These instructions will not be applicable to credit for the following service activities for which separate sets of guidelines have been prescribed by the Bank.
a) Non-banking financial services;
b) Service activity in the nature of development and export of software;
c) Construction activity including financing of real estate agencies, construction companies, etc.
Further, advances to Trade and Services activities which are eligible for classification as priority sector advances in terms of RBI guidelines will not be governed by instructions contained in this Chapter. All trade and services enterprises not eligible for advances under SIB segment can be financed under C&I segment provided the proposals are bankable and economically viable.
Eligible activity: Any lawful trading activity i.e., trading in goods and in services is considered eligible for bank finance. A list of activities that can be financed subject to the Bank’s general guidelines on credit is given below by way of illustration.
Activities relating to trade sector: Trading in agricultural or industrial commodities, whether as stockists/dealers, wholesalers, semi-wholesalers, large retailers like departmental stores or big merchants in high value goods, dealers of consumer durables, electronic products, bulk suppliers in iron & steel products, cement and other building materials, sanitary wares, hard-wares, etc., trade/export houses, other export/import intermediaries/grain merchants, fertilizer dealers and dealers of commodities falling under the purview of Selective Credit Control.
Activities relating to services sector: Business enterprises, professionals and self-employed persons, transport operators, contractors, cinema houses; Tourism related facilities: Hotels/Motel chains, Private Airlines, Travel Agents, etc.; Large transport operators of passenger buses/fleet owners; Large transport operators of goods; Concerns running fleet of taxis; Professionals/others who operate hospitals, or clinics on commercial lines, large Nursing Homes/Hospitals, in the organised sectors, Modernisation/expansion of the hospital facilities/clinics; Hire purchase finance companies/firms; Construction, Transport and Supply contractors; Maintenance contractors (maintaining, decorating, painting buildings, etc.); Commercially run educational institutions; Owners of markets, godowns/warehouses, drama theatres, marriage halls, etc.; Consultancy firms/Chartered Accountants, Agencies engaged in advertisement and publicity services; Publishers; Architects; Auditors; Lodging houses; Other professionals, self-employed persons, etc. falling outside SBF scheme; Large housing co-operatives, industrial estates, real estate firms, commercial/residential property developers.
Application & Appraisal Forms
Trading activities:
Fund-Based Working Capital (FBWC) limit size Application and appraisal formats
a. Rs.1 crore and above Application accompanied by the Annexures-Trade-PBS-1 to 5; Appraisal as prescribed for assessment under PBS method.
($) If the FBWC limit required is Rs.10 lacs or below and fully secured by tangible collateral security in the form of immovable property, the application and appraisal formats will be as applicable to large SBF advances (Specimen in Annexure-SBF-1, Chapter 37, Volume III).
Service units: In case of service units, the general application/ appraisal forms are to be used with appropriate modifications.
Application forms for Trade advances should be accompanied by two copies of audited financial statements for last 3 years, the latest not being more than 12 months old. Audited balance sheets should be obtained in all cases. However, in the case of borrowers of long standing for whom FBWC limits up to Rs.5 lacs are proposed, financial statements extracted from the books of accounts and certified by a Chartered Accountant (without usual certificates by the auditor) may be obtained. Appraisal forms should be accompanied with, among other things, the following:
(i) Analysis of financial statements.
(ii) Assessment of working capital requirements.
(iii) Terms & conditions.
(iv) Opinion reports on borrowers and guarantors.
(v) Review of existing account, if any, for the past 12 months.
Other aspects of credit to T&S sector
5.1 Nature of Facilities: The following need-based credit facilities may be sanctioned for purposes noted thereagainst:
Purpose Credit facility
(Fund-based & Non-fund based) Security
Working Capital
• Cash Credit (stocks)
• Cash Credit against pledge of documents of title to goods (RRs, LRs, etc.) • Pledge/ Hypothecation of stock-in-trade
• Document of title to goods
• Cash Credit ( Book debts)
• D.D Purchase [Cheques]
• D.D Purchase [Bills (Clean or Documentary)]
• BD/IB limits (Clean or Documentary) • Hypothecation of book-debts
• Cheques/bills
• Documents of title to goods in case of documentary bills
Letters of credit/Bank guarantee Cash margins, Collateral security, or lien on the drawing power against stock in case of usance LC, etc.
Capital Expenditure Term Loan for
a) acquisition of land/building etc.
b) purchase of equipment/ vehicles, etc. • Mortgage of land/building
• Pledge/ hypothecation of equipment/vehicle(s)
In addition to the above, a general purpose term loan viz., ‘Flexi loan’ (minimum Rs.5 lacs and maximum Rs.25 lacs) may be sanctioned to units in trade & services sector for any of the following purposes like:
• Holding of stocks/book-debts
• Acquisition of land and building
• Building construction/ Up-gradation and renovation of offices, show rooms, godowns etc.
• Purchase of equipment, furniture and vehicles etc.
• Shoring up networking capital
• Payment of long term deposits / advances to suppliers
• General Trade purposes
Often the terms ‘Financial Markets’ and ‘Capital Markets’ are used interchangeably and for many, ‘Financial markets’ mean only ‘Capital markets’, but internationally, Capital Market is only a small part of the financial market.
Similarly, select dealers of identified large corporate borrowers of the Bank are also be eligible for loans from Rs.5 lacs up to Rs.1 crore by way of cash credit and term loan under the Bank’s ‘Channel Financing’ scheme. The special provisions under the scheme are detailed in Chapter 29-8.
5.2. Credit Risk Assessment and Pricing: The pricing of all trade advances, except for those under ‘Channel Financing’ scheme, under C&I segment is linked to the CRA rating. Therefore, all such loans/advances are to be subjected to credit risk rating review as explained in Chapter 3.
5.3. Quantum of advance: Bank finance should be appropriately linked to the needs of the borrowers assessed on the basis of the turnover, the level of inventories and book-debts required to be carried and the extent of finance already available from different sources i.e., capital as equity, sundry creditors, loans and deposits of long term nature from family members, etc. However, in cases where the turnover and other operational data of the traders are not reflected fully in their books, branches should assess the requirements based on the disclosed figures and financial statements only.
Sometimes, traders may not bring the entire capital as equity, part of it being brought in by way of loans, deposits, etc., from family members. In these cases, such sources can be treated as quasi-equity provided they are retained in the business throughout the year and supported by undertakings from the promoters, friends and relatives, for treating these as quasi-equity.
5.4 Norms for assessment of fund-based working capital (FBWC) limits
The method of assessment of working capital advances in general, has been detailed in Chapter 7. The changes envisaged for Trade and Services sector in respect of some of the norms for assessment are given below:
i) Current Ratio (CR): The benchmark level of Current Ratio will be 1.33 for FBWC limits of Rs.1 crore and above. For FBWC limits below Rs.1 crore, a relaxation in the ratio may be permitted if profitability is good but the CR should not be below 1.0. In other words, the net working capital in the business should not be negative.
ii) TOL/TNW ratio: A TOL/TNW ratio higher than 3.00 would be permissible as a higher gearing is a normal feature in trade activity. In the case of service units the position of outside liabilities should be examined and accepted on a case to case basis.
iii) Profitability ratio: New exposures to T&S units will be permissible as long as the units are earning profits. In the cases where Term Loans or Clean Cash Credit limit subject to repayment are granted, the profit earnings of the unit should be adequate to service the debt.
5.5 Appraisal of Term Loan (TL): In all cases where a TL is proposed for acquisition of fixed assets, a detailed appraisal prescribed for TL (refer Chapter 12) will be followed. In the cases where only a single item of equipment, car or a transport vehicle is to be financed, it will be adequate if a simplified assessment is carried out. Accordingly, in such cases, it will not be necessary to examine in detail the projected debt service coverage ratio (DSCR) if the current level of profits is adequate to service the proposed repayment obligation. Also in this case, the projected cash flow statement need not be compiled.
5.6 Term Loan facility for borrowers of another bank: In select cases of financially strong and well established trade or services units of repute, branches may extend TL finance to them without taking part in the WC finance. Branches may explore the prospects of taking over the borrowers’ entire business in due course. The guidelines on take-over of advances to trade and services sector are given in paragraph 5.11, Chapter 1.
5.7 Clean advances: Such assistance can be extended to the full extent of the requirement on the following terms:
i) Clean Cash Credit (Clean CC): A clean CC facility repayable in a period up to 3 years and fully secured by tangible collateral security in the form of immovable property can be sanctioned for the following:
To a wholesale dealer/ retailer For giving long term deposit (security deposit) or advance to suppliers.
To a trade or services unit For meeting shortfall in long term funds/margins required for WC purposes.
To a trade or services unit For outlays in WC, other than in stocks-in-trade and receivables (e.g. advance payments for purchases, advance tax paid); in this case the clean CC facility will, normally be repayable within a period of one year.
To a trade or services unit In exceptional cases, for long term revenue expenditure like advertisement, cost of franchise, licences, etc.
ii) Clean Term Loan (clean TL): A clean TL facility repayable in a period up to 5 years and fully secured by tangible collateral security in the form of immovable property can be sanctioned towards cost of setting up show room/office space or expenditure like rental deposit, cost of interior decorations, etc., which do not result in acquisition of a tangible asset.
5.8 Terms & conditions of advance
i) Primary and collateral security: In addition to the primary security by way of charge on the assets financed by the Bank, the loans/ advances will be secured by tangible collateral security by way of mortgage of immovable property, pledge of shares/debentures, assignment of surrender value of life insurance policies, lien on fixed deposits, etc. As a general rule, collateral security of immovable property should be obtained and normally this should be, at least, 50% of the total exposure (fund and non-fund) to a trade or service unit (for facilities other than clean advances mentioned in sub-paragraph 5.7 above).
SEBI Reforms:
SEBI has brought in reforms in the form of improved disclosure standards, introduction of prudential norms, simplified issue procedures, transparency by way of disclosure of all material facts and risk factors etc.
SEBI amended the Listing agreement of the stock exchanges to require listed companies to furnish annual statement to the stock exchanges showing variations between the financial projections and projected utilization of funds in offer documents.
It has introduced code of conduct for advertisements for the public issues. This ensures fair and truthful disclosures by the issuing companies
SEBI has started the process of prosecuting companies for misstatements. It has directed a few companies to refund the application money also.
It has also introduced a system of penalty points for Merchant Bankers for defaults committed by them. This ensures prompt/proper conduct of the Merchant Bankers too.
SEBI permitted private mutual funds to be established and many such mutual funds have been set up.
Capital adequacy requirements for brokers have been introduced
SEBI has advised all stock exchanges to develop surveillance system by advising all stock exchanges to have their own surveillance departments.
SEBI made electronic trading possible in 1994, and Demat accounts were introduced from 1996.
Brokers were brought within the regulatory frame work in 1995, by the concept of dual registration, compulsory audit of books and compulsory filing of the audit report with SEBI.
Insider trading was totally prohibited. It is made a criminal offence punishable under SEBI Act.
SEBI can take penal action directly against any member of the stock exchange for violation of SEBI Act.
SEBI introduced T+2 rolling settlement cycle to push the Indian bourses ahead of most developed markets vis a vis trading and settlement system.
Elimination of leverage trading on the stock market (2001) and introduction of derivative products are some other reforms.
In case of violation of SEBI (Disclosure and Investor Protection) guidelines, 2000 and in the interest of the investors SEBI may,
Direct the persons concerned to refund any money collected under issues to the investors
Direct the persons concerned not to access capital markets for a particular period
Direct the stock exchanges not to list or permit trading
Direct stock exchanges to forfeit the security deposit
Initiate action including suspension or cancellation of certificate of registration of any intermediary who fails to exercise due diligence or who is alleged to have violated SEBI guidelines
Debt Market:
The debt market in India can be classified into Government Securities market and Corporate debt market. The Govt. debt market is dominated by the debt issued by the Central Govt. The outstanding issuance of marketable central Govt. debt as on 31 Aug 2003 stood at Rs.7,60,000 crores and that of state Governments stood at Rs. 1,65,000 crores. Reliable information on corporate debt market is not available. However, it is estimated at Rs.2,00,000 crores, which is mostly issued by private placements, which by its nature is unregulated. The corporate debt securities are issued by top rated corporate entities, public financial institutions, banks and by state owned enterprises/entities issuing guaranteed bonds. The primary debt market is dominated by Central Govt. securities. In the secondary market also, volumes traded on Govt. Securities on a typical day would be around Rs.8000-8500 crores, while that in the Corporate debt would range from Rs. 500-600 crores. The common instruments in the debt market are: Corporate Fully Convertible Debentures(FCDs)/Party Convertible Debentures (PCDs)/Non Convertible Debentures (NCDs)/PSU Bonds/Zero Coupon Bonds/Deep Discount Bonds and Gilt Edged Securities etc.
Regulations in Debt Market:
The Public Debt Act 1944 provides the framework under which government securities can be issued and serviced. Under the Act and as also under the RBI Act, 1934, RBI is the sole manager of Govt. Debt. As a debt manager for both Central and State Govts, RBI deals with the issue, servicing and repayment of the Govt. Debt.
SEBI regulates the corporate debt securities, while private placements, which are made under Section 67(3) of the Companies Act, 1956 are largely unregulated. The amendment to the Securities Contract Regulation Act 2000 clearly delineates the division of regulatory responsibility between RBI and SEBI.
Secondary market trading in government securities is mostly over telephone. Banks, Primary Dealers and FIs are allowed to use only BSE,NSE and OTCEI members as brokers for dealing in government securities as per RBI guidelines. Forward trading in government securities is not permitted, however, repos in government securities are allowed as per RBI guidelines as long as repos are between entities having SGL account with RBI and the trades are settled through such accounts . Of course, this includes settlements through the Clearing Corporation of India Ltd (CCIL). Uniform accounting norms were introduced for repo transactions which ensure (i) that the legal character of repo under the current law, viz., as outright purchase and outright sale transactions will be kept intact and (ii) the book value of the securities remain unchanged post repo. RBI guidelines require banks to actually hold the securities in their accounts before they can sell the securities. Hence same day sale of purchased securities is not allowed except those allotted in the primary auction. Where SGL facility is available, settlement has to be only through SGL account and no brokers are allowed to be used in the settlement.
Regulation of Investments by Banks:
RBI regulations for investments by banks is furnished below:
- Investment Policy: Banks are expected to frame and implement a suitable investment policy to ensure that their operations in securities are conducted in accordance with sound and acceptable business practices. While framing the investment policy, the banks should bear the following aspects in mind:
i) It should not hold oversold position in any security
ii) All transactions put through by a bank should be settled on the same day or on the next day unless the transaction is through a NSE broker in which case the settlement is T+2. All transactions on the bank’s own account should be settled through SGL.
iii) Return of SGL form for want of sufficient balance in the account must be avoided. Three times SGL bouncing in a quarter makes them liable for stoppage of SGL facility.
The key controls over market risk activities, and particularly over Dealing Room activities, exist in the Back Office. It is critical that both a clear segregation of duties and reporting lines is maintained between Dealing Room staff and Back Office staff, as well
as clearly defined physical and systems access between the two areas. It is essential that critical Back Office controls are executed diligently and completely at all times including:
- The control over confirmations both inward and outward: All confirmations for transactions concluded by the Dealing Room must be issued and received by the Back Office only. Discrepancies in transaction details, non-receipts and receipts of confirmations without application must be resolved promptly to avoid instances of unrecorded risk exposure.
- The control over dealing accounts (vostros and nostros)- Prompt reconciliation of all dealing accounts is an essential control to ensure accurate identification of risk exposures. Discrepancies, non-receipts and receipts of funds without application must be resolved promptly to avoid instances of unrecorded risk exposure.
- Unreconciled items and discrepancies in these accounts must be kept under heightened management supervision as such discrepancies may at times have significant liquidity impacts, represent unrecognised risk exposures, or at worst represent collusion or fraud.
- Revaluations and marking-to-market of market risk exposures: All market rates used by the bank for marking risk exposures to market, used to revalue assets or for risk analysis models such as Value at Risk analysis, must be sourced independently of the Dealing Room to provide an independent risk and performance assessment.
- If the bank has an established and independent Middle Office function, this responsibility may properly pass to the Middle Office.
- Monitoring and reporting of risk limits and usage: Reporting of usage of risk against limits established by the Risk Management Committee (as well as Credit Department for Counterparty risk limits) should be maintained by the Back Office independently of the Dealing Room. Maintenance of all limit systems must also be undertaken by the Back Office and access to limit systems (such as counterparty limits, overnight limits etc.) must be secure from access and tampering by unauthorised personnel. If the bank has an established and independent Middle Office function, this responsibility may properly pass to the Middle Office.
- Control over payments systems: The procedures and systems for making payments must be under at least dual control in the Back Office independent from the dealing function. Payments systems should be at all times secure from access or tampering by unauthorised personnel.
Treasury Bill Market:
Treasury bills are a kind of finance bill or promissory note issued by the Govt, to raise short term funds. The important features of Treasury bills are high liquidity, absence of risk of default, ready availability, assured yield, low transaction cost, eligibility for inclusion in SLR requirements and negligible capital depreciation. Presently there are two types of treasury bills:
a. 91 day Treasury bill – maturity is 91 days. Its auction also takes place on all Wednesdays. The notified amount for this auction is also Rs.250 crores
b. 364 days Treasury bill – Its auction also takes place on alternate Wednesdays. The notified amount for this auction is Rs. 750 crores.
Based on the bids received at the auctions, RBI decides the cut off yield and accepts all the bids below that yield. Banks, Insurance Companies and FIs are the main investors. Banks invest in these bills as they not only serve as investment but also meets part of their SLR requirements.
The treasury bills are issued at a discount to face value and can be traded in the market. Most of the time, unless the investor requests specifically, they are routed through the Subsidiary General Ledger (SGL ) account which is maintained by the RBI. Normally trading is high in each bill immediately after its issue and before redemption.
3. Inter Bank Term Money Market: The lendings/borrowings in these markets are for periods ranging from 15 days to 3 months. Only banks are the players in the market.
4. Certificates of Deposit Market: Next to Treasury bills, the lowest risk category investment option is the Certificate of Deposit (CD) issued by banks and FIs . A CD is a negotiable promissory note, secure and issued for periods less than a year. A CD is issued at a discount to the face value, the discount rate being negotiable between the issuer and the investor. Interest rate on one-year deposit act as a base rate in the market.
5. Commercial Paper: CPs are a unsecured promissory notes issued by highly rated Corporates, Primary dealers and All India Financial Institutions, which have been permitted to raise resources through money market instruments under the umbrella limit fixed by RBI.
A company can issue CP – provided (1) its tangible net worth as per the latest audited balance sheet is not less than 4 crores (2) the company has been sanctioned working capital limit by bank/s or all India financial Institutions and (3) the borrowal account of the company is classified as Standard Asset by the financing bank. Credit rating is compulsory for all CPs.
CPs can be issued for a minimum period of 15 days and a maximum of 1 year., CPs can be issued in denominations of Rs. 5 lakhs or multiples thereof. CPs can be issued and held only in demat form through any of the depositories approved by and registered with SEBI. CPs are issued at a discount to the face value.
CPs can now be issued as ‘stand alone’ product and the aggregate amount of CP from an issuer shall be within the limit as approved by its Board of Directors or the quantum indicated by the credit rating agency for the specified rating whichever is lower.
6. Other Instruments: Inter corporate Deposits (ICD), Inter Bank Participation Certificate (IBPC) Commercial bills which form a negligible portion of deals in the money market.
COMMONLY USED TERMS IN FINANCIAL MARKETS:
Amortization:
The paying off of debt according to a schedule over a period of time.
Arbitrage:
1. The act of buying something at a low price in one market and simultaneously selling it for a higher price in another market.
2. Doing a spread trade – i.e., selling one thing and using the proceeds to buy a second thing.
3. Yield Curve Arbitrage: Doing a spread trade that exploits anomalies in the yield curve.
4. Statistical Arbitrage: Taking a calculated gamble that the two sides of a spread trade will move in your favour, back to a more normal relationship.
Basis point (BP, BIP):
A measure of a bond’s yield, equal to 1/100th of 1% of yield. A bond whose yield increases from 5.0% to 5.5% is said to increase by 50 basis points. When applied to a price rather than a rate, the term is often expressed as annualized basis points.
Convertible bond:
A bond which the holder can convert into a specified number of shares issued by the company.
Coupon:
This term is often used interchangeably with interest, but coupon actually has two distinct meanings:
1. In the case of Bearer Bonds, the coupon is the warrant attached to the certificate, i.e. a physically detachable coupon, which you are required to present to a paying agent in order to receive the interest payment due. The coupon will state the amount of interest due at each payment date.
2. As a result of the definition above, coupon has also come to be accepted as a name for the nominal interest a bond pays. Remember not to confuse the nominal interest being offered with the yield. The latter is the actual rate of return you are getting and it relates to the market price you paid for the investment.
Derivative:
A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards, and various combinations thereof.
Fungibility:
A term which can be likened to liquidity and transferability. The characteristic by which the instrument can be transferred or converted and the mechanism by which the investor can exit his investment.
Greenshoe Option:
In case of over subscription, the option to retain upto a specified amount above the issue amount. The lead manager exercises this option on behalf of the issuer.
Hedge:
An investment made in order to reduce the risk of adverse price movements in a security. Normally, a hedge consists of a protecting position in a related security.
Mark to market:
The process in a futures market in which the daily price changes are paid by the parties incurring losses to the parties making profits
Securitisation:
Securitisation is a technical term describing the process of bundling a group of mortgages together such that they may be treated, for funding purposes, as a single entity and made available to prospective investors in mortgage debt.
Developed in the USA, the idea came to the UK market in the 1980s. Mortgage debt is seen as a relatively attractive safe investment by many institutions, pension funds etc. Securitisation allows lenders to raise money in the money markets, lend it to domestic property purchasers and then sell the resulting group of mortgages on to other institutions.
This is also known as “off balance sheet lending” since the debt does not form part of the lenders assets. All one really need to know as a mortgage borrower is that this process does not affect the terms and conditions of his mortgage in any way.
Red Herring Prospectus:
A draft prospectus. This contains all the details regarding the issuer, the project. But it does not contain exact quantum of funds to be raised and the price of the instrument.
Insurance reform:
Insurance reform sounds good, but what it has been and the word was nice and as the word reform meant from evil to good, giving self respect and protecting sovereignty. While performing the job of reform one should understand that in no way, country’s sovereignty and security would be compromised. One should also see that indigenous companies must grow nearer to reform oriented companies that would be reached at your doorstep after proper reforms had been conducted.
Why insurance reform, as many a times indigenous companies did require resource for expansion, but due to dearth of resources, they could not be expanding thus minimizing their growth, and for this, with the advent of foreign insurance companies and in partnership with local insurance companies, the concerned companies would be getting more and more resources for expansion , but the important parameters was that the stake of stake holders and how they were going to perform , and how could their equity would be preserved? Now these local companies would be extracting money by selling their shares to foreign companies and thus in this manner they could raise their resources and in a way they would be expanding their bases.If at all these foreign companies , would not fulfill the promise as they had been at the beginning then in the long run there would be serious crisis of savings and in the long run that would be threatening country’s financial base and basis of the existence of economy.
Bibliography:
- https:// www.economicsdiscussion.net/india/sebi/securities-and-exchange-board-of-india-sebi-and-capital-market-reforms/11075
- https:// www.sebi.gov.in/sebi_data/commondocs/ar97981b2_h.html
- https:// www.studymode.com/essays/Sebi-Functions-And-Responsibilities-688443.html
- https:// www.studymode.com/essays/Sebi-Functions-And-Responsibilities-688443.html
- https:// www.rbi.org.in/scripts/NotificationUser.aspx?Id=604&Mode=0
Last updated on July 23, 2022
