Page 22 - Banking Finance June 2022

ARTICLE

How the non-fund limits play a role in Business turnover of the firm
Assessments details & maximum expected outstanding
Business:
Nature of goods: Marketability, Seasonality,
Facilitates trade: domestic & international
Susceptibility to price changes
Helps in reducing fund based working capital
Import duty on purchases
requirement
Helps seller to get immediate payment though credit Currency fluctuations/ risk
extended by seller's Bank Crystallization facilities on failure / default of the
borrower
Bank intermediates and earns income through
commission
Assessment of Letter of Credit:
Letter of Credit: (definition) Working capital limit under letter of credit depends on how
An arrangement by means of which a bank (issuing bank) much of raw material procured under LC and time period
required for completion of one LC transaction. Before
acting at there quest of a customer (applicant) undertakes
knowing on time required for one LC transaction, we have
to pay to a third party (beneficiary) an amount by a given
to understand two terminologies i.e. Lead time and Usance
predetermined date according to agreed terms and
period.
conditions against presentation of stipulated documents.
LC Mechanisim
Lead time:
LC Advising/
LC issuing Bank This is the time taken for supply of goods (to be purchased
Negotiation Bank
(Buyer’s Bank) on LC basis) from the date of placing order till goods reaches
(Seller’s Bank)
to the customer. This period depends upon certain factors
such as nature of product, demand and supply situation,
distance between place of customer and of supplier, mode
of transport i.e. by road, air, water etc. For example buyer
place order to buy 100 units from it's suppler x. The supplier
x said, he required one month time to procure raw material
to produce good and then required further 15 days time to
Aplicant (Buyer) Benificiary (Seller) transport goods. It means the total lead time in this case is
45 days (i.e. 30+15 days)
Underlying Transaction
Factors influencing in Assessment Non- Usance Period:
This is the period of credit given by the supplier to make
fund based limits:
the payment for the goods supplied which depends upon the
Means and standing of applicant; Known through by
nature of business practice and mutual agreement of the
compiling net worth/ means report the prospective
customer and supplier. In other terms it is credit period
borrower
extended by the supplier.
What purpose the facility serves in business operation,
This is done in case of DA LC (Documents against
Bank to understand business model of the borrower.
Acceptance) where documents are delivered to buyer to get
Study on working capital cycle of the business
goods delivered against acceptance that the payment shall
Source of repayment (retire / honor facilities on due
be paid on due date. Unlike in case of DP LC (documents
date)
against Payment), no credit is extended by the supplier and
Amount of purchases under given facility such as documents (title to goods) delivered only after receipt of the
amount raw purchase under letter of credit etc. payment.

22 | 2022 | JUNE | BANKING FINANCE