This document discusses international short term finance. It defines short term finance as budgets and financial plans for periods of one year or less, which are used by businesses for day-to-day operations like paying wages and ordering inventory. It also discusses the importance of short term finance for marketing, accounting, and management decisions. Key aspects of short term financial management are minimizing working capital needs and raising/deploying short term funds at minimum cost while meeting liquidity needs. Common short term borrowing instruments include commercial papers, banker's acceptances, certificates of deposit, and bank deposits.

1. International short term
finance
Presented by:
Aman Singhal

2. Short term finance
 Budgeting and making financial plans for
periods of one year or less.
 These funds are usually for businesses to run
their day-to-day operations including payment
of wages to employees, inventory ordering
and supplies.

3. Importance
–Marketing –
• For deciding whether to finance the firm's
funds requirements aggressively or
conservatively.
Accounting
• Cash conversion cycle, management of
inventory, accounts receivables, payables,
receipts and disbursements of cash.
Management
• Sales will be affected by the availability of
credit to purchasers, sales will be affected
by the inventory management
Management

4. Essence of short term
financial management
 Minimize the working capital needs consistent with
other policies.
 Raise short term funds at the minimum possible cost
and deploy short term cash surpluses at the
maximum possible rate of return consistent with the
firm's risk preferences and liquidity needs.

5. Short term borrowing
Commercial
papers
Banker's
acceptances
Short term
bank deposits
Certificate of
deposite
Instruments
Instrument Currency
Location of
financial
centre
Tax related
issues
Principal
dimensions

6. Key Factors
• 1)Maximize local
financing.2)Faced with
confiscation or currency
controls, fewer assets at risk.
• a) Offset foreign assets
with foreign liabilities
• b) Borrow where no
exposure increases
exchange risk
• a)Yes. Currency is irrelevant.
• b)No. Cover costs may differ -
added risk may mean the forward
premium/discount does not offset
interest rate differentials.
• a. If yes :trade-off required
between cost and exchange risk
• b. If no : costs are same
everywhere
Deviations
from Int'l
Fisher
Effect?
Does
Interest
Rate Parity
Hold?
Political
Risk: If
high,
Exchange
Risk

7. Investing surplus funds
 Fixed term money market deposits such as CDs- A CD
bears a maturity date, a specified fixed interest rate and
can be issued in any denomination. The term of a CD
generally ranges from one month to five years.
 Commercial paper- An unsecured, short-term debt
instrument issued by a corporation, typically for the
financing of accounts receivable, inventories and
meeting short-term liabilities. Maturities - rarely range
any longer than 270 days.

8. Considerations
 Yield – Total ROI
 Marketability- Liquidity
 Exchange rate risk
 Price risk
 Transaction costs

9. Example
Consider the case of a Treasurer who has a surplus of
$180,000 for 90 days. 90 day USD CDs are attractive
instrument offering a return of 10% but the denomination
is $100,000 per CD. The Treasurer can purchase one CD
and invest $80,000 in a bank deposit earning 6% or
borrow $20,000 via an overdraft facility at 13% and
purchase 2 CDs. Which course of action is preferable?
Soln: Let M=minimum size of investment instrument
S=surplus funds
i=interest rate on instrument
d=interest rate on the bank deposit
b=interest rate on borrowing or overdraft

10. Breakeven size= M x i – (M – S*) x b = S* x d
S*= M[(b-i) / (b-d)]
If excess funds on hand exceed S*, money should be
borrowed to invest in the money market instrument
otherwise excess funds should be left in a bank deposit.
M= $100,000
i= 0.10
d=0.06
b= 0.13
Breakeven size= 100,000[(0.13-0.10) / (0.13-0.06) =
42,857.14
Since the treasurer has $80,000 excess, it is preferable to
borrow $20,000 and purchase 2 CDs.

11. CODI rates Reported by Federal Reserve Board
2014 MoneyCafe.com Source: Derivation of Rates Reported by Federal

12. 2014 MoneyCafe.com Source: Derivation of Rates Reported by Federal
Reserve Board

13. Financing short term
deficits
 Objective- Minimize overall borrowing
requirement consistent with the firm's liquidity
needs and to fund these at the minimum possible
all-in-cost.
 Suppose a treasurer determines that he has a
requirement of USD 60,000 for 30 days. An
overdraft facility would cost him 12% while 30
day term loan is available at 9% but the minimum
amount is USD 100,000. Surplus funds can be
kept in a deposit earning 5%.

14. Centralized Cash
Management
Centralized cash management:-In centralized system of cash
management collection of cash and payment of cash is made
to and by Head office only instead of different-different
branches of the company. In this system, to have efficient cash
management there is two steps:-
 Prompt Payment by Customer:- one way to ensure prompt
payment by customers is prompt billing. What the customer has
to pay, the period of payment etc. should be notified
Accurately and in advance.
The use of mechanical devices for billing along with the enclosure
of a self-addressed return envelope will speed up payments by
customers. Another and more important technique to
encourage prompt payment by customers is the practice of

15.  EARLY CONVERSION OF PAYMENT INTO CASH:-
Once the customer makes the payment by writing a cheque in
favour of the firm, the collection can be expedited by prompt
encashment of the cheque. It will be recalled that there is
lag is between the time a cheque is prepared and mailed by
the customer and the time the funds, are included in the
cash reservoir of the firm.

16. NTAGES OF
CENTRALIZED CASH
MANAGEMADVAENT. Helps in maintaining minimum cash balance during the
year.
 Helps the companies to generate maximum possible
returns by investing all cash resources optimally.
 Helping the companies to take complete advantage of
multinational netting, so as to minimize transaction cost and
currency exposure.
 Optimally, utilizes the various ledging strategies so as to
minimize the mncs foreign exchange exposure.
 Achieve maximum utilization of the transfer pricing
mechanism so as to enhance the profitability and growth of

17. DISADVANTAGE OF
CENTRALIZED CASH
MANAGEMENT. Local managers may loose motivation to control cash flows
adequately. When the cash management and finance function
are in the hand of headquarter the co-ordination between the
financial disciplines and the local knowledge may more easily is
frustrated.
 Moreover, a centralized cash system requires a highly
formalized cash balance control system, thus rising regulative,
administrative, and information costs. Finally, internalizing and
recognizing the cash balance may disturb relationship of
subsidiaries with local banks.
 The disadvantage of centralized European cash management,
however decline. Moreover, netting and pooling of cash
positions gain attractiveness and trend towards centralized
treasuries is already apparent. In fact, even non European

18. DECENTRALIZED CASH
MANAGEMENT.
Decentralized cash:-this system of cash management means that
the collection and payment of cash is maintained by the
branches of large enterprise to complete the objectives of
minimizes the cost of collection and reduction in the period of
collection of cash. under this system ,overall there are two
techniques used by large enterprise:
 Concentration banking- a concentration bank is one which the
firm has major account usually a disbursement. Hence, this
arrangement is referred to as concentration banking.
 Lock box system:-Under this arrangement, firms hire a post
office box at the important collection centers. The customers
are required to remit payments to collection centers or lock
box. The lock banks of the firm, at the respective places are
authorized to open the box and pick up the(cheque) received

23. MIBOR
MIBOR is the interest rate at which banks can borrow
funds, in marketable size, from other banks in the
Indian interbank market.
MIBOR is calculated everyday by the National Stock
Exchange of India (NSEIL) as a weighted average of
lending rates of a group of banks, on funds lent to
first-class borrowers. The MIBOR was launched on
June 15, 1998 by the Committee for the Development
of the Debt Market, as an overnight rate.

24. MIBOR
The NSEIL launched the 14-day MIBOR on
November 10, 1998, and the one month and three
month MIBORs on December 1, 1998.
Further, the exchange introduced a 3 Day FIMMDA-
NSE MIBID-MIBOR on all Fridays with effect from
June 6, 2008 in addition to existing overnight rate.
Thus, we can say that MIBOR is is arrived now a
days by FIMMDA and NSE, based on inputs from PS
Banks, Private Sector Banks, Primary Dealers and
Foreign Banks .

25. LIBOR
Originally, in 1986 LIBOR was published for three
currencies ie USD, GBP and JPY. Later on other
currencies were added and after merger of some
currencies in 2000 into Euro, now Libor rates are
calculated for 10 currencies and 15 borrowing periods
ranging from overnight to one year. These are
published daily at 11:30 am (London time).
The rates are published for period ranging from 1 day
to 12 months (i.e. 1 day, 1 week, 2 weeks, 1 month, 2
month ...... upto 12 months at monthly intervals)

26. LIBOR
LIBOR is calculated and published by
Thomas Reuters on behalf of British Bankers'
Association (BBA) for currencies like (1) US
Dollar, (2) GB Pound (GBP), (3) Euro
(EUR), (4) Swiss Franc (CHF), (5) Canadian
dollar (CAD), (6)Japanese Yen (JPY), (7)
Danish Krone (DKK), (8) Swedish Korna
(SEK), (9) Australian Dollar (AUD), (10) New
Zealand Dollar (NZD). MIBOR is the
benchmark for overnight interest rates
for Indian Rupee (INR).

28. Importance of LIBOR and
MIBOR
The Libor is widely used as a reference rate / bench
mark for many financial instruments in both financial
markets and commercial fields. In 2012, it was
estimated that at least US$ 350 trillion in derivatives
and other financial products were tied to the
LIBOR. Thus, for banks and other financial
institutions, huge number of transactions are valued
based on the current trend of LIBOR.
The MIBOR (alongwith MIBID) rate is used as a
bench mark rate for majority of deals struck for
Interest Rate Swaps, Forward Rate Agreements,
Floating Rate Debentures and Term Deposits in Indian
markets.

29. Products that are popular
linked to LIBOR
Some products which are linked / bench marked /
reference rated to LIBOR include, Forward Rate
Agreements, Interest Rate Futures, Interest Rate
Swaps, Swap options, Overnight Index Swaps,
Interest Rate Options, Floating Rate Notes, Range
Accrual Notes.

30. LIBOR Scandal
We have seen above that LIBOR is the average
rate (declared on daily basis) and is calculated
based on the rates submitted by major
international banks in London. We have also
seen that huge amount of transactions / deals,
specially derivative deals, are benchmarked or
have reference to LIBOR. Thus, the daily mark
to market valuation of such deals depends on the
LIBOR and even settlement among banks /
government is done by banks based on
LIBOR. In case LIBOR is manipulated, it will
impact the valuation / settlement amount of huge
volume of transactions across the world as
LIBOR is widely used.

31. On 27th June 2012, Barclays admitted to misconduct and thus UK's FSA imposed a 59.5
million pound penalty. US Department of Justice and Commidity Futures Trading
Commisison too imposed fines worth 102 and 128 million pound penalties . Thus Barclays
paid total of about 290 million pound as penalty.
On 31st July, 2012, Deutsche Bank confirmed that a "limited number" of staff were involved
in the LIBOR rate rigging scandel, but it cleared the senior management of the charges.
On 19 December 2012, UBS agreed to pay regulators $1.5bn ($1.2bn to the US Department
of Justice and the Commodity Futures Trading Commission, £160m to the UK Financial
Services Authority and 60m CHF to the Swiss Financial Market Supervisory Authority) for
its role in the scandal.

32. Early estimates are that the rate manipulation scandal cost U.S. states, counties, and local
governments at least $6 billion in fraudulent interest payments, above $4 billion that state
and local governments have already had to spend to unwind their positions exposed to rate
manipulation.
The British Bankers’Association said on 25 September that it would transfer oversight of
Libor to UK regulators, as proposed by Financial Services Authority Managing Director
Martin Wheatley and CEO-designate of the new Financial Conduct Authority. On 28
September, Wheatley's independent review was published, recommending that an
independent organization with government and regulator representation, called the Tender
Committee, manage the process of setting Libor under a new external oversight process for
transparency and accountability
The FSA announced final proposals for new regulations on how financial market benchmarks
are calculated, tightening requirements that information be more transparent.

33. Types of Risk
Preshipment - Shipment - Postshipment

34. The Trade Cycle and Risk
7
The Trade Cycle
The Transaction over Time
Contract
Production
Land Transport
Port of Departure
Sea Transport
Port of Destination
Customs!
Land Transport
and Delivery
Final Payment

35. Initial Contact
Contract
Production Process
Transport
To Port
Port Entry
Pre-shipment Risks
LOADING
SHIP
PORT
EXPORT
CUSTOMS

36. Transport to Port
By rail mode
By air mode
By ground mode

37. THE PORT

39. LOADING THE SHIP

42. LOADED
SHIP
Ocean Freight is
most common mode
of transport
PERILS OF THE SEA
Shipment Risks
Port
Of
Departure
Port
Of
Arrival

43. Shipment Risks
Perils of the Sea
Engine Trouble
Ramming
Jettison
Running Aground

44. Post-Shipment Risk
Port
Of
Arrival
CUSTOMS
IMPORTER’S
WAREHOUSE
FINAL
PYMT
Transit to Importer

45. PAYMENT TERMS
I. PAYMENT TERMS
Four Principal Means:
1. Cash in advance
2. Open Account
3. Letter of Credit
4. Drafts

46. PAYMENT TERMS
A. Cash in Advance
1. Minimal risk to exporter
2. Used where there is
a. Political unrest
b. Goods made to order
c. New and unfamiliar
customer

47. PAYMENT TERMS
B. OPEN ACCOUNT
1. Creates a credit sale
2. To importer’s advantage
3. More popular lately because
a. major surge in global trade
b. credit information improved
c. more global familiarity with
exporting.

48. PAYMENT TERMS
4.Benefits of Open Accounts:
a. greater flexibility in
making a trade
b. lower transactions costs
5.Major disadvantage:
-Slow payment
-highly vulnerable to
government currency controls.

49. PAYMENT TERMS
C. Letter of Credit (L/C)
1. A letter addressed to seller
a. written and signed by
buyer’s (importer) bank
b. promising to honor seller’s
(exporter) drafts.
c. Bank substitutes its own
commitment
d. Seller must conform to terms
e. Protects in case of
discrepancies

50. PAYMENT TERMS
2. Advantages of an L/C to Exporter
a. eliminates credit risk and
b. pre-shipment risk of order
cancellation

51. PAYMENT TERMS
3. Advantages of L/C to Importer
a. shipment by exporter assured
b. documents inspected ensure
the correct order
c. may allow better sales terms

52. PAYMENT TERMS
4. Safest type of L/Cs
a. documentary
includes bill of lading and commercial invoice
b. irrevocable
99% of the time
c. confirmed

53. PAYMENT TERMS
D. DRAFTS
1. Definition:
- unconditional order in
writing
- exporter’s order for importer
to pay
- at once (sight draft) or
- in future (time draft)

54. PAYMENT TERMS
2. Three Functions of Drafts
a. clear evidence of financial
obligation
b. reduced financing costs
c. Can be a financial product for
investors
(i.e. A time draft may be converted to a
banker’s acceptance)

55. PAYMENT TERMS
3. Types of Drafts
a. sight
b. time

56. DOCUMENTS
II. DOCUMENTS USED IN INT’L TRADE
Three most used documents
1. Bill of Lading (most
important)
2. Commercial Invoice
3. Insurance Certificate

57. DOCUMENTS
A. Bill of Lading
Three functions:
1.Acts as a contract to
carry the goods.
2.Acts as a shipper’s
receipt
3. Establishes ownership
over goods if negotiable type.

58. DOCUMENTS
B. COMMERCIAL INVOICE
Purpose:
1.Lists full details of goods
shipped with INCOTERMS
2.Names of importer/exporter
given
3.Identifies payment terms in a
specific currency
4.List charges for transport and
insurance.

59. INCOTERMS
A codification of international rules for the
uniform interpretation of common contract
clauses in export/import transactions.
EXW: at exporter’s warehouse; importer has
most liability
FAS: along side the ship
FOB: after shipment is loaded on
board
DDP: Delivered duty paid-exporter has most
liability

60. DOCUMENTS
C. INSURANCE
1. Marine Insurance-
same name whether ocean or air
freight.
2. Insurance Certificate-
issued per trip to show proof of
insurance

61. A “Small” Container Ship

62. Insurance Principle:
GENERAL AVERAGE
An ocean marine loss that occurs through the
voluntary sacrifice of a part of the vessel or cargo, or
an expenditure, to safeguard the vessel and its
remaining cargo from a common peril.
If the sacrifice is successful, all interests at risk
contribute to the loss borne by owner of the
sacrificed property based on their respective saved
values.
A party can insure their portion of such a loss
under an ocean marine policy.

63. Example of General Average
Liability Assigned
If only shipper A’s container is jettisoned at a loss of $250,000, what is shipper
B and C liable for?
Total
Co. Containers % Value Liability
A 1 5 $250,000 0
B 4 20 $20,000 $50,000
C 15 75 $150,000 $187,500
Total: 20 containers at risk when ship set sail.

64. SHORT-TERM
FINANCING
TECHNIQUESIII. FINANCING TECHNIQUES
A. Four Types:
1. Bankers’ Acceptances
2. Discounting the draft
3. Factoring
4. Forfaiting

65. BANKERS’
ACCEPTANCES
1. Bank created acceptances
a. Creation: Time drafts
accepted by bank
b. Terms: Payable at
maturity to holder
c. Sale in the money market:
Bankers acceptance
d. Highly liquid market

66. DISCOUNTING
2. Discounting
a. Converts exporters’ time drafts to
cash
minus interest to maturity and
commissions.
b. Low cost financing with few fees
c. May be:
with recourse (exporter still liable)
or
without recourse(bank takes
liability for nonpayment)

67. FACTORING
3. Factoring
firms sell accounts receivable to
another firm known as the factor.
a. Discount charged by factor
b. Non-recourse basis: Factor
assumes all payment risk.
c. When used:
1.) Occasional exporting
2.) Clients geographically
dispersed.

68. FORFAIT
4. Forfaiting
a. Definition:
discounting at a fixed rate
without recourse for medium-
term accounts receivable
b. Use: Large capital purchases
c. Most popular in W. Europe

69. GOVERNMENT
SOURCES
IV. GOVERNMENT SOURCES OF EXPORT
FINANCING AND CREDIT INSURANCE
A. Export-Import Bank of the
U.S.
-known as Ex-Im Bank
-finances and facilitates U.S.
exports only.

70. GOVERNMENT
SOURCES
1. Ex-Im Bank Programs:
a. Direct loans to exporters
b Loan guarantees
c. Risk Insurance: Political and
commercial insurance

71. GOVERNMENT
SOURCES
2. Ex-Im Restrictions:
 At least 51% U.S. content
 No armaments
 Must be environmentally friendly to both countries

72. COUNTERTRADE
V. COUNTERTRADE
A. Three Specific Forms:
1. Barter
direct exchange in kind
2. Counterpurchase
sale/purchase of unrelated
goods but with currencies
3. Buyback
repayment of original
purchase through sale of a
related product.

73. COUNTERTRADE
B. When to Use Countertrade
1. with “soft-currency”
developing countries
2. when tariffs or quotas
prevent
trade.

74. The Reserve Bank of India (RBI) is the nation’s central bank. Since 1935,
when it began itsoperations, it has stood at the centre of India’s financial
system, with a fundamental commitmentto maintaining the nation’s monetary
and financial stability.Main FunctionsMonetary Authority
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate
flow of credit to productive sectors.Regulator and supervisor
of the financial system
Prescribes broad parameters of banking operations within
which the countrys banking and financial system functions.
Objective: maintain public confidence in the system, protect
depositors interest and provide cost-effective banking services
to the public.Manager of Foreign Exchange
Manages the Foreign Exchange Management Act, 1999
Objective: to facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India.Issuer of currency: ∑ Issues
and exchanges or destroys currency and coins not fit for circulation.

75. As a prudential measure aimed at better risk management and avoidance of
concentration of credit risks, the Reserve Bank of India has advised the
banks to fix limits on their exposure to specific industry or sectors and has
prescribed regulatory limits on banks’ exposure to individual and group
borrowers in India
The exposure ceiling limits would be 15 percent of capital funds
in case of a single borrower and 40 percent of capital funds in
the case of a borrower group.
Credit exposure to a single borrower may exceed the exposure norm of
15 percent of the bank's capital funds by an additional 5 percent (i.e.
up to 20 percent) provided the additional credit exposure is on account
of extension of credit to infrastructure projects. Credit exposure to
borrowers belonging to a group may exceed the exposure norm of 40
percent of the bank's capital funds by an additional 10 percent (i.e., up
to 50 percent), provided the additional credit exposure is on account of
extension of credit to infrastructure projects

76. Bills discounted under Letter of Credit (LC)
In cases where the bills discounting/purchasing/negotiating bank and
LC issuing bank are different entities, bills
purchased/discounted/negotiated under LC (where the payment to the
beneficiary is not made ‘under reserve’), will be treated as an exposure
on the LC issuing bank and not on the third party / borrower. However,
in cases where the bills discounting/purchasing/negotiating bank and
LC issuing bank are part of the same bank, i.e. where LC is issued by
the Head Office or branch of the same bank, then the exposure should
be taken on the third party/borrower and not on the LC issuing bank. In
the case of negotiations ‘under reserve’, the exposure should be treated
as on the borrower.

77. ExemptionsRehabilitation of Sick/Weak Industrial Units
The ceilings on single/group exposure limits are not
applicable to existing/additional credit facilities (including
funding of interest and irregularities) granted to weak/sick
industrial units under rehabilitation packages.
Food credit
Borrowers, to whom limits are allocated directly by the Reserve
Bank for food credit, will be exempt from the ceiling.
Guarantee by the Government of India
The ceilings on single /group exposure limit would not be
applicable where principal and interest are fully guaranteed by
the Government of India.
Loans against Own Term Deposits
Loans and advances (both funded and non-funded facilities)
granted against the security of a bank’s own term deposits may not
be reckoned for computing the exposure to the extent that the bank
has a specific lien on such deposits.

78. Exposure
Exposure shall include credit exposure and investment exposure . The
sanctioned limits or outstandings, whichever are higher, shall be reckoned for
arriving at the exposure limit.
Measurement of Credit Exposure of Derivative Products
For the purpose of exposure norms, banks shall compute their credit
exposures, arising on account of the interest rate & foreign exchange
derivative transactions and gold, using the 'Current Exposure Method',
as detailed below. While computing the credit exposure banks may
exclude 'sold options', provided the entire premium / fee or any other
form of income is received / realised.
Credit Exposure
Credit exposure comprises the following elements:
(a) all types of funded and non-funded credit limits.
(b) facilities extended by way of equipment leasing, hire purchase
finance and factoring services.

79. Investment Exposure
a) Investment exposure comprises the following elements:
(i) investments in shares and debentures of companies.
(ii) investment in PSU bonds
(iii) investments in Commercial Papers (CPs).
b) Banks’ / FIs’ investments in debentures/ bonds / security receipts / pass-
through certificates (PTCs) issued by an SC / RC as compensation
consequent upon sale of financial assets will constitute exposure on the SC
/ RC. In view of the extraordinary nature of the event, banks / FIs will be
allowed, in the initial years, to exceed the prudential exposure ceiling on a
case-to-case basis.

80. Credit Exposure to Industry and certain Sectors
Fixing of Sectoral Limits
Apart from limiting the exposures to an individual or a Group of borrowers, as indicated
above, banks may also consider fixing internal limits for aggregate commitments to
specific sectors, e.g. textiles, jute, tea, etc., so that the exposures are evenly spread
over various sectors. These limits could be fixed by the banks having regard to the
performance of different sectors and the risks perceived. The limits so fixed may be
reviewed periodically and revised, as necessary.
Unhedged Foreign Currency Exposure of Corporates
To ensure that each bank has a policy that explicitly recognises and takes account
of risks arising out of foreign exchange exposure of their clients, foreign currency
loans above US $10 million, or such lower limits as may be deemed appropriate
vis-à-vis the banks’ portfolios of such exposures, should be extended by banks
only on the basis of a well laid out policy of their Boards with regard to hedging of
such foreign currency loans. Further, the policy for hedging, to be framed by their
boards, may consider, as appropriate for convenience, excluding the following:
Where forex loans are extended to finance exports, banks may not insist on
hedging but assure themselves that such customers have uncovered
receivables to cover the loan amount.
Where the forex loans are extended for meeting forex expenditure.

81. Exposure to Real Estate
(i) Banks should frame comprehensive prudential norms relating to the ceiling on the
total amount of real estate loans, single/group exposure limits for such loans, margins,
security, repayment schedule and availability of supplementary finance and the policy
should be approved by the banks' Boards.
(ii) While appraising loan proposals involving real estate, banks should ensure that the
borrowers have obtained prior permission from government / local governments / other
statutory authorities for the project, wherever required. In order that the loan approval
process is not hampered on account of this, while the proposals could be sanctioned in
the normal course, the disbursements should be made only after the borrower has
obtained requisite clearances from the government authorities.
The exposure of banks to entities for setting up Special Economic Zones (SEZs)
or for acquisition of units in SEZs which includes real estate would be treated as
exposure to commercial real estate sector for the purpose of risk weight and
capital adequacy from a prudential perspective. Banks would, therefore, have to
make provisions, as also assign appropriate risk weights for such exposures, as
per the existing guidelines.

82. Banks have been permitted to undertake leasing, hire purchase and factoring
activities departmentally. Where banks undertake these activities departmentally,
they should maintain a balanced portfolio of equipment leasing, hire purchase
and factoring
Their exposure to each of these activities should not exceed
10 percent of total advances
Banks are allowed to extend credit/non-credit facilities (viz. letters of credit and
guarantees) to Indian Joint Ventures/Wholly-owned Subsidiaries abroad and
step-down subsidiaries which are wholly owned by the overseas subsidiaries of
Indian Corporates
The above exposure will, however, be subject to a limit of 20 percent of
banks
loan will be granted only to those joint ventures where the
holding by the Indian company is more than 51%.
While extending such facilities, banks will have to comply with
Section 25 of the Banking Regulation Act, 1949, in terms of
which the assets in India of every banking company at the close
of business on the last Friday of every quarter shall not be less
than 75 percent of its demand and time liabilities in India.

83. Banks' capital market exposures would include both their direct exposures
and indirect exposures. The aggregate exposure (both fund and non-fund
based) of banks to capital markets in all forms would include the following:
direct investment in equity shares, convertible bonds, convertible debentures
and units of equity-oriented mutual funds the corpus of which is not
exclusively invested in corporate debt;
advances against shares/bonds/debentures or other securities or on clean
basis to individuals for investment in shares (including IPOs/ESOPs),
convertible bonds, convertible debentures, and units of equity-oriented mutual
funds;
advances for any other purposes where shares or convertible bonds or
convertible debentures or units of equity oriented mutual funds are taken as
primary security;
advances for any other purposes to the extent secured by the collateral
security of shares or convertible bonds or convertible debentures or units of
equity oriented mutual funds i.e. where the primary security other than
shares/convertible bonds/convertible debentures/units of equity oriented
mutual funds does not fully cover the advances;
secured and unsecured advances to stockbrokers and guarantees issued on
behalf of stockbrokers and market makers;

84. Statutory limit on shareholding in companies
In terms of Section 19(2) of the Banking Regulation Act, 1949, no banking company
shall hold shares in any company, whether as pledgee, mortgagee or absolute owner,
of an amount exceeding 30 percent of the paid-up share capital of that company or 30
percent of its own paid-up share capital and reserves
Advances against shares to individuals
Loans against security of shares, convertible bonds, convertible
debentures and units of equity oriented mutual funds to individuals from
the banking system should not exceed the limit of Rs.10 lakh per
individual if the securities are held in physical form and Rs. 20 lakhs per
individual if the securities are held in demat form. Such loans are meant
for genuine individual investors and banks should not support collusive
action by a large group of individuals belonging to the same corporate or
their inter-connected entities to take multiple loans in order to support
particular scrips or stock-broking activities of the concerned firms. Such
finance should be reckoned as an exposure to capital market.

85. Margins on advances against shares/ issue of guarantees
A uniform margin of 50 per cent shall be applied on all advances / financing of IPOs
/ issue of guarantees on behalf of stockbrokers and market makers. A minimum
cash margin of 25 per cent (within the margin of 50%) shall be maintained in
respect of guarantees issued by banks for capital market operations. These margin
requirements will also be applicable in respect of bank finance to stock brokers by
way of temporary overdrafts for DVP transactions.

86. Banks may extend finance to stockbrokers for margin trading. The
Board of each bank should formulate detailed guidelines for lending for
margin trading, subject to the following parameters:
The finance extended for margin trading should be within the overall
ceiling of 40% of net worth prescribed for exposure to capital market.
A minimum margin of 50 per cent should be maintained on the funds
lent for margin trading.
The shares purchased with margin trading should be in dematerialised
mode under pledge to the lending bank. The bank should put in place
an appropriate system for monitoring and maintaining the margin of
50% on an ongoing basis.
The bank’s Board should prescribe necessary safeguards to ensure
that no "nexus" develops between inter-connected stock broking
entities/ stockbrokers and the bank in respect of margin trading. Margin
trading should be spread out by the bank among a reasonable number
of stockbrokers and stock broking entities.

87. Banks' Exposure to Commodity Markets
In terms of extant instructions, banks may issue guarantees on behalf of
share and stock brokers in favour of stock exchanges in lieu of margin
requirements as per stock exchange regulations. While issuing such
guarantees banks should obtain a minimum margin of 50 percent. A
minimum cash margin of 25 percent (within the above margin of 50
percent) should be maintained in respect of such guarantees issued by
banks. The above minimum margin of 50 percent and minimum cash
margin requirement of 25 percent (within the margin of 50 percent) will
also apply to guarantees issued by banks on behalf of commodity brokers
in favour of the national level commodity exchanges, viz., National
Commodity & Derivatives Exchange (NCDEX), Multi Commodity
Exchange of India Limited (MCX) and National Multi-Commodity
Exchange of India Limited (NMCEIL), in lieu of margin requirements as
per the commodity exchange regulations.

88. Banks’ exposure in respect of Currency Derivatives
segment
The provisions with respect to capital market exposure
including the related provisions with regard to maintenance
of 50% margin as well as intra-day monitoring are not
applicable to banks’ exposure to brokers under the currency
derivatives segment.
Limits on exposure to unsecured guarantees and unsecured advances
2.9.1 The instruction that banks have to limit their commitment by way of
unsecured guarantees in such a manner that 20 percent of the bank’s
outstanding unsecured guarantees plus the total of outstanding unsecured
advances do not exceed 15 percent of total outstanding advances has been
withdrawn to enable banks’ Boards to formulate their own policies on unsecured
exposures. Simultaneously, all exemptions allowed for computation of
unsecured exposures also stand withdrawn.