Security Documentation Final

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H YPOTHECATION OF M OVABLE M ACHINERY ,LETTER OF CREDIT &PACKING CREDIT


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All stores and spare parts

Both present and future

Belonging to the borrower

Being and lying in the borrowers premises or godowns of or rented by the borrower or otherwise used in connection with the

business of the borrower

What constitutes MovableMachinery?


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Salient Features of hypothecationof movable machinery

Hypothecation is one of the most popular methods of creationof charge on movable assets without transferring possessionof the assets

The property is charged with the amount of a debt but neither ownership nor possession is passed to the creditor

Security remains in possession and control of the borrower and is charged in favour of the bank through documentsexecuted by the borrower


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The documents contain a clause that obligates the borrower togive possession and control of movable machinery ondemand. Once possession is given to the bank, it is akin to a

pledge

There is no transfer of interest in the property but representsan obligation to repay the debt. It evidences an equitable right



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Since the securities are with borrowers, he/she can, in thenormal course of business, sell the same and can purchasefurther movable machinery

If a need arises the bank may seize the movable machinerywithout intervention of the court, sell the same andappropriate the proceeds towards the dues including Interest +

Expenses

All hypothecation letters should be stamped as per the StampAct



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Letter of Confirmation

Place, Date, Stamp, Name

Declaration regarding Movability of Machinery

Obtained from the Borrower

Advance Account Details, Declaration

Small tin plate with wordings Hypothecated to ..Bank ....Branch should be fixed on each machinery to evidence that

the Plant & Machinery are under hypothecation to the Bank


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Instrument of Hypothecation of Movable Machinery

Clause 1: Balance due to the Bank Principal, interest, charges and expenses

Clause 2: Hypothecated machinery

Clause 3: End use of funds

Clause 4: Payable on demand

Clause 5: Interest rate


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Instrument of Hypothecation of Movable Machinery

Clause 7 : Borrower agrees & undertakes : Not to sell the hypothecated machinery, nor give it to anyone

without prior consent of the bank Not to open advance a/c with any other bank without prior

consent of bank Clause 8: Maintenance

Clause 9 : Inspection

Clause 10: Board or boards with the name of bank legibly anddistinctly printed or written to be placed at all times at all thehypothecated premises


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Instrument of Hypothecationof Movable Machinery

Clause 20: After 48 hrs notice from possession of thehypothecated machinery without assigning any reason

Bank can sell either by public auction or private contract

Borrower undertakes to transfer all relative contracts,securities, bazaar chits, bills, notes, hundies and documents to bank

Borrower is bound by banks decision.Clause 22: Pay, rents, rates, taxes

Clause 28: Default in repayment


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Letter of Credit


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Definition and Purpose

A Letter of Credit, simply defined, is a written instrumentissued by a bank at the request of its customer, the Importer (Buyer), whereby the bank promises to pay the Exporter (Beneficiary) for goods or services, provided that the Exporter

presents all documents called for, exactly as stipulated in theLetter of Credit, and meet all other terms and conditions setout in the Letter of Credit. A Letter of Credit is alsocommonly referred to as a Documentary Credit

Letters of credit are especially useful if you're not well-established, you don't have the best credit, you're dealing withan overseas company and you want to give assurance thatyou'll pay for your products


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Parties involved

Applicant The applicant is normally the buyer of the goods . i.e. the

importer who request his bank to issue a letter of credit in favour of a named beneficiary against tendering of certain specified

documentsBeneficiary The beneficiary is normally the seller of goods who receives

payment under documentary credit if he has complied with terms

and conditions thereof .


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Parties involved(cont.)

Issuing Bank The issuing bank or the opening bank is one which issue the

credit , i.e. undertake , independent of the Undertaking of theapplicant , to make payment provided the terms and conditions

of the credit have been complied withAdvising Bank The advising bank advises the credit to the beneficiary thereby

authenticating the genuineness of the credit

Confirming Bank A confirming bank is the one which adds its guarantee to the

credit . It undertakes the responsibility of payments / negotiation/ acceptance under the credit in addition to that of the issuing

bank


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Parties involved(cont.)

Nominating Bank A Nominating bank is the bank nominated or authorized by

issuing bank to pay , to incur a deferred payment liability , toaccept drafts or to negotiate the credit

Reimbursing Bank A reimbursing bank is the bank authorized to honour the

reimbursement claims in settlement of negotiation with the paying or accepting bank


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Characteristics

Negotiability Revocability Transfer and Assignment Sight and Time Drafts


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Standard forms of Documentation

Commercial Invoice Packing List Bill of lading and other transport documents Certificate of Origin Inspection Certificate Bill of Exchange Insurance Documents Warranty of title


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Common Defects in Documentation Letter of credit has expired prior to presentation of draft Bill of lading evidences delivery prior to or after the date range

stated in the credit

Stale dated documents Inconsistent description of goods Insurance document errors Invoice amount not equal to draft amount Ports of loading and destination not as specified in the credit Document required by the credit is not presented


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Functions

1. Payment Instrument In absence of letter of credit, sight or time drafts used

2. Performance Guarantee

Payment by bank would not be released until goods and documentconforms to specifications on letter of credit

3. Financial Instrument Seller can use letter of credit as collateral to finance production

and exportation of good


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Advantages

Credit risk eliminated

Reduces exchange rate and political risk

No Need for Credit Check

Pre-shipment risk avoided Facilitates financing Immediate payment

Expert Examination of

Documents Sources of Supply expand Financing

No cash tied up Payment only after compliance To ship by a certain date

requires an on-board bill of lading

EXPORTER IMPORTER


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Case Study

The steps mentioned in theexample

A business called the InCosmetikafrom time to time imports goodsfrom a business called ACME,which banks with the ABC Bank.InCosmetika holds an account atthe Commonwealth Bank.InCosmetika wants to buy$500,000 worth of merchandisefrom ACME, what steps should betaken to get a LC ?


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1. InCosmetika goes to The Commonwealth Bank and requests a$500,000 letter of credit, with ACME as the beneficiary.

2. The Commonwealth Bank can issue a letter of credit either onapproval of a standard loan underwriting process or byInCosmetika funding it directly with a deposit of $500,000 plus

fees which are typically between 1% and 8% of the face value of the letter of credit.

3. The Commonwealth Bank sends a copy of the letter of credit to theABC Bank, which notifies ACME that payment is available andthey can ship the merchandise InCosmetika has ordered with thefull assurance of payment to them.

4. On presentation of the stipulated documents in the letter of creditand compliance with the terms and conditions of the letter of credit,the Commonwealth Bank transfers the $500,000 to the ABC Bank,

which then credits the account of ACME for that amount.

Case Study


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Types of Letter of Credit

There are basically 2 types of letters of credit:-

1.Commercial letter of credit

2.Standby Letter of credit


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Other types of letters of credit

1. Revocable/Irrevocable2. Confirmed/Unconfirmed3. Restricted/Unrestricted4. Transferable5. Back-to-back 6. Revolving

7. Deferred8. Red clause/Green Clause


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Buyer & Seller Agree

ApplicantImporter/Buyer

BeneficiaryExporter/Seller

5. Product isShipped

1. 1.

10.

Exporters Bank/Advising Bank/

Confirming Bank 9.

Importers Bank/Issuing Bank

2.

8.Documents

2. Application

7. Documents

3. Letter of Credit

6.Documents 4.

ConfirmedLetter of

CreditConfirming Bank

Confirmed Letter of Credit cycle


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Packing Credit


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Packing Credit Pre-shipment fund based credit facility for a specific period

extended by the banks to those customers who have received aconfirmed order or LC for export of merchandise, on the termsindicated.

It is provided for working capital needs like: Procure raw materials, carry out manufacturing process. carry out manufacturing process and pack goods Provide a secure warehouse for goods and raw materials. Ship the goods to the buyer.

Pre-shipment finance is extended in the following forms : Packing Credit in Indian Rupee Packing Credit in Foreign Currency (PCFC)


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Different Stages of Packing Credit Appraisal and Sanction of Limits Disbursement of Packing Credit Advance Follow up of Packing Credit Advance Liquidation of Packing Credit Advance Overdue Packing

Documents Required : DPN Letter of Continuing Security Pledge/hypothecation of goods Undertaking to adjust each PC drawdowns in a time frame by

export proceeds

P hi C di F i


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Pre-shipment Credit ForeignCurrency

PCFC is available to exporters for domestic and importedinputs of goods to be exported at LIBOR related rates of interest as decided by RBI

To qualify for this purpose, the exporters overdue bill shouldnot exceed 5% of the average annual export realization duringthe preceding three years

Terms & Conditions :

The corporations/exporters having firm export orders or confirmed L/C are eligible for PCFC, provided they satisfyother credit norms of the Bank.

PCFC is to be repaid with the proceeds of the export bill

submitted after shipment.


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THANK YOU