Professional Documents
Culture Documents
Issues in India
By Amit Bhushan
Contact:
amitbhushan@rediffmail.com
Author works with Global Transaction
Services team of an MNC Bank in India.
Views are personal
– Exposure is off balance sheet (i.e. Financing may be given off balance sheet
treatment)
– Based on Performance of borrower rather than his credit rating (Leverage the
strength of commodity by using it as primary collateral)
– Difficult to enforce banks’ rights due limited recourse nature of such facility.
– Get financing in tranches aligned with stock build-up schedule
– Repayment schedule aligned with actual usage
Benefits to
– Borrower
Debt service payments proportional to revenue stream
Reduces cash-flow volatilities
– Financer
Reduce risk of corporate default (separate market risk from
credit risk)
Assured fixed return on the loans (though corporate pays
floating rate linked to the aluminium prices)
Improving asset quality
1) Inventory financing
3) Prepayments
Other complex forms of Structured Commodity Finance like Tolling, Barter, Counter-trade,
Processing Finance, SCF with Reverse Factoring for Exporter etc. are not covered in
this presentation.
DEFINITION: A loan is made with limited recourse to the exporter whereby the
security is provided by an assignment of the commodity stored in a warehouse
and the repayment comes from export proceeds paid by future buyers directly
to the lender. Involves below steps:
Exporter puts goods in warehouse
Bank takes security interest over goods in warehouse
Goods inspected and security interest perfected
Bank makes loan to exporter
Exporter sells goods (preferably Ex-Works/Warehouse or as per comfort of financer)
[If necessary Bank obtains top-up goods and gives order to warehouse for sold goods to be delivered to
buyer]
Buyer pays sale proceeds into escrow account (common if banker is based outside the country of
financing)
Bank is repaid from escrow account and excess after agreed deductions release to exporter
DEFINITION: A loan is made without recourse or with limited recourse to the buyer/
importer for prepayment of the commodity sold by the exporter whereby the security
is provided by an assignment of the prepaid export sales contract and by an
assignment of the commodity stored (or to be stored) in a warehouse and whereby
the repayment comes directly from the buyer.
Used when relationship between the buyer and the exporter is strong eg. when the exporter is a
subsidiary or JV of the buyer.
Sale contract between exporter and importer providing for prepayment by the importer assigned to Bank
Bank inspects goods for purposes of loan to importer (at Warehouse in country of exporter) to enable
importer to prepay for goods to exporter.
Bank takes security over goods stored in warehouse upon prepayment.. Can make advance without
security over goods.
Importer sells goods to sub-buyers with sub-sale proceeds from sub-buyers assigned to Bank
Goods released from warehouse against payment paid to Bank with excess split between exporter and
importer
The Financer is the principal stakeholder in the SCF transaction and the Pledge of
Commodity / Warehouse Receipt is one of the principal collateral instruments. Financer
has interest in adequacy of its control over the collateral at all stages of the transaction
Integrity and commitment of Stakeholders at all stages i.e Pre-Procurement Procurement,
Storage, Transportation, Processing, Post-Processing & Final Delivery to Buyer with clarity of
processes & controls.
Management of Market Risk of Commodity & linked structure with Fx & Interest rate markets
and thus availability of a transparent & Liquid market for the same. Such hedges should
preferably be assignable to financers
Easy enforceability of Security Interest at jurisdiction favoulable to financer and ensuring that
such judgments are adequately honored by Collateral Manager, Logistics Providers and other
such agencies to ensure risk mitigation for financer.
Operational Flexibility to get out of transaction within reasonable time and cost
Structuring Term Sheet, Trade Terms, Collateral Management Agreement, Logistics
Agreement to protect Financers interests in all jurisdictions to which the transaction is spread.
Ensure Risk Mitigation through clearly defined policy & procedures.
Conduct of all stakeholders such as Buyer, Seller, Financer, Logistics provider & Collateral /
Warehouse Manager and other agencies involved is covered with adequate guarantees
Counterparty Risk of Buyer is either absorbed by financer with adequate Lines being blocked
or with cover from an Export Credit agency while Performance risk of Supplier is mitigated by
adequate examination of past track record.
18 03/15/09 by Amit Bhushan
Structured Commodity Finance –
Issues in India
CollateralManagement
Document-Custodian Service
Price-Valuation Service
Monitoring Services
Market Liquidity
Trade Policy & Tariffs
For continual validity of the bank or trader’s legal claims to the commodities, these
documents should be issued to the principal or be in negotiable form.
Negotiability issue is still to become law as discussed previously
Issuance of Documents in name of Principal/Bank has Restrictions exist on
commodity exposure by banks directly. Banks are also not allowed to deal in
commodity derivatives for hedging – Banking Regulations Act needs to be
amended to facilitate above
Also, Options on commodities not allowed - FCRA to be amended.
Since documents & commodity ownership can be transferred frequently in SCF
transactions, so electronic form of issuance is required. The infrastructure is yet
to develop fully. Beginning has been made by NCDEX-CSDL.
Even at the cost of being repetitive, it may be stated that the spot and derivatives
markets are central to conduct direct transactions and for use of prices for
information processing and financing decisions.
The spot and derivative markets for commodities have yet to develop a sophisticated
institutional capacity to offer transparency & comfort to Financer as no central
dissemination of information of prices. Considering the fact that cost of transportation
of commodity is significant, a reliable price source & liquidity of the physical stock at
local wholesale markets provides comfort to the Financer.