Roll No- D018, SAP ID- 80101190221

Answer 1

Process flow in case of Buyer’s credit

Buyer’s Credit
Trade Credits (TC) refers to credits extended to maturity by the overseas supplier, bank, financial
institution and other approved lenders for capital / non-capital products permitted under the
Government of India's Foreign Trade Policy, as defined in this system. Such TCs include the credit of
manufacturers and the credit of purchasers from known lenders, depending on the source of finance.
Benefits of Buyer’s Credit
The benefits of buyer’s credit for the importer are:

 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 may use this financing for any form of trade i.e. 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.

Buyers Credit Process

 Roll No- D018, SAP ID- 80101190221

i. Importer enters into contract with supplier for import of goods under LC/DA/DP.
ii. Suppliers ships the goods and submits document to supplier’s bank (as per agreed payment
terms). Supplier’s Bank in turn submits documents for importer’s bank for payment.
iii. Importer requests the Buyer’s Credit Consultant before the due date of the bill to avail
buyers credit quote.
iv. Consultant approaches overseas bank for indicative pricing, which is further quoted to
Importer.
v. If pricing is acceptable to importer, overseas bank issues offer letter and shares all required
format. Some overseas branches are asking for a separate request letter from importer
before offer letter is issued.
vi. Importer accepts of the offer letter and execute loan agreement (2 copies). Importer’s bank
emails scanned image of offer letter, loan agreement and photo copy import documents to
Overseas Bank and followed by courier.
vii. Importer’s bank issues SBLC in the given format under SWIFT message format MT760.
viii. Importer’s bank issues MT799 in given format containing details more or less same as earlier
LOU format. Some bank instead of MT799 asking for details on bank letter head.
ix. On receipt of 6, 7, 8, overseas branches fund the buyers credit transaction to the Nostro
Account of Importer’s bank and sends repayment details by MT799.
x. Importer’s bank to make import bill payment by utilizing the amount credited
xi. On due date Importer’s bank to recover the principal and Interest amount from the importer
and remit the same to Overseas Bank on due date.

Letter of Credit

A letter of credit (LC) is a written document on behalf of the importer, issued by the bank of the
importer. By issuing it, the exporter is guaranteed that the issuing bank will make a payment to the
exporter for the conduct of the foreign trade. The importer is the LC's claimant while the recipient is
the exporter. In an LC, the issuing bank agrees to pay the said amount in compliance with the agreed
timetable and against stated documents.

An LC's guiding principle is that the issuing bank can make the payment based solely on the
submitted documents, and they are not expected to physically ensure the goods are delivered. If the
documents presented are in accord with the terms and conditions of the LC, the bank has no reason to
deny the payment.

Types of Letter of credit:

Revocable Letter of Credit
Revocable LC can be modified or revoked independently by the issuing bank without any notice. It is
rarely practiced in modern-day international trade.
Irrevocable Letter of Credit
Irrevocable LC cannot be withdrawn or changed without the approval of the issuing bank, the receiver
and the bank that confirms it. It is a safer choice for the exporter, as it guarantees that if the submitted
papers follow the terms and conditions of the agreement, the amount listed in the LC will be paid.
Confirmed Letter of Credit
Confirmed LC is an arrangement where another bank adds its guarantee to the LC. It gives added
assurance to the exporter, but the cost of the LC also escalates.
 Roll No- D018, SAP ID- 80101190221

LC at Sight
Sight Credit LC requires the issuing bank to make the payment at sight, on-demand, or upon
presentation.
Usance Letter of Credit
Usance Credit LC is where the draft is drawn on the issuing or corresponding bank at the end of the
agreed usance period.
Back to Back LC
The Back-to - back Letter of Credit is where a second LC is opened as security with another LC. This
second LC funds both sides of a loan and counter-credit deal. The traditional case of back-to - back
LC is a middleman buying from one party and selling to another.
Transferable Letter of Credit
Transferable LC is used where a middleman is involved or when another company / producer sells the
commodity. The first recipient asks the bank to pass the whole payment to the second recipient or part
thereof. The first beneficiary of this system is usually the middlemen, or a business that sells the
goods of another.
Standby Letter of Credit
Standby LC is similar to a bank guarantee and is more popular in the US. The exporter can obtain
payment from the bank even in the case of the applicant’s failure to perform as per the agreement.
Freely Negotiable Letter of Credit
Freely Negotiable LC allows any bank to be nominated as long as it is prepared to pay, approve, incur
deferred payment undertakings or negotiate the LC. The LC must clarify that it is not limited to
negotiating with any bank, or that it can be negotiated in any bank.
Revolving Letter of Credit

Revolving LC is one where the specified sum is restored after payment, thus reducing the need to
construct a new LC. It is used for shipments involving a diverse collection of goods or repeated
collection of the same goods that are exchanged within a given duration.

Process flow for Letter of Credit:

Step 1: Issuance of LC
After the parties to the trade agree on the contract and the use of LC, the importer applies to the
issuing bank to issue an LC in favor of the exporter. The LC is sent by the issuing bank to the
advising bank. The latter is generally based in the exporter’s country and may even be the exporter’s
bank. The advising bank (confirming bank) verifies the authenticity of the LC and forwards it to the
exporter.
Step 2: Shipping of goods
After receipt of the LC, the exporter is expected to verify the same to their satisfaction and initiate the
goods shipping process.
Step 3: Providing Documents to the confirming Bank
After the goods are shipped, the exporter (either on their own or through the freight forwarder)
presents the documents to the advising/confirming bank.
 Roll No- D018, SAP ID- 80101190221

Step 4: Settlement of Payment from importer and possession of goods

The bank, in turn, sends them to the issuing bank and the amount is paid, accepted, or negotiated, as
the case may be. The issuing bank verifies the documents and obtains payment from the importer. It
sends the documents to the importer, who uses them to get possession of the shipped goods.
The following is the process flow chart-

Documents required of Letter of Credit

It is evident that the buyer generally requests the documents from a seller in a LC transaction.
So think as a buyer/Importer when looking for the logic behind the kind of documents that typically
get requested in a LC (or documentary credit) transaction.
From a buyer's' perspective, the buyer would absolutely need the following
1. Proof of value of goods boing imported
2. Proof of Ship
3. Proof of Packing
Furthermore, the buyer may also want the following
4. Proof of Origin of goods (same as bullet point number 9 given below)
5. Proof that the products meet the desired quality
 Roll No- D018, SAP ID- 80101190221

6. Proof of Insurance
Additionally, the buyer's country may have statutory requirements like
7. Phytosanitary or Health Certification of product that is being imported.
8. The buying country's embassy-certified (or legalized) Invoice and/or documents.
9. Certification and declaration by the seller/exporter that good in a particular export shipment are
wholly obtained, produced, manufactured or processed in a particular county.
Moreover, the nominated bank needs to pay the money to the beneficiary of the LC (i.e. seller/
exporter) may want a:
10. Financial negotiable instrument to be drawn up by seller in order to make payment to the seller
tight or by acceptance of a draft.
Based on the above-listed 10 requirements respectively let's generate the document list
1. Commercial Invoice (Proof of Value)
2. Bill of Lading (Proof of Shipment)
3. Packing Lint (Proof of Packing)
4. Certificate of Origin (Proof of Origin)
5. Inspection Certificate (Proof of Quality)
6. Insurance Certificate (Proof of insurance)
7. Health Certificate of Phytosanitary Certification
8. Consular Invoice or Legalized Commercial Document).
9 Certificate of Origin (same an 84 given above).
10. Draft or Bill of Exchange (Negotiable Instrument to be given to the bank in order to get paid).
 Roll No- D018, SAP ID- 80101190221

Answer 2

2.(1)
1.) Tier 1 Capital:
 Statutory Reserve = 170
 Non-Cumulative Perpetual Preference Share capital = 200
 Equity share capital (CET1) = 1500
 Capital Reserve = 62
Total = 1932
Tier 2 Capital:
 Cumulative Redeemable Preference Share capital = 500
 Subordinated Debt = 100
 Revaluation reserve discounted at 55% = 7.2
Total = 607.2

2. (2)
The primary source of funds is Tier 1 Capital which basically includes common stock equity and
retained earnings. Undisclosed reserves, Revaluation reserves, hybrid instruments and subordinate
debt are included in Tier 2 capital.
Risk Weighted Assets
 Cash with RBI = 0%
 Cash with other banks = 20%
 Other investments = 100 %
 Loan guaranteed by govt = 0%
Home Loan
 Up to Rs.30 lakh (LTV≤ 80%) = 0.25%
 Up to Rs.30 lakh (LTV> 80% and ≤ 90%) = 50%
 Above Rs.30 lakh and up to Rs.75 lakh (LTV≤ 80) = 50%
 Premises = 100%
 Guarantee and other obligations = 50%
 Acceptances, endorsements and letter of credit = 20%
Total = Rs 3320
 Roll No- D018, SAP ID- 80101190221

Answer 3

3.(1)

Method 1

 Total current Assets = 18,50,000

 Total Current Liabilities (Other than Bank borrowings) = 17,50,000 – 10,00,000

= 7,50,000
 Working Capital Gap = 18,50,000 - 7,50,000
= 11,00,000

 Minimum Required Margin (25% of WCG) = 2,75,000

 Maximum Permissible Bank Finance = 825000

Method 2

 Total current Assets = 18,50,000

 Total Current Liabilities (Other than Bank borrowings) = 17,50,000 – 10,00,000

= 7,50,000

 Working capital gap = 18,50,000 - 7,50,000

= 11,00,000

 Min. required margin (25% of CA excluding export receivables) = 462500

 Maximum Permissible Bank Finance = 11,00,000 – 462500 = 637500

3.(2)

 Net Banking Credit = 1 – 6 = 12000 – 1000 = 11000

 Adjusted Net Banking Credit = Net Banking Credit – 2 + 3 – 4 + 5
(Bonds/Debentures in non-SLR HTM category)
= 10000

 40% of 10000 = 4000 (A)

 And Bank’s portfolio contains exposure to credit equivalent items in the off balance sheet =
8000 (B)

 Target to Lend Priority Sector = 40% of ANBC or contains exposure to credit equivalent items
in the off balance sheet (WHICHEVER IS HIGHER) = 8000
 Roll No- D018, SAP ID- 80101190221

Answer 4

4.(1)

Provisions to be made:
Standard Assets Given = Rs. 17,000 Lakh
 Provision for Standard Home Loan = 0.25% of (Rs. 2000) = Rs. 5 Lakh
 Provision for Agriculture Loan = 0.25% of (Rs. 1000) = Rs.2.5 Lakh

Provision for remaining Standard Assets = 0.4% of (Rs. 17,000 - 2000- 1000) = Rs. 56 Lakh
Provision for Sub-Standard Assets (Unsecured)= 25% of (Rs. 3000) = Rs. 750 Lakh
Doubtful – I Given Rs. 1000 Lakh
 Provision for Secured Doubtful- I Assets = 25% of (Rs.500) = Rs. 125 Lakh
 Provision for Unsecured Doubtful -I Assets= 100% of (Rs. 1000-500) = Rs. 500 Lakh
Doubtful – II Given Rs.500 Lakh
 Provision for Secured Doubtful- II Assets= 40% of (Rs.300) = Rs. 120 Lakh
 Provision for Unsecured Doubtful-II Assets= 100% of (Rs.500 – 300) = Rs.200 Lakh
 Provision for Doubtful – III = 100% of (Rs. 300) = Rs. 300 Lakh

Total Provisions for the commercial bank = Sum of all provisions made for all asset types.
 Provision For Standard Assets = Rs. 63.5 Lakh
 Provision for Sub-standard Assets = Rs.750 Lakh
 Provision for Doubtful Assets = Rs. 1245 Lakh
 Total Provisions to be made = Rs. 2058.5 Lakh

Net NPA
Given Gross NPA = Rs. 50,000 Lakh
Provisions Made for Standard Assets = Rs. 63.5 Lakh
Other Provisions Made = Rs. 1985 Lakh

Therefore, Net NPA = Gross NPA – Provisions + Provisions Made for Standard Assets
Net NPA = 50,000- 2048.5 + 63.5
The Net NPA for the commercial Bank is Rs. 48,015 Lakh
 Roll No- D018, SAP ID- 80101190221

Salient Features of IBC 2016

 The institutional infrastructure under the IBC, 2016 rests on four pillars, viz., insolvency
professionals; information utilities; adjudicating authorities (National Company Law Tribunal
(NCLT) and Debt Recovery Tribunal (DRT)); and the Insolvency and Bankruptcy Board of India
(IBBI). Under the provisions of the Code, insolvency resolution can be triggered at the first
instance of default and the process of insolvency resolution has to be completed within the
stipulated time limit.
 The first pillar of institutional infrastructure is a class of regulated persons – the ‘Insolvency
Professionals’. They assist in the completion of insolvency resolution, liquidation and
bankruptcy proceedings and are governed by ‘Insolvency Professional Agencies’, who will
develop professional standards and code of ethics as first level regulators.
 The second pillar of institutional infrastructure are ‘Information Utilities’, which would
collect, collate, authenticate and disseminate financial information. They would maintain
electronic databases on lenders and terms of lending, thereby eliminating delays and
disputes when a default actually takes place.
 The third pillar of the institutional infrastructure is adjudication. The NCLT is the forum
where cases relating to insolvency of corporate persons will be heard, while DRTs are the
forum for insolvency proceedings related to individuals and partnership firms. These
institutions, along with their Appellate bodies, viz., the National Company Law Appellate
Tribunal (NCLAT) and the Debt Recovery Appellate Tribunal (DRAT), respectively, will seek to
achieve smooth functioning of the bankruptcy process.
 The fourth pillar is the regulator, viz., ‘The Insolvency and Bankruptcy Board of India’. This
body has regulatory oversight over insolvency professionals, insolvency professional
agencies and information utilities.
 For individuals, the Code provides for two distinct processes, namely, “Fresh Start” and
“Insolvency Resolution”, and lays down the eligibility criteria for these processes. The Code
also establishes a fund (the Insolvency and Bankruptcy Fund of India) for the purposes of
insolvency resolution, liquidation and bankruptcy of persons. A default-based test for entry
into the insolvency resolution process permits quick intervention when the corporate debtor
shows early signs of financial distress.
 On the distribution of proceeds from the sale of assets, the first priority is accorded to the
costs of insolvency resolution and liquidation, followed by the secured debt together with
workmen’s dues for the preceding 24 months. Central and State Governments’ dues are
ranked lower in priority. The code proposes a paradigm shift from the existing ‘debtor in
possession’ to a ‘creditor in control’ regime. Priority accorded to secured creditors is
advantageous for entities such as banks.
 When a firm defaults on its debt, control shifts from the shareholders / promoters to a
Committee of Creditors to evaluate proposals from various players about resuscitating the
company or taking it into liquidation. This is a complete departure from the experience
under the Sick Industrial Companies Act under which delays led to erosion in the value of the
firm.