UNIT 3

FINANCE FROM INTERNATIONAL SOURCES

Many firms in India export, import, borrow foreign currency loans and even invest
abroad. International involvement of Indian firms is increasing and this trend is expected to
continue.

RAISING FOREIGN CURRENCY FINANCE (OR) INTERNATIONAL SOURCES

OF FINANCE

The major sources available to Indian firms are:

1. Term loans from Financial Institutions in foreign currency

Financial institutions provide foreign currency term loans for meeting the following
expenditures:

♦ Import of plant and machinery

♦ Import of equipment
♦ Payment of foreign technical know-how fees.

Liability for periodical payment of interest and principal remains in the currency/
currencies of the loans and is translated into rupees at the prevailing rate of exchange for
making payments.

2. Export credit schemes

Export credit agencies have been established by the governments of major

industrialized countries for financing exports of capital goods and technical services. These
agencies follow guidelines under a convention known as the Berne Union. As per these
guidelines, the interest rate applicable for export credits to Indian companies for various
maturities is regulated. Two kinds of export credit is provided:

a. Buyers credit
Under this agreement, credit is provided directly to the Indian buyer for
purchase of capital goods and/ or technical services from the overseas
exporter.
 Details to be mentioned in the application of credit

i. Nature of goods' services

ii. Value of the contract
iii. Terms of payments
iv. Projected shipment / Provision of services
v. % of financing required

Operation /Process

b. Suppliers credit

This is provided to overseas exporters so that they can make available medium-term
finance to Indian importers.

Operation / Process

3. External commercial borrowings (ECB)

 The government of India permits Indian firms to resort to ECB for the import of plant
and machinery subject of certain terms and conditions.

i. Secure the permission of the Capital Goods Committee/ Project Approval

board.

ii. Obtain an offer from a bank,

iii. Get the approval of die Department of Economic Affairs (DEA), Ministry of
finance, for the offer,

iv. Arrange for documentation of the loan.

v. Secure the approval of the Reserve Bank of India,

vi. Deposit the loan document with the DEA.

vii. Draw the loan.

4. Eurocurrency
A eurocurrency is simply a deposit of a currency in a bank outside the country of the
currency.

Ex: Suppose an American oil company buys oil from middle east, and pays $10
million drawn on a US bank and the seller deposits the cheque in his account with a
Swiss bank. The dollar deposit placed outside the US, is a eurodollar deposit

The Swiss bank can use this deposit for granting Eurodollar loans.

Features of Eurocurrency loans

i. Syndication
 Eurocurrency loans are often syndicated loans, where in a group of lenders,
particularly banks, participate jointly in the process of lending under a single loan
agreement The syndicate of lenders is represented by the lead bank and the borrower
is required to pay a syndication fee ranging between ½% and 2% to the lead bank
which also represents the management fees to lead bank, participation fee to other
banks and other charges.

ii. Floating rate

The rate of interest on Eurocurrency loans is a floating rate. It is usually finked to

London Inter Bank offer rate (LIBOR) or Singapore liter bank offer rate (SIBOR)
while the rate of interest is determined at the beginning of each interest period, the
interest is payable at the end of each period.

Ex: Air India International, obtained a Eurodollar loan of $88 million at an interest
rate of 3/8 % above the LIBOR.

iii. Interest Period

The interest period may be 3, 6, 9 or 12 months in duration and is usually left to the
option of the borrower.

iv. Currency Option

The borrower often enjoys the multi-currency option which enables it to denominate
the interest and Principal in the new currency opted for and this option is exercisable
at the end of each interest period.

v. Repayment

The Eurocurrency loans are repayable in instalments, which are typically equal over a
period of time as agreed to by the parties.

vi Prepayment

The borrower may prepay the loan after giving notice to the lead bank, when
prepayment is done, some premium is payable.

5. Euro issues
 Following economic liberalisation, companies began looking at bonds and
Euroequities collectively referred to as ‘Euroissues’.

The Principal mechanisms used by Indian companies are :

* Depository Receipts Mechanism

* Euro convertible Issues.

The former represents indirect equity investment while the latter is debt with the latter
is debt with an option to convert in into equity.

Global Depository Receipts

In this mechanism, the shares issued by a firm are held by a depository, usually a
large international bank, who receives dividends, reports etc., and issues claims against these
shares. These claims are called depository receipts with each receipt being a claim on a
specified number of shares. The underlying shares are called depository share. The GDRs are
denominated in a convertible currency usually US dollars.

Regulation

A company planning a GDR issue must obtain the approval from the ministry of
finance as well as from Foreign Investment Promotion Board (F1PB) Since GDRs are
deemed to be FDI (Foreign Direct Investment)

Eurobonds

A Eurobond is a bond that is denominated in a currency that is not mat of the country
in which it is issued.

Ex: a US dollar denominated bond sold outside the US is a Eurodollar bond.

Eurobonds are sold by international syndicates of brokers, because they are generally
sold simultaneously in a number of countries. The syndicates will normally have a lead
manger (and co-lead manager, as the case may be) who underwrites the largest portion of the
issue.

Foreign bonds
 A foreign bond is a bond sold in a foreign country in the currency of the country of
issue.

Ex: A US company might sell a German-mark- denominated bond in Germany.

Foreign bonds are usually sold by brokers who are located in the country in which it is
issued

Parallel loans

A parallel loan involves an exchange of funds between firms in different countries.

Ex: Imagine a situation in which a US company's subsidiary in Brazil needs Brazilian

rials while a Brazilian company's subsidiary in the US needs dollars the Brazilian firm can
lend rials to the US owned subsidiary in Brazil while it borrows an approximately equivalent
amount of dollars from the US parent in the US.

The advantage of parallel loans, over bank loans are that they can circumvent foreign
exchange controls. The problem with parallel loans is locating the two sides of the deals.

LIBOR

LIBOR rates are those charged in interbank transactions (i.e, when banks borrow form
each other) and are the base rates for non bank customers. LIBOR rates are calculated as the
averages of the lending rates in the respective currencies of six lending London Banks.
Borrowers are changed on a "LIBOR - plus" basis with the premium based on the credit
worthiness of the borrower.

Credit Swaps

Involves the exchange of currencies between a bank and a firm rather than between
two firms, It is an alternative method of obtaining debt capital for a foreign subsidiary
without sending hinds abroad.

Ex: a U.S. firm may place US dollars in an a/c in New York. The US bank then
instruct one of its foreign subsidiaries to lend foreign currency to a subsidiary of the parent
that made the deposit.

FINANCING FOR EXPORTS / INTERNATIONAL TRADE

1. Forfeiting

Is a form of medium - term financing of exports.

Steps

i. The importer prepares promissory notes that are guaranteed by a bank.

ii. The notes are sent to the exporter who sells them for cash to a forfeiting bank.

iii. The bank may then sell notes which has no recourse to exporter in case of
non-payment.

2. Bankers Acceptances: When an exporter gives credit to a foreign buyer by issuing a

draft for some date in the future, the draft itself can be used by the exporter for short -
term financing such a draft is termed as trade draft.

3. Financing by Government Export Agencies:

Because of the jobs and income that derive from a healthy export sector, it has
become standard practice for governments around the world to help their exporters
win contracts by offering export financing. This financing can be of short, medium or
long term maturity and takes a number of different forms.

4. Counter trade:
Involves a reciprocal agreement for the exchange of goods or services. The parties
involved may be firms or governments.
Barter

The simplest form of counter trade involves the direct exchange of goods or services
from one country for the goods or services of another. There is no 'money' involved and
hence no need for letters of credit or drafts. Since, goods or services are exchanged at the
same time; there is no need for trade financing or credit insurance.

Counter Purchase

Counter purchase is substantially more common than barter. With Counter purchase
die seller agrees with the buyer either to :

i. Make purchase from the company nominated by the buyer (or)

ii. Take products from the buyer in the future

It can also involve tie combination of these two possibilities.

These types of counter-trade deals are called COMPENSATION

AGREEMENTS.

Industrial offset

A large portion of counter-trade involves agreements to buy materials or components

from the buying company or country.

Ex : An aircraft manufactures may buy engines from the buyer of its aircraft.

Bay back

This form of counter-trade is common with capital equipment used in mining and
manufacturing. In a buyback agreement the seller of a capital equipment agrees to buy the
products made with the equipment it supplies.
Switch Trading

Occurs when the importer has received credit for selling something to another country
at a previous time and this credit cannot be converted into financial payment, but can be used
for purchases in the country where the credit is held

(Give example s wherever possible).

Relative Importance of different forms of Counter trade

Barter - 4%

Counter purchase - 55%

Industrial offset - 24%

Buy back - 9%

Switch Trading - 8%

Role of EXIM Bank/Commercial Banks

ROLE OF COMMERCIAL BANKS IN FINANCING FOR EXPORTS

Exports play an important role in accelerating the economic growth of developing

countries like India. In view of the important role played by exporters, several initiatives have
been taken by Reserve Bank of India and Government of India These initiatives have
contributed to the impressive increase in our exports. Of the several factors influencing
export growth, credit is a very important factor which enables exporters in efficiently
executing their export orders.

The commercial banks provide short term export finance mainly by way of pre and
post-shipment credit. Export finance is granted in Rupees as well as in foreign currency.

In view of the importance of export credit in maintaining the pace of export growth,
RBI has initiated several measures in the recent years to ensure timely and hassle free flow of
credit to the export sector. These measures, inter alia, include rationalization and
liberalization of export credit interest rates, flexibility in repayment/prepayment of pre-
shipment credit, special financial package for large value exporters, export finance for
agricultural exports, Gold Card Scheme for exporters etc. Further, banks have been granted
freedom by RBI to source funds from abroad without any limit for exclusively for the
purpose of granting export credit in foreign currency, which has enabled banks to increase
their 1 en dings under export credit in foreign currency substantially during the last three
years.

Working capital loans to Exporters

RBI introduced the Export Financing scheme in 1968. The policy behind the scheme
was to make short-term export finance available to exporters at internationally competitive
interest rates while at the same time ensuring that the rates are well above the financing
banks' cost of finance for short-term loans of the same duration in the relevant currency.
Under the scheme, banks extend working capital loans to exporters at pre and post shipment
stages. The credit limits sanctioned to exporters is based upon the financing banks' perception
of the exporter's creditworthiness and past performance.

Pre-shipment Financing in Indian and Foreign currencies

Export Financing may be denominated either in Indian Rupees or in foreign currency.

For both types of pre-shipment financing, RBI sets a ceiling on the interest rate that banks
may charge to borrowers under the scheme. Since RBI fixes only the ceiling rate of interest
for export credit banks are free to fix lower rates of interest for exporters on the basis of their
actual cost of funds, operating expenses and taking into account the track record and the risk
perception of the borrower/ exporter.

The procedure adopted for pre-shipment credit against a deferred payment contract
are the same as those applicable to short-term contracts. Pre-shipment credit is allowed by
banks against a contract/letter of credit.

The commercial banks offer Pre-shipment Credit (Packing Credit) to the exporters,
for financing purchase, processing, manufacturing or packing of goods prior to shipment. The
loan or advances extended to may be on the basis of:

a) Letter of Credit opened in your favor or in favor of some other person, by an

overseas buyer,

b) a confirmed and irrevocable order for the export of goods from India;
 c) any other evidence of an order or export from India having been placed on the
exporter or some other person, unless lodgement of export order or Letter of
Credit with the bank has been waived

Packing credit

Packing Credit is granted for a period depending upon the circumstances of the
individual case, such as the time required for procuring, manufacturing or processing (where
necessary) and shipping the relative goods. Packing credit is released in one lump sum or in
stages, as per the requirement for executing the orders/LC.

The pre-shipment / packing credit granted has to be liquidated out of the proceeds of
the bill dawn for the exported commodities, once the bill is purchased/discounted etc.,
thereby converting pre-shipment credit into post-shipment credit.

Post-Shipment Export Credit

When an exporter enters into a deferred payment contract, the entire contract value,
excluding the advance payment received by him, is realized by him over an extended period
of, say, up to 5 years. This imposes a severe burden on his finances. To relieve him of this
burden, as also to give incentives to exporters, the Reserve Bank of India has authorized
commercial banks to extend to the exporters a 'Term Export Credit" as post-shipment credit.

Depending on the nature of the deferred payment contract, post shipment credit is
given either directly by a commercial bank or in collaboration with Exim Bank.

The exporter has the following options at post-shipment stage:

i. To get export bills purchased /discounted / negotiated;

ii. To get advances against bills for collection;

iii. To receive advances against duty drawback receivable from Govt.

The exporter has the option to avail of pre-shipment and post-shipment credit either in
rupee or in foreign currency. However, if the pre-shipment credit has been availed in foreign
currency, the post-shipment credit has necessarily to be under EBR Scheme since foreign
currency pre-shipment credit has to be liquidated in foreign currency. The details of pre-
shipment and post-shipment credit in foreign currency are mentioned below.
Refinance of export credit

Under this Programme, the commercial banks in India, who are authorised to deal in
foreign exchange, can obtain from EXIM Bank 100% refinance of term loans extended for
export of Indian capital goods. This credit is commercial banks can obtain financing
participation under EXIM Bank's other programmes.
Concessions in lending rates

The Reserve Bank of India has asked all commercial banks to cut the interest rate on
loans given to exporters in sectors like textiles, leather and handicrafts by two percentage
points, following government's decision to offer relief to exporters hit hard by rise in rupee
value.

Pre-shipment credit up to 180 days, and post-shipment credit up to 90 days, 4.5 per
cent below prime lending rate against 2.5 per cent earlier.

RBI, in its notification, said that interest relief of two percentage points should be
given to nine sectors - textiles, leather products, readymade garments, handicrafts,
engineering products, sports goods, processed agriculture products, marine items and toys.

The benefit would extend to small and medium exporters whose investment in plant
and machinery does not exceed Rs.10 crore, it said.

Under the revised guidelines, export credit to these categories will be available at 4.5
per cent less than the prime lending rate, which is in the range of 12 per cent. Earlier, the
difference was 2.5 per cent.

This rate will apply to pre-shipment and post-shipment credit disbursed between April
and December 2007.

The subsidy of two per cent would be borne by the central government, which early
this announced an Rs. l,400 crore package for exporters feeling the pinch after the Indian
currency rose nearly nine per cent against the dollar since the beginning of 2007.

EXPORT – IMPORT BANK OF INDIA

- established on 1st January 1982

- statutory financial corporation

- provides financial assistance

- co-ordinates the working of the institutions engaged in financing exports with its
headquarters in Mumbai.
MANAGEMENT

Organisation Director

Managing Director

Board of Directors

Secretaries (7) Representative

1. Department of Industrial (3) – Scheduled Commercial Banks

Development
(4) – Export Communication
2. Commerce
3. Finance (3) – Ministries and Departments
4. Banking
5. IDBI
6. ECGC
7. RBI
 To develop commercially viable relationships with a target set of externally oriented
companies by offering them a comprehensive range of products and services, aimed at
enhancing their internationalization efforts.
 EXIM BANK

- encompass all sectors of the economy

- Agriculture, Industry & Services

Role of Exim Bank

- established primarily for the purpose of financing, facilitating and promoting foreign
trade of India.

- Some of the specific function are as follows :L

1. Planning, promoting, developing and financing export-oriented concerns.

2. Underwriting the issue of shares, stocks, bonds, debentures of any c/o. engaged
in exports.

3. Financing export or import of m/c on leare basis.

4. Granting loans and advances for joint ventures in foreign countries.

5. Accepting, discounting and collecting bells of exchange or promissory notes
relating to export or import trade.

6. Subscribing to or purchasing of shares or debenture of any development bank

or export-import bank of other countries.

7. Developing and financing export – oriented industries.

8. Providing technical, administrative, and financial assistance of any kind of

export or import.

9. Co-ordinating the working of the institution engaged in promoting foreign trade.

10. Giving lines of credit to foreign government and foreign F.I in developing
countries by participation in the share capital of such institution.

11. Providing reference facilities to commercial banks by discounting their export

bills.

12. Collecting, compiling & disseminating market and credit information about
foreign trade.
 EXIM’S CATALYSTIC ROLE

- First institution to finance and promote computer software exports (1986); e.g.
Infosys.

- Set up Global Trade Finance Ltd. As a joint venture with IFC & west LB (now
acquired by FIM Bank of Malta) in 2001 for providing. Export factoring facility as
an alternate trade financing instrument for SME sector.

- Set up Global Procurement Consultants in 1996 as a joint venture with 10 Indian

private and public sector enterprise to take up overseas assignments in procurement
advisory services.

- Launched the Asian Exim Banks Forum in 1996 and brought together 8 EXIM
banks operating in Asia to promote intra – regional trade and reduce transaction
cost.

- Introduced new trade financing instruments like pre-export financing, factoring

and forfeiting Bank offers structured financing and forfeiting Bank offers structured
financial solutions using financial derivatives.

- Introduced programmes for financing R&D, export product development, quality

certification expert oriented film financing etc.

- Operated successfully world bank supported Export Marketing Finance

Programme (EMF)

Operations of Exim Bank

Exim deals with medium and long-term credit

- Supplier’s credit (when Indian exporter arranges for the export of goods and services
on credit.

- Buyer’s credit (Importer in India)

The Exim Bank lends loans to :

- Indian companies

- Foreign Governments, C/os and F.Is.

 - Indian Commercial Banks

Loans to Indian Companies

- direct financial assistance to Indian exporters of plant, equipments and relating

services. (Deferred credit to buyers)

- for setting up mill, plant, construction project overseas

- to pay for Indian consultancy and technical service

- finances Indian c/o. established on joint venture basis.

- Provides financial assistance to companies which has obtained export contract before
dispatch of goods.

Loans to foreign government, companies and financial institution

- offers direct financing to foreign importers for import of eligible Indian goods and
services repayable in easy instalments.

- Loans are ranted to foreign government for importing Indian capital goods and related
services.

- Re-lending facilities are also offered to overseas banks.

Loans to commercial banks in India

- provides funds to commercial banks in India authorized by RBI to deal with foreign
exchange by rediscounting export commercial bells for a period of 90 days.

- Provides refinance facility for term loans for export of Indian goods.

- Exim bank along with commercial banks gives guarantees in foreign currencies for
the Indian exporters who deal in construction and turnkey project.
Line of Credit

- On case to care basis they provide financial assistance in foreign exchange to

importers in other financial assistance in foreign exchange to importers in other
countries to boost the exports in India. They have been lending through foreign banks
and Bank of Baroda.

Deemed Exports

- finances deferred credit facility at a competitive rate to Indian exporter or foreign

buyer.

- The intermediate banks or F.Is can avail of refinancing facility from Exim-bank.

Agency Services

Apart from direct and indirect financiers, the Exim Bank, through its International merchant
banking division, offers the following advisory service :

- advise on exchange control practices in other countries.

- Advise and danger financial packages for export oriented industries in India.

- Exposing Indian exporting companies to Euro financing.

- Guiding Indian C/os on contracts abroad.

- ROLE OF COMMERCIAL BANKS IN FINANCING FOR EXPORTS

- Exports play an important role in accelerating the economic growth of developing
countries like India. In view of the important role played by exporters, several
initiatives have been taken by Reserve Bank of India and Government of India These
initiatives have contributed to the impressive increase in our exports. Of the several
factors influencing export growth, credit is a very important factor which enables
exporters in efficiently executing their export orders.
- The commercial banks provide short term export finance mainly by way of pre and
post-shipment credit. Export finance is granted in Rupees as well as in foreign
currency.
- In view of the importance of export credit in maintaining the pace of export growth,
RBI has initiated several measures in the recent years to ensure timely and hassle free
 flow of credit to the export sector. These measures, inter alia, include rationalization
and liberalization of export credit interest rates, flexibility in repayment/prepayment
of pre-shipment credit, special financial package for large value exporters, export
finance for agricultural exports, Gold Card Scheme for exporters etc. Further, banks
have been granted freedom by RBI to source funds from abroad without any limit for
exclusively for the purpose of granting export credit in foreign currency, which has
enabled banks to increase their 1 en dings under export credit in foreign currency
substantially during the last three years.
- Working capital loans to Exporters
- RBI introduced the Export Financing scheme in 1968. The policy behind the scheme
was to make short-term export finance available to exporters at internationally
competitive interest rates while at the same time ensuring that the rates are well above
the financing banks' cost of finance for short-term loans of the same duration in the
relevant currency. Under the scheme, banks extend working capital loans to exporters
at pre and post shipment stages. The credit limits sanctioned to exporters is based
upon the financing banks' perception of the exporter's creditworthiness and past
performance.
- Pre-shipment Financing in Indian and Foreign currencies
- Export Financing may be denominated either in Indian Rupees or in foreign currency.
For both types of pre-shipment financing, RBI sets a ceiling on the interest rate that
banks may charge to borrowers under the scheme. Since RBI fixes only the ceiling
rate of interest for export credit banks are free to fix lower rates of interest for
exporters on the basis of their actual cost of funds, operating expenses and taking into
account the track record and the risk perception of the borrower/ exporter.
- The procedure adopted for pre-shipment credit against a deferred payment contract
are the same as those applicable to short-term contracts. Pre-shipment credit is
allowed by banks against a contract/letter of credit.
- The commercial banks offer Pre-shipment Credit (Packing Credit) to the exporters,
for financing purchase, processing, manufacturing or packing of goods prior to
shipment. The loan or advances extended to may be on the basis of:
- a) Letter of Credit opened in your favor or in favor of some other person, by an
overseas buyer,
- b) a confirmed and irrevocable order for the export of goods from India;
- c) any other evidence of an order or export from India having been placed on the
exporter or some other person, unless lodgement of export order or Letter of Credit
with the bank has been waived
- Packing credit
- Packing Credit is granted for a period depending upon the circumstances of the
individual case, such as the time required for procuring, manufacturing or processing
(where necessary) and shipping the relative goods. Packing credit is released in one
lump sum or in stages, as per the requirement for executing the orders/LC.
- The pre-shipment / packing credit granted has to be liquidated out of the proceeds of
the bill dawn for the exported commodities, once the bill is purchased/discounted etc.,
thereby converting pre-shipment credit into post-shipment credit.
- Post-Shipment Export Credit
- When an exporter enters into a deferred payment contract, the entire contract value,
excluding the advance payment received by him, is realized by him over an extended
period of, say, up to 5 years. This imposes a severe burden on his finances. To relieve
him of this burden, as also to give incentives to exporters, the Reserve Bank of India
has authorized commercial banks to extend to the exporters a 'Term Export Credit" as
post-shipment credit.
- Depending on the nature of the deferred payment contract, post shipment credit is
given either directly by a commercial bank or in collaboration with Exim Bank.
- The exporter has the following options at post-shipment stage:
- i. To get export bills purchased /discounted / negotiated;
- ii. To get advances against bills for collection;
- iii. To receive advances against duty drawback receivable from Govt.
- The exporter has the option to avail of pre-shipment and post-shipment credit either in
rupee or in foreign currency. However, if the pre-shipment credit has been availed in
foreign currency, the post-shipment credit has necessarily to be under EBR Scheme
since foreign currency pre-shipment credit has to be liquidated in foreign currency.
The details of pre-shipment and post-shipment credit in foreign currency are
mentioned below.
- Refinance of export credit
- Under this Programme, the commercial banks in India, who are authorised to deal in
foreign exchange, can obtain from EXIM Bank 100% refinance of term loans
extended for export of Indian capital goods. This credit is commercial banks can
obtain financing participation under EXIM Bank's other programmes.
 - Concessions in lending rates
- The Reserve Bank of India has asked all commercial banks to cut the interest rate on
loans given to exporters in sectors like textiles, leather and handicrafts by two
percentage points, following government's decision to offer relief to exporters hit hard
by rise in rupee value.
- Pre-shipment credit up to 180 days, and post-shipment credit up to 90 days, 4.5 per
cent below prime lending rate against 2.5 per cent earlier.
- RBI, in its notification, said that interest relief of two percentage points should be
given to nine sectors - textiles, leather products, readymade garments, handicrafts,
engineering products, sports goods, processed agriculture products, marine items and
toys.
- The benefit would extend to small and medium exporters whose investment in plant
and machinery does not exceed Rs.10 crore, it said.
- Under the revised guidelines, export credit to these categories will be available at 4.5
per cent less than the prime lending rate, which is in the range of 12 per cent. Earlier,
the difference was 2.5 per cent.
- This rate will apply to pre-shipment and post-shipment credit disbursed between April
and December 2007.
- The subsidy of two per cent would be borne by the central government, which early
this announced an Rs. l,400 crore package for exporters feeling the pinch after the
Indian currency rose nearly nine per cent against the dollar since the beginning of
2007.

SICK UNITS

All Industrial units pass through phares of feast and famine in operations. When
problems strike due to inefficiencies in production, labour, marketing finance, management
etc., the industrial unit initially considers that the difficulties are transient and tries to meet
them through some palliative. But if the problems persist, the unit’s financial position
becomes precarious and it loses the very rationale for its existence.

Symptoms of Sickness

The symptoms could be either financial or non-financial. Usually non-financially

symptoms precede the financial symptoms.
Financial Symptoms may be grouped as under :

(a) Irregularity in bank accounts, viz., inability of the borrower to provide sufficient
security in the form of current assets for the cash credit and other working capital
advances.

(b) Non payment of interest either from banks or from F.Is or from others.

(c) Non-repayment of installments due under term loans, debentures etc as also
inability to repay, on the due date, the public deposits that mature.

(d) Inability to pay the creditors on time.

(e) Adverse reaction in the stock exchange to the shares of the company.

The non-financial symptoms would generally be among the following groups :

(a) Incapacity to produce according to schedule

(b) Inability to market the goods produced.

(c) Fast turnover of executives, staff and labour.

(d) Generally poor reputation in the market.

Sick units – Definition

Section 3(i) (o) of SICA lays down that Sick Industrial Company is a company (being
a company registered for not less than 5 years) which has at the end of an financial year
accumulated losses equal to or exceeding its entire net worth.

Thus, the ingredients of the definition of source industrial company under SICA (Sick
Industrial Companies (Special Provisions) Act)

(i) It should be scheduled industry other than shipping.

(ii) It should not be a small-scale or ancillary industrial unit.

(iii) It should have been a registered as a company for not less than 5 years.

(iv) Its net worth must be negative i.e. fully eroded by part losses at the end of the
latest financial year.
 Only those units which satisfy all the above fan condition are clarified as sick units.
Banks have also adopted the above definition for clarifying their advances portfolio into
sick and non-sick units.

FINANCE FOR REHABILITATION OF SICK UNITS

Role of BIFR (Board of Industrial & Financial Reconstruction

BIFR was set up in 1987. The main role of BIFR as given by SICA is :

(i) Ensuring timely detection of sick and potentially sick c/os.

(ii) Speedy determination of group of experts of the various measures to be

taken in respect to sick C/o.

(iii) The expeditions enforcement of such measures.

Reporting to BIFR – Board of directors to report within 60 days.

Enquiry by BIFR – Conducts an enquiry by appointing an ‘Operating Agency’ (generally

the FI/banks financial the sick industries).

Revival Through A scheme

Further Financial Assistance / Reliefs

In case of schemes requiring further financial assistance / reliefs by various agencies

including central and state govt., banks. F.Is etc., the scheme will be circulated to the
concerned for their consent within 60 days. Once the consent is read it is bending on the
consenting parties. Where such consent is not given, it has no power to for such concern. It
BIFR is satisfied that such consent is necessary for the success of the scheme, BIFR will
adopt other measures, such as winding up of the sick c/o. If it decides to wind up, it shall
forward to the High court who shall arrange to proceed with winding up under the C/os
Account.

Financial Assistance / Reliefs available to sick units

The Reserve Bank of India has streamlined the cancerous in interest and other reliefs
that may be extended by banks for nursing sick units.
 (i) Term loans : Interest may be reduced by maximum of 2% below the prevailing
rate.

(ii) Irregularity in Cash Credit Account : The irregular portion of the cash credit
account may be segregated from the first date of accounting year from which the
unit started incurring cash losses continuously. The resultant figure will comprise
the interest (incl. penal interest) and cash losses (before interest)

(iii) Funded Interests : From the accumulated interest portion as alone, penal
interest / liquidated damages etc., if levied should be reduced / waived. The
resultant figure may be kept separately as funded Interest loan. This funded
interest may be charge interest at 6.5% below the bank’s prime lending rate and
it should be repaid over 3-5 years. In exceptional cares, the period of repayment
may extend upto 7 years.

(iv) Past Cash Losses : The portion reflecting part cash losses in item (ii) may be
segregated and converted into working capital term loan. This loan may carry
interest between 1.5% - 3% below prime lending rate and should be repaid in
about 7 years.

Additional financial requirement of sick units

The additional financial requirements of a sick unit can be broadly classified into :

(a) Financing Cash Losses

(b) Financing further operations

(a) Financing Cash Losses

Cash losses should be met by long term funds preferably brought in by the promoters or
failing them, the long term lending institutions. The unit should look to financial
institutions for financing there future cash losses, from the date of implementation of
scheme to the time when the unit attains cash break even levels. The existing bankers to
the sick unit on many occasions provide finance for meeting future cash losses also.

(b) Financing further operations

Meeting overdue statutory liabilities

 Cash inputs required for meeting overdue statutory liabilities, workers’ dues and
creditors form’s part of the scheme may be shared on 50:50 basis between F.Is and banks. If
no F.I. is already a lender of sick unit, the existing bankes will take up the entire financial
burden.

Meeting additional working capital requirement

To meet additional working capital requirements besides reduction in interest,

sometimes reduction in the margin on security may be considered but should be kept under
constant review.

Financial Assistance for installation of equipments / diversification / expansion

programmes.

The additional finance needed in this connection will have to be extended by

promoters, banks and F.Is in substance proportions. While granting such additional financial
instance, the available security should be shared prorate by all F.Is and banks.

Other Relief Measures

Government : The Central Government on specific cases may postpone the recovery
of excise duty. The State Government may defer the collection of purchase /sales tax to
improve the liquidity of the unit. A general relaxation in excise duty might be given for
increased production.

Merger : An alternative course of action to rehabilitate a since unit would be to

promote the merger of sick unit with a healthy unit. By merging a sick unit to healthy unit,
two major objectives would be achieved, the managerial capacity would improve and its
liquidly and financial portion are also likely to show improvement.

Government Take over

When a banker is convinced that a sick unit cannot be rehabilitated independently or

by merger the active support and assistance of central and state government. The banks come
to this conclusion when

- The banker is convinced that the management of sick unit is dishonest.

 - The financial requirements of the unit are so large that it is impossible for the banks &
F.Is to provide such funds.

With liberalization and revalorization, the governments – central and state are no longer
interested in takeover of sick units.

Winding up of company

If all attempts at reviving a unit or merging it with a healthy enterprere or takeover by

the government fail, the bank may have no option but to recall the advances and sell the
assets of the enterprise. This career can be adoptee only when BIFR decides to wind up the
company.

INFLATION AND FINANCIAL DECISIONS

A key element that profoundly affects how people, businesses, and economies as a
whole handle their finances is inflation. The overall rise in costs of goods and services over
time that reduces the purchasing power of money is what it alludes to. Making wise financial
decisions, managing assets, and preserving long-term financial health all depend on knowing
how inflation affects the economy.

How is inflation measured?

An inflation rate, which is the percentage change in the average price level of goods
and services over a given period, is commonly used to calculate inflation. The Consumer
Price Index (CPI) and the Producer Price Index (PPI) are two popular inflation indicators.

 Purchasing power, investment decisions, debt management, pricing strategies, cost of

living, and risk management are all significantly impacted by inflation.

 In order to ensure financial stability, financial managers must take into account the
erosion of purchasing power brought on by inflation and make wise judgments.

 Because inflation has an impact on the real rate of return on investments, it’s
important to carefully consider investment options in order to beat inflation and
preserve wealth.

 Inflation should be taken into account when managing debt because it can lessen the
real burden of fixed-rate debt for borrowers while posing risks for lenders.
  Cost of living adjustments are essential to take inflation into account, guarantee
sufficient savings, and facilitate budgeting for future needs.

 Businesses’ pricing strategy should take inflation into account to ensure profitability
and market competitiveness.

 Financial managers must evaluate the impact of inflation on interest rates on

borrowing costs, investment returns, and overall financial stability.

 Risk management plans ought to take into account how inflation can affect
investments, portfolios, and financial planning.

 Strategies including diversification, hedging, and inflation-indexed securities can

reduce the risks associated with inflation.

 By being aware of the effects of inflation and taking proactive measures to address
them, people and organizations may improve their financial security and manage
market swings

Inflation and Financial Management

1. Purchasing Power Erosion

The loss of purchasing power is one of inflation’s main impacts. Each unit of
currency costs less to purchase goods and services as the general price level rises. Both
individuals and businesses may be impacted by this, which may make it harder to pay bills,
save money for the future, or make asset investments. In order to maintain financial stability,
financial management choices must take inflation into account.

2. Investment Considerations

Real rate of return is impacted by inflation, which has an impact on investment

decisions. The investment return that has been inflation-adjusted is known as the real rate of
return. The actual buying power of investment profits is diminished by inflation. Financial
managers must therefore take inflation into consideration when assessing investment
possibilities and choosing assets that generate returns that are higher than inflation.
Investments like equities, real estate, or inflation-protected securities, like TIPS (Treasury
Inflation-Protected Securities), are sometimes thought of as inflation-hedging strategies.

3. Debt Management

The management of debts may be impacted by inflation. Over time, inflation

depreciates the value of money, hence lowering the true burden of fixed-rate debt. If a
borrower took out a loan with a fixed interest rate, they may gain from inflation as the real
value of their debt declines. Lenders, however, run the danger of getting paid back with
money that has less purchasing value. Financial managers must take inflation into account
when deciding how much to borrow, lend, and pay off debt.

4. Cost of Living Adjustments

Since inflation has an impact on living expenses, it is crucial for both individuals and
organizations to take it into consideration when budgeting and making plans for the future.
Making financial management decisions without taking inflation into account might result in
inadequate savings, retirement shortages, or the inability to keep up with rising costs. To
retain the same quality of living over time, it is critical to adjust wages, salaries, and
retirement contributions to keep up with inflation.

5. Pricing and Profitability

Business pricing decisions are impacted by inflation. Costs of manufacturing may rise
as a result of rising prices for labor, inputs, or raw materials. To retain profitability,
businesses must carefully assess how inflation may affect their pricing strategy. Lack of price
inflation adjustment may lead to lower profit margins, weakened competition, or even
financial losses.

6. Risk Management

Financial management becomes more unclear and risky as a result of inflation. The
value of investments, interest rates, and overall economic stability can all be impacted by the
volatility of inflation rates. Risk management tactics that take into account the possible
impact of inflation on portfolios, investments, and financial planning must be used by
financial managers. Risks associated with inflation can be reduced through diversification,
hedging, and the use of inflation-indexed assets.
 7. Mitigation Strategies for Inflation

Exploring effective measures to mitigate the impact of inflation on financial

management decisions.

8. Inflation-Adjusted Investments

Understanding the importance of investing in assets that provide returns higher than
the inflation rate.

9. Long-Term Debt Planning in an Inflationary Environment

Guidelines for managing debt in an inflationary period to take advantage of reduced

burden and minimize risks for lenders.

10. The Role of Cost of Living Adjustments

Highlighting the significance of cost of living adjustments in financial planning and

maintaining a stable standard of living.

11. Balancing Pricing Strategies with Inflation

Examining the relationship between pricing strategies and inflation to ensure

profitability and competitiveness.

12. Inflation’s Influence on Interest Rates

Exploring how inflation affects interest rates and its implications for borrowing costs
and investment returns.

13. Proactive Risk Management in Inflationary Markets

Implementing risk management strategies that consider the impact of inflation on

investments and portfolios.

14. Diversification and Hedging as Inflation Risk Mitigation

Understanding how diversification and hedging can help reduce the risks associated
with inflation.

15. Seeking Professional Financial Advice

 The importance of consulting financial professionals and staying informed about
inflation trends for effective financial management.

16. The Role of Inflation Expectations in Financial Decision Making

Exploring how inflation expectations shape financial management choices and the
importance of accurately forecasting future inflation trends.

17. Inflation’s Impact on Retirement Planning

Analyzing how inflation affects retirement savings, income streams, and the
importance of incorporating inflationary pressures into long-term retirement planning.

18. Government Policies and Inflation Management

Examining the role of government policies, such as monetary and fiscal measures, in
managing inflation and their implications for financial management decisions.

19. International Trade and Inflation

Discussing how inflation influences international trade dynamics, including currency

exchange rates, import/export costs, and strategies for managing inflationary effects on global
business operations.

20. Inflation and Asset Allocation

Exploring the relationship between inflation and asset allocation strategies, including
diversification across different asset classes to mitigate inflation risk and preserve wealth.

21. Inflation and Business Investment Decisions

Analyzing how inflation impacts business investment decisions, capital expenditure

planning, and the evaluation of investment projects in an inflationary environment.

22. Inflation’s Influence on Consumer Behavior

Examining how inflation affects consumer behavior, spending patterns, and the
challenges faced by businesses in adapting to changing consumer preferences in response to
inflationary pressures.