388703006-SBLC-ADVANCE-PERFORMANCE-GUARANTEE-APG-ppt.ppt

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1. 1.STAND BY LETTER OF CREDIT (SBLC)
&
2.ADVANCE PERFORMANCE
GUARANTEE(APG)/EXPORT PERFORMANCE BANK
GUARANTEE(EPBG)
MECKLAI INTERNATIONAL FINANCE

2. 1.STAND BY LETTER OF CREDIT(SBLC)
SBLC is similar to Bank Guarantee issued by Indian bankers of parent company
infavoring subsidiary for offshore day to day working capital. Foreign/offshore banks
finances against the SBLC of Indian banks.
Most Indian companies with imports use buyers’ credit to try and reduce their interest
cost of post-shipment finance. Over the past few years, several large Indian companies
have been extending this to pre-shipment finance (effectively working capital) by using
a Stand-By Letter of Credit (SBLC).
The company opens a SBLC through its bankers favoring the company’s overseas
subsidiary; the Indian parent company uses this facility to raise USD funds in the global
market remitted as a loan to the subsidiary for use as working capital or, in the case of
trading operations, to purchase goods globally and sell them anywhere.

3. Depending on market conditions, the cost for such a facility for amounts ranging
from $ 1 to $ 10 million for 1 to 2 years works out to about 4 to 5% p.a. (inclusive of
arrangement fees). It generally takes about 3 to 4 weeks for getting an in principle
offer letter against an SBLC, subject to submission of all required documents in timely
fashion.
Domestic bankers generally charge about 0.75-1.25% p.a. for issuing the SBLC,
and it requires a separate SBLC limit, which would be carved out of the company’s
overall bank limits.
Thus, the company’s total cost of USD working capital would work out to about 4.75
to 6.25%.
STAND BY LETTER OF CREDIT(SBLC) Contd..

4. SBLC/Bank
Guarantee
Offshore Bank
Parent Company
Sellers/Exporters
Subsidiary
Goods exported directly
to Parent Co. in India
where as documents will
routed from Singapore
Subsidiary
Indian Bank
Shipping Docs

5. IndianbanksissuesSBLCinfavoringSubsidiaryforworkingcapital
purpose.
BasedonthisSBLC/Guaranteeoffshorebankfinancestothesubsidiary.
Subsidiarybuysgoodsonbehalfofparentcompany
Goodswillbeexportedtoindiadirectlyfromseller
Documentswillberoutedthroughsubsidiary.
SBLCagainrolledoveranditcontinues.
SBLC Procedure

6. OverseasInvestment-GuaranteeonbehalfofWhollyOwnedSubsidiaries(WOSs)/JointVentures
(JVs)abroadOverseasInvestmentshouldbewithinthepresentceilingof400%ofthenetworthofthe
IndianPartyasonthedateofthelastauditedbalancesheet.
IndianPartycanofferanyformofguaranteeprovidedthat:•Allfinancialcommitmentsincludingall
formsofguaranteesarewithintheoverallceilingof400%ofnetworthprescribedforoverseas
investment.
•Noguaranteeshouldbe'openended'i.e.theamountandperiodoftheguaranteeshouldbe
specifiedupfront.Inthecaseofperformanceguarantee,timespecifiedforthecompletionofthe
contractshallbethevalidityperiodoftherelatedperformanceguarantee;
•Incasetheceilingof400%ofnetworthexceedsduetoinvocationofguarantee,theIndianParty
shallseekthepriorapprovaloftheReserveBankbeforeremittingfundsfromIndia,onaccountforsuch
invocation.
•Issuanceofcorporateguarantees(includingperformanceguarantee)isrequiredtobereportedto
RBI,etc.
Overseas Investment

7. 2.ADVANCEPAYMENTAGAINSTLONGTERMEXPORTS
(MAXIMUMUPTO10YEARS)
ItisalsocalledExportPerformanceBankGuarantee(EPBG)/Export
Securitization/ExportCredit
AsperthelatestRBImastercircular,exportersallowedtoreceivelongtermexport
advanceuptomaximumof10years(earlieroneyear)tobeutilizedforexecutionof
longtermsupplycontractsforexportsofgoodssubjecttotheconditions.
ADbankersallowedthereceiptofexportadvancepaymentforexportofgoods
whichwouldtakemorethanoneyeartomanufacture&shipsubjecttoconditions.
Theextendeddurationofloanswillenableexporterstoaccesscapitaltofulfilllong
termcontractualobligations.Thismayhelpturnaroundmanyturnkeyprojectswhich
werehithertostuckduetolackoffunds

8. EPBGSTRUCTURE
Such advances should be adjusted through future exports
Firm Irrevocable supply orders and contracts should be in place
Double financing for working capital for execution of export orders should be
avoided.
BG/SBLC may be issued for a term not exceeding two years at a time and
further rollover of not more than two years at a time.
BG/SBLC issued by from India in favour of overseas buyer shouldn’t be
discounted by the overseas branch /subsidiary of bank in India.
BG/SBLC should cover only the advance on reducing balance basis.
AD bank should ensure compliance with AML/KYC Guidelines and rigorously
evaluate like credit proposal.
Interest shouldn’t exceed Libor+200 bps pa

9. Advance Payment
Guarantee
Trade Advance
Exporter
Ultimate Buyers
Subsidiary/any offshore buyer
Export realizations
adjusted against
advance

10. Subsidiary/offshorebuyerentersintolong-termsupply/offtakeagreementwith
exporter.
ExporterissuesBG/SBLC/AdvancePaymentGuarantee/Exportperformancebank
guaranteefromhisbankerinfavorofsubsidiary/offshorebuyer.
Buyerarrangesadvancetotheexporter(foreignbankfinancesagainstthe
guarantee)
Allexportrealizationswillgointoforeignbankandadjustedagainstadvance
Note:OnlyForeignBanksareallowedtofinanceagainstAPG/EPBGissuedbyIndian
banks.Ex:AlokIndustries&Essarraisedmorethan$1bnthroughEPBGroutefor
payingofftheirhighcosttermloandebt.
APG/EPBG Procedure

11. THANK YOU