Banking Terms and their Definitions: 1. Running Finance: Running Finance Facility, is the form of lending, where customer is allowed to borrow money from a Banker up to a certain limit either at once or as and when it is required. Running Finance Facility, is the form of lending, where customer is allowed to borrow money from a Banker upto a certain limit either at once or as and when it is required. If it is availed and withdrawn at different intervals and paid back on various occasions, then the mark up levied thereon is worked out on daily product basis. The formula to work out mark up on "daily product basis", in respect of Running Finance, according to recognized Banking practice is: 'Balance Outstanding X Number of days X Rate 365 days in a calendar year" The mark up in running finance facility, is a revolving credit. It renews until exhaustion of amount of credit, the customer has the facility to draw it again when limit is reached. Credit is automatically reinstated after each drawing, within the limit. The limit is renewable credit, until it's full utilization. "Revolving Credit" as defined in Dictionary of Banking and Finance by "P. H. Collin", is a system where someone can borrow money at any time up to an agreed amount, and continue to borrow while still paying off the original loan. Revolving Credit Account, according to Dictionary of Banking by Jaffrey L. Seglin, is the loan that allows customer to pay less than the total amount due every month. Whatever balance is carried forward into the following month is subject to, an agreed upon finance charge. There is typically no charge for the line of credit when it is not in use. A similar definition appears in the Dictionary of "Banking by F E Perry and G Klein". The definitions of the terms "Roll Over" and "Running Finance" it may observe that when a loan, in the shape of running finance, is sanctioned up to a limit, the customer can withdraw amounts according to his own choice and there is no charge amount. There are frequent transactions in such accounts as, to the payment and withdrawals; therefore, mark up on such transactions is leviable on daily product basis.
2. Cash Finance: Cash Financing: Credit facilities are offered to ensure that trade settlement and cash transactions do not fail because of insufficient funds on the client's cash account. Credit lines are made available by the service provider at its discretion. Cash Finance:
This facility provides cash inflows to any organization. It is also backed by collateral in the forms of land, buildings and tangible assets. Markup is charged on the complete amount of the facility provided and is payable during the tenure of the facility.
3. Term Finance: Term Finance is usually granted for specific purposes and is fixed as to amount and period. Such a loan can be liquidated either by a single repayment of principle and mark up, in which case the mark-up is fixed for the period or by means of a repayment schedule in the case of medium or long term loans. Term Finance Certificate (TFC)
A corporate debt instrument issued by companies to generate short and medium-term funds. Corporate TFCs offer institutional investors, in particular retirement funds and insurance companies, with a viable high yield alternative to the National Saving Schemes (NSS) and bank deposits. TFCs are also an essential complement to risk free, lower yielding government bonds such as PIB. TFCs can be issued both as a fixed or floating rate instrument and may have a call or put option.
TFC Rating
A TFC must be rated before issuance. The rating reflects, the credit risk of The TFC, i.e. the issuer’s ability and commitment to repay scheduled TFC payments. Currently two rating agencies PACRA and JCR-VIS are operating in Pakistan.
Income/Return structure of TFC
Like bonds, TFCs are structured to provide regular income in the form of coupons. Unlike a generic bond, a TFCs principal may gradually be redeemed over the tenor of the instrument. TFCs are exempt from Capital gain tax. However, coupons payments are subject to income tax.
* Invest only in listed scrips and carries a minimum BBB rating. Salient features of TFC
Redeemable capital Monitored by Trustee Return on investment may be fixed or floating
4. Letter of Credit(L/C): Credit(L/C): 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.
5. Letter of Credit(Sight): Credit(Sight): A letter of credit that is payable once it is presented along with the necessary documents. An organization offering a sight letter of credit commits itself to paying the agreed amount of funds provided the provisions of the letter of credit are met.
For example, a business owner may present a bill of exchange to a lender along with a sight letter of credit, and walk away with the necessary funds right then. A sight letter of credit is thus more "on demand" than some other types of letters of credit.
6. Letter of Credit(Usance) Credit(Usance) or Document Acceptance(DA): Acceptance(DA): Usance Letter of Credit: Alternative term for deferred payment letter of credit i.e. a letter of credit payable at a determined future date after presentation of conforming documents.
Under a deferred payment letter of credit, the applicant does not pay until a future date determined in accordance with the terms of the letter of credit. No drafts are called for, which avoids “stamp duties” charged by some countries on bills of exchange (drafts). One reason an exporter might extend credit terms to an importer could be the competitiveness of the market and the need for the exporter to finance the importer if the exporter is to make the sale. Time Letter of Credit: Letter of credit requiring payment a certain number of days after the appropriate documents are presented. It is also called a usance letter of credit.
7. Letter of Guarantee: A type of contract issued by a bank on behalf of a customer who has entered a contract to purchase goods from a supplier and promises to meet any financial obligations to the supplier in the event of default. 2. A document issued by a bank on behalf of a call writer guaranteeing that the writer owns the underlying asset and that the bank will deliver the underlying securities should the call be exercised. Explanation: A letter of guarantee often helps firms conduct business with parties they would never normally get the chance to deal with. Many suppliers will often choose to do business with customers that have a letter of guarantee because it eliminates the risk that they will not receive the appropriate payment for the goods that they are selling. Additionally, call writers will often use a letter of guarantee when the underlying asset of a call option is not held in their brokerage account.
8. Bid Bonds: A debt secured by a bidder for a construction job or similar type of bid-based selection process for the purpose of providing a guarantee to the project owner that the bidder will take on the job if selected. The existence of a bid bond provides the owner with assurance that the bidder has the financial means to accept the job for the price quoted in the bid. Bid bonds help the selection process of a job contract run smoothly. Without them, project owners would have little in the way of assurance that the bidder they select for a job would be able to properly complete the job without running into cash flow problems along the way. By providing bid bonds for their respective bids, each bidder for the project is able to provide sufficient assurance to the owner that the project is within its means.
9. Performance Bonds:
A bond issued to one party of a contract as a guarantee against the failure of the other party to meet obligations specified in the contract. For example, a contractor may issue a bond to a client for whom a building is being constructed. If the contractor fails to construct the building according to the specifications laid out by the contract, the client is guaranteed compensation for any monetary loss.
10.Advance 10.Advance Payment Guarantee: 1.
2.
Guarantee for recovery of advance payment or a guarantee that enables a buyer to recover an advance payment made under a contract or order if the supplier fails to fulfill its contractual obligations. Guarantee supplied by a party receiving an advance payment to the party advancing the payment. It provides that the advanced sum will be returned if the agreement under which the advance was made cannot be fulfilled. Also called advance payment guarantee.
11.Stand 11.Stand by Letter of Guarantee: A Standby Letter of Credit or Guarantee is a written undertaking given by CIBC to the person with whom you are doing business (beneficiary) to pay a specified amount of money in the event that you or a third party do not meet specific financial or performance obligations. Upon CIBC's payment to the beneficiary, you reimburse CIBC for such payment. Different types of Standby Letters of Credit or Guarantees offered o ffered by CIBC
Bid Guarantees (Bid Bond) Performance Guarantees (Performance Bond) Advance Payment Guarantees Retention Guarantees or Advance Payment Holdback Under Contract Guarantees Financial Guarantees
Key benefits 1. Improves your cash flow 2. Convenient 3. Access to trade finance expertise
12.Finance 12.Finance against Packing Credit: FAPC is a type of bank’s own source finance provided to clients engaged in export trade. As the term packing indicates that the credit line is granted to an exporter for the purpose of packing merchandise for shipment to an importer abroad. An exporter should give documentary proof to the bank consist of L/C in favor of exporter indicating the description of the merchandise, the purchase price, date of delivery along with other terms.
Packing Credit is any loan or advance granted or any other credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of letter of credit opened in his favor or in favor of some other person, by an overseas buyer or a confirmed and irrevocable order for the export of goods from the producing country or any other evidence of an order for export from that country having been placed on the exporter or some other person, unless lodgment of export orders or letter of credit with the bank has been waived.
Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. The main objectives behind pre shipment 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 Rupee Packing Credit in Foreign Currency (PCFC)
13.Finance 13.Finance against Foreign Bills(FAFB): It is a post shipment finance facility which is provided by the bank to its clients after providing the evidence of shipment, he contacts his bank to request him to lodge the documents. He then provide the request letter with sale contract to grant him finance and his department grant him finance (90% value of commercial invoice).
14.Finance 14.Finance against Trust Receipts (FATRs): FATRs are related to import transactions and should be granted only as a sub-limit of an import L/C line. The bank may also allow to specific customers FATR facility against collection documents as per the terms set out by the Head Office from time to time.
15.Export 15.Export Refinance I and II: Export Refinance Scheme was introduced with an aim to boost exports of non-traditional items in Pakistan. The scheme is bifurcated in two parts i.e. Part I & Part II. Under Part-I, the finance is given on pre as well as post shipment basis for export of eligible commodities.
This facility is provided on a case-to-case basis. Under Part-II, an exporter may avail the export finance limit, based on his last year’s export p erformance in respect of eligible commodities. The process of disbursement of credit through export refinance schemes is operationally carried out through the field offices of the Bank. These offices have meaningfully contributed towards disbursement of export finance at industrial centers of the country through commercial banks. The various sectors of business facilitated by this scheme include textile, carpets, telecommunication, IT, electronics, leather, frozen seafood etc. (According to State Bank of Pakistan)
