Financial Credit

Financial credit is an arrangement for you to pay

at a later date.
It means a letter of credit used directly or indirectly
to cover a default in payment of any financial
contractual obligation of the Company and its
Subsidiaries, including insurance-related
obligations and payment obligations in respect of
Indebtedness undertaken by the Company or any
Subsidiary, and any letter of credit issued in favor
of a bank or other who issues a guarantee or similar
undertaking.
 Objectives of Financial Credit

1. To establish proper financial institutions to cater the

needs of weaker sections of society.
2. To help people to secure financial products (deposits,
loans, insurance) at affordable prices.
3. To bring mobile banking and financial services within the
reach of weaker sections living in remote areas.
4. To bring awareness about financial credit and related
facilities to the people.
5. To bring digital financial solutions for economically
weaker sections of the society.
6. To build financial sustainability so that the weaker
sections are assured of the availability of required funds.
Credit Risk
Credit risk is the possibility of a loss resulting from a borrower's failure to repay
a loan or meet contractual obligations. Traditionally, it refers to the risk that a
lender may not receive the owed principal and interest, which results in an
interruption of cash flows and increased costs for collection.
When lenders offer mortgages, credit cards, or other types of loans, there is a
risk that the borrower may not repay the loan. Similarly, if a company offers
credit to a customer, there is a risk that the customer may not pay their invoices.
Credit risk also describes the risk that a bond issuer may fail to make payment
when requested.
Credit risks are calculated based on the borrower's overall ability to repay a loan
according to its original terms. To assess credit risk on a consumer loan, lenders
look at the 7 C’s:
Character
If it’s a personal borrower, what kind of person are they, and do they have a
strong credit history?
With commercial borrowers, character describes company management’s
reputation and credibility; character also extends to company ownership if it’s a
private corporation.
Capacity
Capacity speaks to a borrower’s ability to take on and service debt obligations.
For both retail and commercial borrowers, various debt service and coverage
ratios are used to measure a borrower’s capacity.
For commercial lenders, this is where understanding the borrower’s competitive
advantage comes in – since its ability to maintain or grow this advantage will
influence the borrower’s ability to generate cash flow in the future.
Capital
Capital is often characterized as a borrower’s “wealth” or overall financial
strength. Lenders will seek to understand the proportion of debt and equity that
support the borrower’s asset base.
Collateral
This the asset which are pledged against the loan. Mean in case the company or
the person fails to repay the amount then those asset are auctioned and amount is
recovered . Land, factory, shares, bonds, buildings , Bank deposit, Bank
guarantee, LIC Policies etc are treated as the collateral for sanction of
loan. Collateral security is a very important part of structuring loans to mitigate
credit risk.
It is critical to understand what assets are worth, where they’re located, how
easily the title can be transferred.
Conditions
Conditions refer to the purpose of the credit, extrinsic circumstances, and other
forces in the external environment that may create risks or opportunities for a
borrower. The condition is the overall economic and political environment and it's
impact on the the business and it's revenue.
They can include political or macroeconomic factors, or the stage in the economic
cycle. For business borrowers, conditions include industry-specific challenges and
social or technological developments that may affect competitive advantage.
Cash
Cash particularly the free cash generated in business or the monthly surplus cash in
case of individual case is key to repayment of advance. If someone is earning high
but the expense to earn that amount is also more than that then he becomes cash
deficiency. Some one have expenses more than income is cash negative so they are
not creditworthy. We use cash flow statement for evaluation of the net cash available
for repayment.
More is the surplus cash higher is there creditworthiness.
Control
Last but not the least factor of creditworthiness is control. This factor cheque the
consistency of the business with the rules and regulations. This also cheque control
on business in achieving it's corporate goals.
More the control higher the creditworthiness.
 Types of Credit Risk
1 – Default Risk
It is a scenario where the borrower is either unable to repay the amount in
full or is already 90 days past the due date of the debt repayment. Default
risk influences almost all credit transactions—securities, bonds, loans, and
derivatives. Due to uncertainty, prospective borrowers undergo thorough
background cheques.
2 – Concentration Risk
When a financial institution relies heavily on a particular industry, it is
exposed to the risk associated with that industry. If the particular industry
suffers an economic setback, the financial institution incurs massive losses.
3 -- Country Risk
Country risk denotes the probability of a foreign government (country)
defaulting on its financial obligations as a result of economic slowdown or
political unrest. Even a small rumor or revelation can make a country less
attractive to investors.
4 -- Downgrade Risk
It is the loss caused by falling credit ratings. Looking at the credit ratings,
market analysts assume operational inefficiency and a lower scope for
growth.
Credit Analysis
Credit analysis is a type of financial analysis that an investor or bond portfolio
manager performs on companies, governments, or any other debt-issuing entities to
measure the issuer's ability to meet its debt obligations. Credit analysis seeks to
identify the appropriate level of default risk associated with investing in that
particular entity's debt instruments.
The borrower, also known as the debtor, could be an individual or a business entity;
the former is referred to as retail (or personal) lending, and the latter is what’s
known as commercial lending.
To judge a company’s ability to pay its debt, banks, bond investors, and analysts
conduct credit analysis on the company. Using financial ratios, cash flow
analysis, trend analysis, and financial projections, an analyst can evaluate a firm’s
ability to pay its obligations. A review of credit scores and any collateral is also
used to calculate the creditworthiness of a business.
For commercial lenders, credit professionals also want to understand business
characteristics – like the borrower’s competitive advantage(s) and industry trends
(using frameworks like SWOT and Porter’s 5 Forces, respectively).
The outcome of the credit analysis will determine what risk rating to assign the debt
issuer or borrower. The risk rating, in turn, determines whether to extend credit or
loan money to the borrowing entity and, if so, the amount to lend.
Not only is the credit analysis used to predict the probability of a borrower
defaulting on its debt, but it's also used to assess how severe the losses will be in the
event of default.
Credit Analysis
Process
The process of credit analysis is very detailed and deep. The entire process can be summarized
into 3 basic steps:
Information collection process
The very first step towards credit analysis is collecting every possible information about the
applicant. The character, the reputation of the person, financial stability, credit history, ability
to repay debt, the actual purpose of seeking debt etc. If the loan is for a project then the loan
officer must understand the objective of the project, financial feasibility of the project,
importance of the project as compared to others, the cash burn in it and mainly the amount of
loan that can be reasonably disbursed for the loan. Many times banks do it through its special
third party inspection agencies which carry out the inspection on the field on behalf of the
bank. Based on the risk associated with the profile as depicted by the agency, the bank decides
whether to move forward in the proposal or not.
Analysing accuracy of the information
The individual borrower or the organisational project may submit all the information as
demanded by the loan officer, but it is for the lender to verify if the given information is
accurate and authentic. The credit analyst or the loan officer would verify the valid identity
card of the borrower or in case of the organisation, the business license, the partnership deed,
the legal document, the certificate of incorporation, etc. At this phase, the financial solvency of
the potential borrower the feasibility of the project, are important factors in credit analysis.
The analyst performs ratio analysis from the past and projected profit and loss statements,
balance sheets, cash flow statements, and other financial statements of the project and analyzes
each of them to arrive at a conclusion before assessing the financial viability of the project. He
then makes a comparison of his own analysis and that provided by the applicant.
In case of individual applicants, the credit analyst assesses the pay slips, Form 16,
Income tax returns etc. to authenticate the information and ensure everything is in
compliance with the statutory regulations.

Decision-making process
The credit analyst tries to understand what impact the proposed loan will have on
enhancing the income and liquidity position of the proposed borrower. A good
indicator for this is the net cash flow of the proposed borrower to pay back the loan
and the interest component along with other expenses within due time. The credit
analyst may also cheque the existing interest burden and fixed charge liability of the
proposed borrower.

Based on the analysis the analyst ascertains the credit risk associated with a loan
application of the individual or the project and takes a call if the level of risk is
acceptable or not. He then forwards his assessment to the higher officers for
approval who decide finally if the loan is to be disbursed or not.
Credit Process
The credit process is undertaken to review credit applications and determine whether a
loan will be granted to the applicant. The process seeks to determine the borrower’s
ability and willingness to honor payment obligations (including interest and principal) on
time and in full. The institution must also understand the borrower’s industry and may
undertake a detailed analysis of how the business generates cash from its operating
activities.
The lending institution applies credit analysis, which includes an analysis of both
business risk and financial risk to assess the probability of default.

The credit process involves several steps that can be broken down into following stages:

1. Generating a Loan Opportunity

In the initial stage, the loan opportunity is generated. Thereafter, the credit team
undertakes a risk assessment that involves an initial analysis of the potential borrower’s
business. Credit analysis covers business risk (macroeconomic, industry, and company
risks) and financial risk (analyses whether the borrower will be able to generate
sufficient cash flow to meet debt obligations. This part of credit analysis involves the
analysis of cash flows, ratio analysis, financial forecasts, and trend analysis to determine
creditworthiness) as part of the initial risk assessment.
2. Reviewing the Five Cs of Credit
In credit analysis, financial institutions attempt to mitigate risk by reviewing the five Cs
of credit – capacity, capital, conditions, character, and collateral.
3. Structuring the Loan
If the credit analysis yields a positive initial risk assessment, the lending agencies must
structure the loan. The point of structuring a loan is to mitigate risk and includes details such
as the identity of the borrower, any complexities in the borrower’s corporate structure, and a
payment schedule that matches the borrower’s future cash flows.

4. Preparing a Credit Memo

Once the loan is structured, a credit memo is prepared. The memo includes details such as the
borrower’s debt capacity, clarification of risks involved, and how those risks will be mitigated.
The memo is presented to the lending agencie’s credit committee, which decides whether to
put the capital at risk or not. At this stage, an application can be rejected even if it is passed the
initial risk assessment.

5. Loan Syndication
Once the credit committee approve the loan application, the loan will be disbursed, or in the
case of a larger loan, a syndicate team will price the loan and distribute exposure to a group of
banks called a syndicate. The final terms between the banks are negotiated and then the funds
are disbursed. Thereafter, the loan will be monitored to ensure terms are met.
In loan syndication, a group of lenders collaborate to provide credit to a single large borrower,
which could be a conglomerate, multinational corporation, or government. The collaboration
usually takes place through an intermediary, the lead bank, that organizes and administers
the syndicated loan. In loan syndication, the risk is shared by the group of lenders and each
lender contributes a portion of the principal. Syndication typically occurs when the requested
loan amount is beyond the capacity of a single lender.
Credit Documentation
It refers to the main documents in a financing transaction. Financial institutions rely on credit
documents to provide information about the customer and establish the customer’s
creditworthiness.

Documentation List

Loan Application Form

The lending institution, ask for the following information.
• Why are you applying for this loan?
• How will the loan proceeds be used?
• What assets need to be purchased, and who are your suppliers?
• What other business debt do you have, and who are your creditors?
• Who are the members of your management team?

Personal Background
Either as part of the loan application or as a separate document, you will likely need to
provide some personal background information, including previous addresses, names used,
criminal record, educational background, etc.

Business Plan
All loan programs require a sound business plan to be submitted with the loan application.
The business plan should include a complete set of projected financial statements, including
profit and loss, cash flow and balance sheet.
Credit Report
• Personal
Personal credit report is required as part of the application process. A credit report
from all major consumer credit rating agencies is required before submitting a loan
application to the lender.
• Business Credit
In case of an already existing business a credit report of the business has to be
submitted. As with the personal credit report, it is important to review the business’
credit report before beginning the application process.

Financials
• Income Tax Returns
Most loan programs require applicants to submit personal and business income tax
returns for the previous 3 years.
• Financial Statements
Many loan programs require owners with more than a 20% stake in the business to
submit signed personal financial statements. The following forms may be used to
prepare projected financial statements:
Balance Sheet
Income Statement
Cash Flow
• Bank Statements
Many loan programs require one year of personal and business bank statements to
be submitted as part of a loan package.
• Accounts Receivable and Accounts Payable
Most loan programs require details of a business’ most current financial position.

Collateral
Collateral requirements vary greatly. Some loan programs do not require collateral.
Loans involving higher risk factors for default require substantial collateral. A
collateral document that describes cost/value of personal or business property that
will be used to secure a loan is submitted.

Legal Documents
Depending on a loan’s specific requirements following one or more legal
documents needs to be submitted.
• Business licenses and registrations required to conduct business
• Articles of Incorporation
• Copies of contracts with any third parties
• Franchise agreements
• Commercial leases
Loan Pricing
Loan pricing is the process of determining the interest rate for granting a loan. The pricing
of syndicated loans requires arrangers to evaluate the credit risk inherent in the loans and to
gauge lender appetite for that risk.
Loan pricing means determining the interest rate for granting loan to creditors, be it
individuals or business firms. It is one of the most important, however difficult task in lending
funds to business firms & other customers. Generally the lender wants to charge a high enough
rate to make sure that the loan will be profitable as well as it will covers enough compensation
against the default risk. On the other hand loan price must be set low enough that helps the
customers to find it easy for successful repayment of loan.
The loan price is the interest rate the borrowers must pay to the bank and the amount
borrowed(principal).
The price/interest rate is determined by the true cost of the loan to the bank(base rate)plus
profit/risk premium for the bank’s services and acceptance of risk. The components of the true
cost of a loan are:
Interest expense,
Administrative cost, and
Cost of capital
These three components add up to the bank’s base rate. The risk is the measurable
possibility of losing or not gaining the value. The primary risk of making a loan is repayment
risk, which is the measurable possibility that a borrower will not repay the obligation as
agreed.
A good lending decision minimizes repayment risk. The prices a borrower must pay to the
bank for assessing and accepting this risk is called the risk premium.
Price of the loan(Interest Rate Charge) = Base Rate + Risk Premium.
Profitability Analysis
Profitability refers to the profits or gains a business makes in relation to its expenses.
Therefore, profitability analysis refers to the process of calculating or analyzing the
profits of a business. It helps businesses identify their revenue streams and where they
can reduce their expenses to generate maximum gains.
Credit analysis ratios are tools that assist the credit analysis process. These ratios help
analysts and investors determine whether individuals or corporations are capable of
fulfilling financial obligations. Credit analysis involves both qualitative and quantitative
aspects. Ratios cover the quantitative part of the analysis. They also help lenders
determine the growth rate of corporations and their ability to pay back loans.
Key ratios can be roughly separated into four groups: (1) Profitability; (2) Leverage
(3) Coverage (4) Liquidity.

Profitability ratios are split into margin ratios and return ratios.
Margin ratios include:
Gross profit margin
EBITD margin
Operating profit margin
Return Ratios include:
Return on assets
Risk-adjusted return
Return on equity
Higher margin and return ratios are an indication that a company has a greater ability to
pay back debts.
Leverage Ratios
Leverage ratios compare the level of debt against other accounts on a balance sheet,
income statement, or cash flow statement. They help credit analysts gauge the ability
of a business to repay its debts.
Common leverage ratios include:
Debt to assets ratio
Asset to equity ratio
Debt to equity ratio
Debt to capital ratio
For leverage ratios, a lower leverage ratio indicates less leverage. For example, if
the debt to asset ratio is 0.1, it means that debt funds 10% of the assets and equity
funds the remaining 90%. A lower leverage ratio means less asset or capital funded
by debt. Banks or creditors like this, as it indicates less existing risk.

Coverage Credit Analysis Ratios

Coverage ratios measure the coverage that income, cash, or assets provide for debt
or interest expenses. The higher the coverage ratio, the greater the ability of a
company to meet its financial obligations.
Coverage ratios include:
Interest coverage ratio
Debt coverage ratio
Liquidity Ratios
Liquidity ratios indicate the ability of companies to convert assets into cash.
In terms of credit analysis, the ratios show a borrower’s ability to pay
off current debt. Higher liquidity ratios suggest a company is more liquid
and can, therefore, more easily pay off outstanding debts.
Liquidity ratios include:
Current ratio
Quick ratio
Cash ratio
Working capital
Regulations
The regulators in the Indian Financial Market ensure that the market participants behave in a
responsible manner so that the financial system continues to work as an important source of
finance and credit for corporate, government, and the public at large. They take action
against any misconduct and ensure that the interests of investors and consumers are
protected. The objective of all regulators is to maintain fairness and competition in the
market and provide the necessary regulations and infrastructure.
Objectives:
1. Financial Stability
2. Consumer protection
3. Market Confidence
4. Reduction of Financial fraud / Crimes

Regulatory Bodies in Indian Financial System

1. Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is a statutory body established under the
SEBI act of 1992, as a response to prevent malpractices in the capital markets. Its primary
objective is to protect the interest of the investors, preventing malpractices, and ensuring the
proper and fair functioning of the markets. SEBI has many functions, they can be categorized
as:
Protective functions: To protect the interests of the investors and other market participants.
It includes – preventing insider trading, spreading investor education and awareness,
checking for price rigging, etc.
Regulatory functions: These are performed to ensure the proper functioning of various
activities in the markets including formulating and implementing code of conduct and
guidelines for all types of market participants, conducting an audit of the exchanges,
registration of intermediaries like brokers, investment bankers, levying fees, and fines
against misconduct.
Development functions: These are performed to promote the growth and development of the
capital markets. For eg. Imparting training to various intermediaries, conducting research,
promoting self-regulation of organizations, facilitating innovation, etc.

2. Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is India’s central bank and was established under the
Reserve Bank of India act in 1935. The primary purpose of RBI is to regulate and supervise
the financial sector, most importantly the commercial banks and the non-banking financial
companies. The RBI also regulates and controls interest rates and liquidity in the money
markets.
Some of the main functions of RBI are:
• It issues the license for opening banks and authorizes bank branches.
• It maintains and regulates the reserves of the banking sector by stipulating reserve
requirement ratios.
• It inspects the financial accounts of the banks and keeps a track of the overall activities in
the banking sector.
• It regulates the payment and settlements systems and infrastructure.
• It prints, issues and circulates the currency throughout the country.
3. Insurance Regulatory and Development Authority of India (IRDAI)
The Insurance Regulatory and Development Authority of India (IRDAI) is an independent
statutory body that was set up under the IRDA Act,1999.
The three main objectives of IRDA are:
• To ensure fair treatment and protect the interests of the policyholder.
• To regulate the insurance companies and ensuring the industry’s financial soundness.
• To formulate standards and regulations so that there is no ambiguity.

4. Pension Funds Regulatory and Development Authority (PFRDA)

The Pension Fund Regulatory and Development Authority (PFRDA) is a statutory body,
which was established under the PFRDA act, 2013. It is the sole regulator of the pension
industry in India. Its major objectives are – to provide income security to the old aged by
regulating and developing pension funds and to protect the interest of subscribers to pension
schemes.

5. Association of Mutual Funds in India (AMFI)

The Association of Mutual Funds in India (AMFI) was set up in 1995. It ensures smooth
functioning of the mutual fund industry by implementing high ethical standard and protects
the interests of both – the fund houses and investors. Most asset management companies,
brokers, fund houses, intermediaries etc. in India are members of the AMFI. Registered
AMC’s are required to follow the code of ethics i.e. – integrity, due diligence, disclosures,
professional selling and investment practice. The AMFI updates the Net Asset Value of funds
on a daily basis on its website for investors and potential investors. It has also streamlined
the process of searching mutual fund distributors.
Credit Facility
Every Business needs funding for smooth operations. There are multiple funding sources
available in the market for business organizations. Credit Facility offered by Banks is one
such source. It can be understood as an agreement or arrangement between the borrower and
banks where the borrower can borrow money for an extended period. Credit Facilities are
utilized by the Companies, primarily to fulfill the funding-needs for various business
Operations. Banks on the other hand earn profit from the interest incurred on the principal
amount lent to the borrower.
The different types of Credit Facilities can be broadly classified into two parts:
Fund Based Credit
Non-Fund Based Credit.

Fund Based Credit

Fund Based Credit is the one where the Bank provides the Fund directly to the Borrower
without any third party involvement. It usually involves an immediate flow of funds to the
borrower’s account. For e.g. Loans, Ods (Over Drafts), CCs (Cash Credit), PAD (Payment
Against Documents), Consortium loans, etc.

Non-Fund Based Credit

On the Contrary, Non-Fund Based Credit is where the Fund is not transferred directly to the
borrower. It is offered to a third-party as agreed upon by the borrower, on behalf of the
Borrower.
The bank usually acts as a guarantee provider to the seller on the behalf of the buyer. If the
payment is not received by the seller within pre-agreed time, The bank pays the amount to
the seller. For e.g. Bank Guarantee, Buyer Credit, Letter of Credit, Supplier Credit.
Loan
A loan is a type of Fund-Based Credit where the Borrower has to repay the Credit within the
pre-agreed time & interest. Loans are given to the business to meet their various running
expenses such as production, distribution, expansion etc. A huge amount of loan can be given
to the companies depending on their requirements.
Demand Loans
Demand Loans, sometimes known as working capital loans, are offered by the lender to the
Borrower for the short-term.
As the name suggests, the Borrower has to repay the loan on the demand of the lender. There
is no fixed tenure for the repayment. These loans are generally offered against tangible assets
or similar securities.
Term Loan:
These loans come with a predefined repayment schedule and tenure. As the tenure is fixed,
the Borrower will have to pay some pre-payment charges in early payments. They are
generally offered for the large funding requirements.

Overdraft
Overdraft facility is also a loan facility, which is provided to an individual or a business,
based on the relationship with the bank. In this system, an individual can withdraw an
amount greater than his available balance till a specified limit as per regulations of the bank.
Overdraft facility is offered for meeting short term obligations of individuals or businesses.
Cash Credit
A Cash Credit (CC) is a short-term source of financing for a company. In other words, a cash
credit is a short-term loan extended to a company by a bank. It enables a company to
withdraw money from a bank account without keeping a credit balance. The account is
limited to only borrowing up to the borrowing limit. Also, interest is charged on the amount
borrowed and not the borrowing limit.

Example
Company A is a phone manufacturer and operates a factory where the company invests
money to purchase raw materials to convert them into finished goods. However, the finished
goods inventory is not immediately sold. The company’s capital is stuck in the form of
inventory. In order for Company A to meet its expenses while waiting for its finished goods
inventory to convert into cash, the company takes a cash credit loan to run its business
without a shortfall.
BILL FINANCE
It is a binding short-term financial instrument that mandates one party to pay a specific sum
of money to another at a predetermined date or on-demand. Also known as a bill of
exchange, it essentially denotes, in writing, that one person (debtor) owes money to another
(creditor).
The practice of bill of exchange issuance involves three parties primarily –
Drawee – This is the person or entity on which a bill of exchange is issued, also referred to
as the debtor. A drawee needs to accept the bill, which legally binds it to pay a specific sum.
Drawer – This person issues a bill of exchange, usually before undertaking credit sales. A
drawee is obliged to pay the due amount to a drawer. This entity must sign a bill of exchange
during issuance.
Payee – The payment ultimately goes to a payee. In most cases, a drawer, and payee are the
same entity. However, in some cases, a drawer can transfer bill finance to a third-party, in
which case that person becomes the payee.

Usually, when a business sells its goods on credit, a bill of exchange is issued by the drawer
to the buyer (drawee). The buyer shall accept this document, assenting to stipulated terms
like date and mode of repayment. Thereafter, it becomes legally binding.

Benefits:
• Improves cash flow position
• Provides instant access to cash
• No collateral involved
• No debt incurred
Drawee
Common in bill or cheque transactions, a drawee can be described as the entity or person
upon whom a bill or cheque is drawn. The drawee is the entity or person to whom a bill
is addressed and is given instructions to pay. In most cases, when a cheque (bill of
exchange) is being drawn, the party said to be the drawee is normally a banker.

Functions of a Drawee
• A drawee typically serves as an intermediary.
• To channel and direct funds from a payer’s account to the account of the payee.
• Holds the funds from the payer in an account that it manages.
Example

Mary works at Company ABC. The company pays its employees on the 25th of each
month. The employees (including Mary) obtain their salaries through a cheque.
Assuming it is the 25th of January today, Mary receives her salary cheque and
presents it to her bank to cash the cheque. Mary’s bank will have the funds directed
from the bank account of the company into Mary’s account, in accordance with the
figure stipulated on the cheque. Hence, the bank deducts the funds from Company
ABC’s account and pay the funds directly into Mary’s account.
In this scenario, Company ABC has instructed the bank to draw funds from its
account and have those funds sent to Mary’s account. The bank is the drawee in this
setting, company ABC is the drawer, and Mary is the Payee.
Henceforth, the owner of the account from which the funds are to be drawn is
referred to as the drawer, the bank or institution that is facilitating the channeling of
the funds from the drawer’s account is known as the drawee, and the person to
whom the funds are sent to is the payee.
Bill Discounting
Bill Discounting is short-term finance for traders wherein they can sell unpaid
invoices, due on a future date, to financial institutions in lieu of a commission. The
Bank purchases the bill (Promissory Note) before its due date and credits the bill’s
value after a discount charge to the customer’s account. The Bank will realise the
bill amount on the bill’s due date directly from the debtor. This helps the traders
optimise their cash flows and business (payment) cycles without disturbing their
balance sheets. Lenders usually offer tenors of up to 180 days while offering bill
discounting facilities.

Example:
Let’s assume, a business owner sells goods to Mr. X worth Rs. 20,000 on credit but
Mr. X agrees to pay after two months of purchase. However, the business owner is in
urgent need of funds and can’t wait for two months. Therefore, a business owner can
discount the bill with the bank for two months before its due date. For example, if
the same trader discounts his bill(s) with a bank offering a discount rate of 12%
p.a., then he would receive Rs. 19,600 after paying a commission of Rs. 400 to the
bank.
Cash Delivery
Cash on delivery (COD) is a type of transaction where the recipient pays for a good
at the time of delivery rather than using credit. The terms and accepted forms of
payment vary according to the payment provisions of the purchase agreement. Cash
on delivery is also referred to as collect on delivery since delivery may allow for
cash, cheque, or electronic payment.

Pros of Cash on Delivery

• The payment period is shorter than with other payment methods.
• The method provides some protection from customers who might fail to pay or
pay late.
• Cash on delivery improves cash flow and budgeting.
• Consumers who do not have credit can buy products.

Cons of Cash on Delivery

• Greater risk of delivery refusal.
• Returning items can be costly for sellers who lack return infrastructure and
support.
• Buyers may find it difficult to return items that do not meet expectations.
Various Payment Facilities
There are different types of payment methods and they vary from business to
business. Long gone are the days where only cash was used for accepting payments.
Thanks to technology, there are various instant payment methods available. Also
with new players like UPI, mobile payments, mobile wallets, etc. payment space is
shifting more towards the digital side.

Credit card
Credit cards are simple to use and secure. The customer just has to enter the card
number, expiry date, and CVV, which has been introduced as a precautionary
measure. The CVV helps detect fraud by comparing customer details and the CVV
number.

Debit Cards
Debit cards are considered the best payment method for e-commerce transactions.
Debit cards are usually preferred by customers who shop online within their
financial limits. The main difference between credit and debit card is with a debit
card one can only pay with the money that is already in the bank account, whereas
in the case of a credit card, the spent amount is billed, and payments are made at the
end of the billing period.
E-Wallets
E-wallet is one of the upcoming trends which gives a new shopping experience
altogether. The use of e-wallets is becoming popular at an alarming rate. After creating an
e-wallet account and linking it to the bank account they can withdraw or deposit funds.
The whole procedure with an e-wallet is easy and fast.

Cash
In India cash is the king. For eCommerce, it comes in the form of the cash-on-delivery
option.
Cash is often used for physical goods and cash-on-delivery transactions. Though
nowadays, cash on delivery does not necessarily mean customers pay with cash (they can
use cards, mobile payments as payment terminals are often available with delivery
agents).

Mobile payments
This digital payment solution offers a quick solution for customers. To set up a mobile
payment method, the customer just has to download software and link it to the bank
account. As eCommerce is becoming mobile mainstreamed, customers are finding it
more convenient to use mobile payment options.

Cryptocurrencies
Though not popular yet, cryptocurrencies are rapidly but surely gaining a spot as a
favorable payment method, particularly with genZ.
Modes of Delivery
Depending upon the nature of the business activity and the operating cycle
prevalent in the particular industry, the following modes of delivery of credit are
seen.

Overdraft/Cash Credit System

In this system, the borrowers are allowed to draw funds from the account within the
maximum permissible credit limit granted by the bank. Borrowers can draw cheques on
their overdraft or cash credit account to the extent of the drawing power so calculated,
subject to the maximum credit limit granted by the bank.

Loan
Loans are sanctioned for definite purposes and periods. term loans for short periods are
the main form of short- term finance. under the loan system, although the purpose of a
loan is determined at the time of granting the loan, once the funds are disbursed, the
bank has no further control over the end use of the funds.

Bill System
In bill system of financing, the borrower is financed against the bills of exchange drawn
by him on his buyers. Financing is also done under sales bills where the borrower
submits the bill of exchange along with the shipping documents, and the bank purchases
or discounts the bill and credits the proceeds to the borrower’s current account for his
Commercial Paper (CP)
Commercial paper is a popular form of raising working capital at a low cost by the
corporate business houses. CP is a short-term money market instrument and the
banks find it a convenient route to park their excess liquidity for a short period, not
exceeding 12 months. The subscribers are other corporate houses, commercial
banks, etc.
Commercial papers provide the corporate houses with an additional avenue of
raising working capital, at a price substantially lower than the interest charged by the
commercial banks in their fund-based working capital limits of overdraft/cash credit
granted to the borrowers.

Bridge Loan
Commercial banks often grant bridge loans to the business enterprises to
temporarily bridge the financial gap between granting of loans by other banks and
financial institutions and actual disbursement by them. The gap arises due to the
time taken for completion of documentation and other formalities between the
borrower and the financial institution.
The bridge loan helps the project work to continue without any hindrance or
stoppage for lack of fund. After the funds are available to the business enterprise, the
bridge loan is repaid. Banks have to exercise caution in granting bridge loans as
unless a proper tie-up with the incoming funds is made, the repayment may pose a
problem.