Page 36 - Banking Finance August 2019

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loan repayment as it will ensure stability of the business. It Warehouse receipts finance: This type of loan is extended
may happen that a firm, say a manufacturer of jewellery to owner of goods, manufacturers against warehouse
makes a windfall profit in one particular year out of trading receipts issued by collateral managers with whom the bank
of bullion. Though, the overall cash flow of the firm will be has a tie up. The loan will be liquidated out of sales proceeds
high in that particular year but that "stability of the cash of the goods. In this type of lending both the movement of
flow" is not ensured. It may happen that in the subsequent stock and cash flow can be monitored by the lender. The
year the cash flow from bullion trading becomes negligible. stock which goes out of the warehouse is recorded and sales
Thus, bank must take into account the source of cash flow proceeds generated out of the sale of stock are collected in
for assessment of the credit limit. the account maintained with lender.

Periodicity of cash flow: Suppose a bank wants to lend to Supply chain finance: It is a cash flow solution. In this
a tea broker, generally during the winter season, tea lending technique buyer purchase the product from the
plucking activity remains suspended and no auction of tea supplier. The supplier then issues invoice to the buyer. The
takes place during the period and therefore cash flow of the buyer submits the invoice to the bank, which in turn makes
tea broker will be less during the period. Now, if the bank payment to the supplier. On due date the buyer makes
fix a standard EMI for this tea broker for all the months, payment to the bank. This financing model is a win - win
then the loan account may come under stress because situation for all the parties. The supplier gets immediate
during the winter season as the borrower may not have payment from the bank, the bank is ensured about the
adequate cash flow to honour the debt obligation. In this transaction that actual trade between the buyer and seller
scenario, bank must fix a ballooning repayment method i.e. has taken place and on the other hand buyer will get some
initial EMI must be of higher amount compared to the EMI's time (credit period) to make the payment.
of the later part of the month.
Value chain finance: Value chain finance is a method of
Ring fencing of cash flow: "Ring fencing of cash flow" is lending, wherein financial assistance is provided at any of
the process of capturing the cash flow generated from the the point or through any point in value chain. In a business
business of the borrower so as to reduce the instances of cycle there are multiple stakeholders involved at different
diversion of fund or siphoning of fund. One of the main level. This product facilitates lending to stakeholders at any
reasons for growing importance of cash flow method of required point. The cash flow is captured to ensure
lending is that the lender can identify the source of cash repayment.
inflow and also capture its movement, as a result the
repayment of loan is ensured. On the other hand, in case of Apart from the above, some popular methods of
asset based lending, the movement of cash flow is not lending used by new age fin techs are:
traced by the lender, the borrower takes undue advantage
Merchant cash advance: In this method, credit limit is
of the situation and misuses the cash generated out of
business which leads the account into NPA.

Common Methods of Cash Based Lending:
Lease Rent discounting: It is a method of lending used for
granting term loan facility to corporate clients. It is
commonly used in case of commercial real estate projects
like Mall financing. The loan is sanctioned against the rent
which will be derived from the lease contracts executed
between Mall owners & clients. The loan tenure will be fixed
based on duration of lease agreement and the rent amount
is to be collected in an escrow account maintained with the
lender. Thus, in this model, the cash flow of the borrower
is captured through escrow account and repayment is made
directly out of the rent received.

36 | 2019 | AUGUST | BANKING FINANCE