the account and an

annual review to be conducted to decide on account renewal.

• Application of interest and service charges :

1. Interest is calculated on daily product basis, applied on calendar monthly basis

2. For credit balance lying in cash-credit account, no interest is payable as cash-credit is in the

nature of current account.

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3. Service charges as per current account rules are to be levied.

V.A.1.3) Demand Loan:

A demand loan is a loan sanctioned for a period upto 35 months repayable on demand. The loan is

disbursed by way of single debit to the account. The amount needs to be repaid in instalments, as per 

terms of sanction.

• Further debits: Demand loan is not a running account and as such no further debits to an

account is made subsequent to the initial advance expect for interest, cheque bounce and other 

sundry /incidental charges.

• Further Credits: No restrictions on credits in the account as they would go towards repayment

of the demand loan outstanding.

• Repayment: Although all demand loans are payable on demand, repayment schedule is fixed by

way of Equated Monthly Instalments. Lump sum payments also to be allowed.

• Interest: Interest is calculated on debit products on daily products basis and applied on calendar 

month basis.

• Granting of additional loan : A fresh loan account should be opened for every new advance

sanctioned and a new DP Note be taken .When a further loan/facility is proposed to be

sanctioned against the same security or to the same borrower , the existing facility nature and

the behaviour thereof must be documented in the CAM .

V.A.1.4) Term Loan

A term loan is an advance allowed for a fixed period either in lump sum or in instalments and which isrepayable according to a schedule of repayment as against on demand and at a time .

• Period: A term loan is granted for a period exceeding 3 years but not exceeding 5 years.

• Purpose: Term loans are generally granted to meet the need of capital expenditure i.e. acquiring

of fixed assets like land, building , plant & machinery etc for the purpose of setting up of new

units or expansion , modernisation ,renovation ,replacement of existing units , adding more bays

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in the service station , more floors in a departmental store etc.

• Repayment: A monthly repayment schedule is fixed and accordingly loan is repaid in

instalments.

Interest: Interest is as per the EMI schedule calculations.

• Security: Term Loans are granted against the security of immovable property, plants &

machinery, vehicles, acceptable liquid securities, etc.

V.A.1.5) Bills purchase/Discounting:

These represent advances against bills of exchange drawn by the customers on their clients .Bills are

either purchased or discounted .Demand bills are purchased and usance bills are discounted .Bills may

  be either clean or documentary . Bills accompanied by title to goods i.e. R/R, MTR, etc are

documentary bills. Bills without such documents are known as clean bills. Documents under bills are

either deliverable against acceptance or against payment.

A seller of goods draws a bill of exchange (draft) on buyer (drawer), as per terms for the supplied. Such

 bills can be routed through the banker of the seller to the banker of the buyer for effective control.

1) Clean & Documentary bill:

• When documents to title to goods are not enclosed with the bill, such a bill is called a

“Clean Bill “. When documents to the title to goods along with other documents are

attached to the bill , such a bill is called “Documentary Bill “

• Documents, the due possession of which give the title to the goods covered by them such as

RR/MTR, bill of lading, delivery orders etc. are called documents to title to goods.

• Cheques and drafts are also examples of Clean Bills.

2) Demand & Usance Bill

When the bill of exchange either clean or documentary is made payable on demand or sight, such a

 bill is called Demand Bill. The buyer is expected to pay the amount of such bill immediately at

sight .If such a demand bill is a documentary bill, then the documents including documents title to

goods are delivered to the buyer only against payment of the bill.(Documents against payment –DP

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Bills)

When a bill, either clean or documentary is drawn payable after certain period or on a specific date,

the bill is called Usance Bill. Such bill is presented to the buyer one for Acceptance, when he

accepts to pay the bill on due date and on due date the bill is presented again for Payment. In case

of documentary usance bill, the documents are delivered to the buyer (drawee/acceptor) against hisacceptance of bill (Documents against acceptance-DA Bills)

3) Finance against bills of exchange:

Working capital finance to meet the post sale requirements of borrowers can be also met through

Bill finance either by Purchasing Bills or Discounting.

A) Bill Purchase facility is extended against clean demand bills like cheques /drafts/bills of 

exchange/hundis and demand documentary bills, whereby the bank lends money to the payee

of the cheque /drafts/and to the drawer of the bills by purchasing the same against tendering of 

such bills by the payee/drawer. The bank in turn sends the bills for collection, preferably to its

own branch at the place of drawee or to its correspondent bank or to the buyers (drawee’s)

 bank.

B) Bills discounting facility is extended against usance bills. In such cases, the seller tenders the

usance bill drawn by him usually along with documents to title to goods; to his banker who

discounts the bill i.e. levies discount charges for the unexpired portion of the duration of the

 bill and credit the balance amount to the seller’s account. Thereafter the drawer’s bank sends

the bill to collecting bank at the centre of drawer either to its own branch or drawee’s bank ,

with instructions to release the documents to title against acceptance and thereafter ,to recover 

the bill amount on due date . Sometimes the accepted usance bills are also tendered and

discounted by the bank.

V.A.1.6) Export Finance:

Export Finance is broadly classified into:

A. Pre-shipment finance

B. Post-shipment finance

Financial assistance extended prior to the shipment of goods shall fall under pre-shipment finance

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whereas; financial assistance extended subsequent to the shipment of goods shall fall under the preview

of Post-shipment Finance.

Export finance is governed , by and large by RBI directives, Exim –Policy etc. and , therefore ,

knowledge of the Exchange Control, Trade Policy procedures and directives of trade control authorities

, international trade practices , particularly those of International Chamber Of Commerce (ICC), Paris ,etc. is very much essential .It is an additional responsibility on the part of lending banker to keep in

mind all such rules and regulations , over and above usual practices , procedures and principles of 

lending .

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V.A.2 Non-Fund Based

There are certain types of advances which do not involve deployment of funds at least in the initial

stage. These are called Non-Fund Based Credit. A performance Guarantee issued by the bank on behalf 

of a customer to third party for fulfillment of terms of contract, Letter of Credit issued by the bank on behalf of its customer favoring the third party in India or abroad is some of the examples of this type of 

finance. Even though funds are not involved at the initial stage, bank is taking risk, and on failure of its

client to fulfill terms of guarantee or letter of credit, we will have to pay out funds to the beneficiary on

 behalf of the customer and recover it later from him.

V.A.2.1) Bank Guarantees

A Contract of Guarantee under the Indian Contract Act is a contract to perform the promise or discharge the liability of a third person on case of his default. A Contract of Guarantee should be

distinguished from Contract of Indemnity in the latter case, party promises to save another person from

loss caused to him by the conduct of the promissory or by any other person.

We come across a Guarantee in two capacities .One as a beneficiary when somebody guarantees the

 payment of debt of bank‘s borrower in case of default. The other as a guarantor; when the bank itself 

 promises to pay the dues or discharge the liabilities of its customers in favour of a third party. While in

the former case, the Bank is the creditor, in the latter case, Bank’s liability is co-extensive with that of 

the debtor.

The need for such guarantees to be issued by banks arises due to the business and financial requirement

of Bank’s constituents. There are many situations wherein, the constituent is required to provide a

guarantee from his banker in lieu of some money owed by the constituents to others or likely loss /

damage that may be caused by constituent’s performing/non-performing of specified task. Thus, the

 bank by issuing such guarantees steps into the shoes of the constituent and assumes the financial risk 

and responsibility attached to it.

Typically, the beneficiaries of Guarantee are generally Statutory /Government authorities, Public Sector 

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Undertakings, Overseas suppliers of goods /machinery on differed payment terms, Reputed institutions /limited

companies /firms.

Types of Guarantees: Guarantees issued are broadly classified into 3 categories Financial,

Performance and Deferred Payment Guarantees.

Financial Guarantees:

In case of financial guarantees, the bank guarantees the customer’s financial worth, credit worthiness

and his capacity to take up financial crisis. Therefore, guarantee issued in respect of constituents

liability, such as guarantees favouring tax/customs/excise/court authorities in respect of disputed

claims, payment of taxes, customs and excise etc .will come under the classification of financial

guarantees. While issuing such guarantees one needs to be sure about the financial strength /liquidity of 

the party.

Guarantees covering security deposit/earnest money/advance payment /mobilisation advance etc.

would come under this category .Similarly, guarantees covering payment for supplies to be lifted by

 parties will also be treated as financial guarantees.

Performance Guarantees:

Performance guarantees are issued on behalf of constituents guaranteeing their performance as per thecontracts entered into, performance of machineries supplied, due discharge of other contractual

obligations undertaken etching such guarantees, Bank does not undertake to perform the obligations

undertaken by the customer under the contract, in the event of his failure/default as they may be of a

highly technical nature. The purpose of the performance guarantee is only to fix the financial

responsibility in the event of default or failure on the part of the customer to perform the obligations

undertaken by him. Hence, in the event of default of the customer and on being notified to that effect,

the Bank will make payment under the guarantee.

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Deferred payment Guarantees:

Deferred Payment Guarantee, which is a financial guarantee, is a way of raising long term resources for 

acquiring fixed assets /capital goods by securing guarantee of repayment of principal and interest from

his banker to the supplier of capital goods for supplier’s credit. This also helps the supplier to improve

his cash flow by discounting these bills from his bankers.

In case of capital goods / machinery /heavy vehicles/tractors/trailers, the purchaser has to raise large

amount of resources to but these items. For this the intending purchaser may approach his bank for 

term loan repayable over a medium/long term in instalments. It is possible that due to various

constraints like mismatch in resources /deployment period, funds crunch etc.bank may not be able tosanction term loans.

Under such circumstances, the borrower /intending partner may request the supplier to extend him long

term credit. The supplier of such goods etc may agree to extend such credit payable over a period of 

say 3/5/7 years at say half yearly instalments. The supplier will also change interest on the credit

extended and such interest may also be recovered in instalments along with principal.

However, the supplier may not agree to extend such credit, unless he is satisfied about the capacity of 

the purchaser to pay the instalments on due date. For this, he may insist on the purchaser’s bank 

guaranteeing the repayments.

The purchaser may then approach his bankers to guarantee the repayment on due dates. The bank may

consider his request and will extend the guarantee which covers an extended repayment period or 

Deferred Payment by the borrower/purchaser to the supplier/beneficiary .Here such a guarantee is

called Deferred Payment Guarantee.

Bid Bond Guarantees:

Whenever a constituent participates in an international tender/bid, he would be required to furnish a bid

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  bond guarantee. Such tenders would be of large magnitude and the completion may involve

considerable time. Therefore requests for bid bond should be examined in totality as in the case of 

financing of large projects/contracts. Besides the viability of the project/contract, the technical and

financial capability of the party to complete the project/contract successfully should carefully be

analysed and branches should satisfy themselves thoroughly about all these aspects.

It should be noted that once the bid is accepted, the party would require various facilities such as

 performance guarantee for earnest money deposit, guarantee in respect of advance payment received,

etc. Further, working capital facilities would also be required for completion of the contract/project on

time. In other words we may have to consider sanctioning of several other facilities which might not

have been envisaged at the time of issuing the Bid Bond Guarantee. Further the amount of the Bid

Bond Guarantee would be relatively small compared to other facilities that the Bank may constrain to

sanction at later stage. Therefore at this stage it is not proposed to issue bid bond guarantee under this

 programme

V.A.2.2) Letters of Credit :

Ideally any seller of goods/services would like to receive payment before the delivery of goods/services

to buyer. Similarly the buyer would also like to ensure that the goods/services bought are as per his

specifications and deliveries are effected in time, before parting with the money .If the buyer and the

seller are two different , far away stations ,both the factors cannot be satisfied simultaneously.

As compromise services of third party as an intermediary are utilised .The intermediary is usually a

 bank who issues a letter of assurance to a seller at the request of a buyer for payment of most of 

goods/services sold on certain terms and conditions .Such an assurance letter of credit.

A letter of credit is a written instrument issued by a banker at the request of a buyer (applicant) in

favour of the seller (beneficiary) undertaking to honour the documents or drafts drawn by the seller in

accordance with the terms and conditions specified in the credit, within a specified time.

Thus the credit is made available to the seller against delivery of certain specified documents. When

the credit stipulates payment of money when the documents are presented to the paying bank, the L/C

is called a Document against payment .If the credit stipulates the delivery of documents by the seller 

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against acceptance and that payment will made on the due date , the L/C is called usance L/C or D/A

L/C .

Parties to a letter of credit:

Following are the parties to a letter of credit.• Applicant: The buyer of the goods/services(borrower)

• Opening Bank: The Bank /Branch which lends its name/credit

• Advising Bank: Opening Bank’s branch or another bank at beneficiary’s place to whom the

letter of credit is sent for onward transmission to the beneficiary.

• Seller/Beneficiary: The party to whom the credit is addressed (seller or supplier of the

goods/services).

•  Negotiating Bank: Opening bank’s branch or another bank that negotiates the documents.

• Conforming Bank: The bank adding conformation to the letter of credit.

Kinds of Credit:

The different types of letters of credits which banks generally issue are:• Inland L/C: An L/C where all the parties to an L/C are located within the country.

• Foreign L/C: An L/C where either the opener or the beneficiary is located outside the country of 

issue and arising out of exports or import of goods/services out of /into the country of issue.

• Revocable Credit: A credit that can be cancelled or amended at any time without the prior 

knowledge of the beneficiary.

• Irrevocable Bank :It is a definite undertaking of the issuing bank to honour documents strictly

drawn as per the terms and conditions of credit which cannot be amended or cancelled without

the agreement of all the parties to the credit in particular the beneficiary .In practice ,LC are

almost always irrevocable .

• Confirmed Credits: Where credits carry the confirmation of the advising bank. It constitutes a

definite undertaking of such conforming bank in addition to that of the opening bank.

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• Transferable Credits :A transferable Credit is a credit under which the beneficiary (1st

  beneficiary)may request the bank authorised to pay, incur a deferred payment undertaking

,accept or negotiate(the transferring bank ) or in the case of a freely negotiable credit , the bank 

specifically authorised in the credit as transferring bank , to make the credit available in whole

or in part to beneficiary (is)second beneficiary/beneficiaries.

• Acceptance Credits: Where the payment is to be made on the maturity date in terms of the

credit.

• Revolving Credit: Which provide that the amount of drawings made there under would be

reinstated and made available to the beneficiary again and again for further drawings during the

currency of credit, up to a certain sum subject to certain conditions specified therein.

Marketing Methodology

HDFC Bank understand how much hard-work goes into establishing a successful SME, and that it is

anything but “small” and as demanding as ever, and the needs are constantly evolving. In keeping with

this requirement, Business Banking offers a bouquet of financial services to meet the clients’

customized financial requirements. The Business Banking division vertical was set up to cater to the

growing demands of capital or working capital requirements of SMEs. The business banking division

of the bank is mainly engaged in sourcing the assets for the bank. The conventional ways of sourcing

were:

• Through the applications submitted in the branches offices

• Cross selling

• Through the Direct Sales Agents (DSAs)

But the skepticism in the market to borrow funds, particularly in SMEs and Micro Enterprises, has

grown due to rising cost of funds and fluctuating currency markets coupled with multiple of suppliers

claiming to have superior product and service mixes. They now prefer to take an expert opinion /

recommendation before making a decision. So the division has adopted push strategy along with pull

strategy and planned to set up a sourcing channel of  CONNECTORS comprising of chartered

accountants, financial consultants and DSAs having SME clients. This channel would help the bank to

reach out directly to the prospective customers. Such connectors shall refer HDFC bank’s products to

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their clients for availing any credit facility and HDFC shall pay them referral fees if the referred party

avail the facility.

Based on above the thought process, Business Banking division devised a team of Management

trainees to initiate discussions with such financial advisors / consultants / potential clients. In

order to develop CONNECTORS’ knowledge and confidence in HDFC’s products and services,

the bank organized a seminar “SYNERGY” on SME Lending & FOREX and provided them a

platform to discuss their queries with the senior officials of the bank.

To implement the aforesaid thought process, our special purpose team of management trainees

was appointed for a stipulated period of two months. The execution stages can be outlined

hereafter.

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 Declaration

I, Ritesh Dineshbhai Parikh, student of Welingkar Institute of Management Studies, roll no.

DPGD/JL08/1046, PGDBA(DLP) – Marketing (2009-10), hereby declare that I have completed my

two months project on:

“Marketing Strategies For Financial Product Of a Bank ” 

The information included in this report is true to the best of my knowledge and belief.

Ritesh Dineshbhai Parikh