Académique Documents
Professionnel Documents
Culture Documents
TOB
Lecturing notes no 4
Debtor/ Creditor
Population/ state/ economic agents
Real/ personal
Fixed/ Floating
Monitoring Institutions
Set up in 1996
Established in 1880
Independent public institution
Only institution authorized to issue money
Set in 1997
Info centre for payment instruments bank & social
Set in 2000
Lecture outline
Objecives of CA
Process of CA
The five Cs
Information sources for CA
Credit application structure - detailed
Loan Closure
Character
Capacity
Capital
Collateral
Conditions
Risks analysis
Sources of information
Customer interview
Internal sources
External sources
Purpose
Amount
Repayment Source
Security (collateral)
Terms (covenants) positive/ negative
market structure
market size
demand for the product
Competition
Industry/economy overview
Credit history
Collateral analysis
Types
Characteristics/Features
Valuation
SWOT analysis
Strengths
Weaknesses
Opportunities
Threats
Qualitative criteria
Quantitative criteria
Management quality
Business strategy and environment
Collateral received
Customer transparency and quality of financial
statements presented
Buyers/ suppliers diversification
Technology used
Age/size of the company and track record
Quality and evolution of the competition
Current ratio
Solvability
Operating profit margin
Interest cover
Equity ratio
Current ratio
Criteria
>1,5 x
>1,2 x
>1 x
>= 0,8 x
<0,8 x
Evaluation
1
2
3
4
5
Solvability
Criteria
>1,5 x
>1,2 x
>1 x
>= 0,8 x
<0,8 x
Evaluation
1
2
3
4
5
Criteria
>10%
>7%
>3%
>= 0%
< 0(loss)
Evaluation
1
2
3
4
5
Interest cover
Criteria
>4x
>3 x
>2 x
>= 1x
<1x
Evaluation
1
2
3
4
5
Equity ratio
Criteria
>35%
>20%
>10%
>= 0%
< 0%
Evaluation
1
2
3
4
5
Financial performance
Clients mark
1,00-2,00
2,01-3,00
3,01-4,00
4,01-4,50
4,51-5,00
A (performing credit)
B (credit under supervision)
C (credit under standard)
D (doubtful credit)
E (credit with losses)
Weight
Values
Mark
Evaluation (w*m)
Qualitative criteria
Management quality,
business strategy,
collateral received
21%
Accumulated
experience within he
main firm activity, good
business strategy, well
known company
0.21
4%
Majority owned by
management
0.08
Ownership structure
Quantitative criteria
Current ratio: Current
assets/Current debts
18%
1.1
0.54
Solvability: Total
assets/total debts
18%
2.83
0.18
Operating profit
margin: Operating
profit/ sales x 100
12%
15.5%
0.12
Interest cover:
Operating profit/ Interest
expenses
18%
34.3
0.18
9%
64.60%
0.09
100%
1.4 - A
RISK EVALUATION
KEY RISKS
MITIGATION FACTORS
Business Risk
Repayment risk
liquidity risk
Management risk
Credit Decision
Yes
No
Yes with conditions
CREDIT ANALYSIS
TOB
Lecturing notes no5
Study case 1
Printing
House Company
Printing House joint stock company was set up in 1993 and has as main activity: printing, coping.
Its Social capital is 2 126 000 000 ROL.
Ownership and management structure Main shareholders: Costel Mihai holds 58%, Diaconu
Raluca holds 33%, Radulescu Cosmin holds 5%, Popescu Dan holds 2%, Damian Andrei holds
2%
Printing House has a dynamic management team composed of highly qualified professionals with
strong capabilities in their filed of activity. Three of the shareholders are also in management
positions.
The market strategy of Printing House Joint Stock Companys highlights the quality of the
products. The company has also a price strategy by offering discounts (cash discounts, quantity
discounts)
Description of the companys activity and technological process
The main activity of the company is printing. The company is a full service printer including all the
phases of the production: pre-press, printing and finishing. It prints all kind of materials such as
newspapers, magazines, books, brochures, labels, forms, packages, business cards, calendars
etc.
The technological procedures are complex and have the following stages:
On January 2004 set up a new branch in Sibiu. The company from Sibiu has the same activity but
is independent from the one in Bucharest.
CREDIT HISTORY
Banking Relationships
Till now Printing House hasnt had any relation with Raiffeisen Bank.
The banks the company is working with are:
BCR
Current account
2,168,418
BRD
Current account
1,680,748
ALPHA BANK
Current account
159,353
History of the Clients Loans
Printing House Joint Stock Company doesnt have any long-term loan, all the companys debts and
investments being made from its internal sources.
It has only 2 leasing contracts:
Financial Leasing Monthly Payment Date
Maturity Date
Balance
Audi A4 full options 1028 EUR
February 2003
January 2005
26,298 EUR
Renault magnum
590 EUR
June 2002
April 2005
12,011 EUR
Credit Information Bureau Database
According to the Credit Information Bureau statement, Printing House Joint Stock Company is not
present in database with any unpaid loans.
Payment Incident Bureau Database
According to the Payment Incident Bureau statement, Printing House Joint Stock Company is not
present in database with any incident.
Taxes, Social Insurance to State Budget
Printing House Joint Stock Company has paid all its debts to the state budget.
The Romanian printing industry has been one of the most dynamic sectors of the economy in the
last decade. Until 1989 in Romania there was only a printing house, the former Tipografia Casa
Scanteii, over 1000 companies which have as main object the activity of printing.
Others(fiscal
forms,lables,
packaging)
24%
Advertising
materials
29%
Newspapers
16%
Magazines
18%
Books
13%
Main competitors
Infopress
Mega Press Holding
Libedi Printing,
Fed Print
Imprimeriile Media Pro - IMP
Companys suppliers
Product
DormanSRL
SC.RTC S.A
ImobConstanta
Kubera SA
ArhiDesignSRL
PrintManSRL
SilverInkSA
EuropapierSA
Others
% in total
suppliers
Services
Paper
Assets
Paper
Consumables
Utilities
Ink
Paper
Others
4.16
15.7
23.5
7.12
10.3
2.65
8.93
11.66
15.98
Payment
term (days)
Payment
method
Acquisition
frequency
30
Payment order
monthly
45
Payment order
monthly
Payment order
60
Payment order once to months
45
Payment order
monthly
45
Payment order
monthly
30
Payment order
monthly
45
Payment order once to 3-4months
30-60 Payment order
seldom
Main customers
Customer
1.Humanitas
2.Adevarul
3. SNCFR
4. Metro SA
5. Elite SA
Romania
Product
Payment
term (days)
School books
newspaper
Booklets, folders,
train schedule
promotional materials
promotional materials
labels
60
15
30
Payment
method
Payment order
Payment order
Payment order
Acquisition
frequency
monthly
monthly
monthly
30
45
Payment order/Cash
Payment order/Cash
6. Editura Niculescu
Books
7. Ioana, Mama
magazines
60
45
Payment order
Payment order
monthly
monthly
8. Petrom SA
30
Payment order
monthly
envelops
labels,
packages
monthly
monthly
Due to the quality of the products and seriousness to its clients, the company
succeeded in becoming a well-known company on printing market.
Books
26%
Magazines
32%
Advertising
materials
Others(fiscal
28%
forms,lables,
packaging)
5%
Newspapers
9%
In terms of turnover, 2003 was good year for the company, the increase representing about 21,9%
as compared to 2002. There is a seasonally in the turnover in the second half of the year due to
the selling of schoolbooks. Only a small part of the turnover is due to the exports. The decrease of
the turnover during the 2002 compared to 2001 is due to the repair of old equipment, which
implied both expenses and activity stagnation due to non-working machines.
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Year
TURNOVER
EBIT
NET PROFIT
EQUITY
TOTAL DEBT RATIO
CURRENT RATIO
OPERATING PROFIT
MARGIN
2001
24.696 bill ROL
4.713 bill ROL
3.477 bill ROL
7.478 bill ROL
0.31
2.1
19.7%
2002
23.658 bill ROL
1.262 bill ROL
786 bill ROL
7.555 bill ROL
0.50
1.4
1.8%
2003
28.837 bill ROL
4.393 bill ROL
3.242 bill ROL
11.424 bill ROL
0.35
1.1
15.5%
Financial performance
Clients mark
1,00-2,00
2,01-3,00
3,01-4,00
4,01-4,50
4,51-5,00
A
B
C
D
E
Current ratio
Solvability
Solvability = Total assets/total debts
Criteria
Evaluation
>1,5 x
1
>1,2 x
2
>1 x
3
>= 0,8 x
4
<0,8 x
5
Interest cover
Equity ratio
Equity ratio = Total Equity/ Total Assets
Criteria
Evaluation
>35%
1
>20%
2
>10%
3
>= 0%
4
< 0%
5
COLLATERAL ANALYSIS
The credit will be guaranteed with 1st rank mortgage on real estate building and land in total area of 7800 sq. situated in Bucharest. The
assets are owned by the Printing House Joint Stock Company.
The market value of the collateral is 262,000 EUR. To this value the
bank applies a risk coefficient of 25% resulting the accepted value of
the collateral of 196,5000 EUR
The value of the collateral cover the amount of the total loan
agreement (the loan amount, the amount of interest rate payable in
the course of the 1st year), and the expenses related to the
collateral enforcement .
SWOT ANALYSIS
Strength
management experience and teams of professionals
good position on the market
long term relationships with the suppliers
ability to pay debts on time
Weaknesses
negative cash flow in 2003
the company doesnt have as activity publishing
Opportunities
increase and consolidation of the market share by the new investment
development of the printing sector in Romania
development of the school books following the new regulations of the Education Ministry
Threats
legislative changes
strong competition in the field
appearance on the market of new printing houses with improved technology
RISK EVALUATION
KEY RISKS
Business Risk
Market Risk
Repayment risk
MITIGATION FACTORS
Companys management has experience in
this domain, and the company extended its
activity quickly.
The general economic growth will determine
also the development of printing activity. By
renewing the printing equipment, the company
will adapt quicker to market needs and will
succeed in maintaining its position on the
market
Good financials, good reputation, ability to pay
debts on time
The profit margin obtained by the company will
cover the unfavorable differences of the foreign
exchange.
Credit scoring
Evaluation criteria
Weight
Values
Mark
Evaluation
Qualitative criteria
Management quality,
business
strategy,collateral
received
21%
Accumulated
experience within he
main firm activity, good
business strategy, well
known company
0.21
4%
Majority owned by
management
0.08
Ownership structure
Quantitative criteria
Current ratio: Current
assets/Current debts
18%
1.1
0.54
Solvability: Total
assets/total debts
18%
2.83
0.18
Operating profit
margin: Operating
profit/ sales x 100
12%
15.5%
0.12
Interest cover:
Operating profit/ Interest
expenses
18%
34.3
0.18
9%
64.60%
0.09
100%
1.4 - A
Case study 2
Borrower Miconstruct S.R.L.
Loan motive acquisition of a XB245
concrete pouring machine
Requested amount 20.000 euros
Lender X Bank
Credit analysis
Credit analysis
4.20-5.00
3.40-4.19
2.60-3.39
1.80-2.59
1.00-1.79
Documents requested
Annual Balance Sheet and Profit and
Loss Account for the last 3 years of
operation
Company's Overview
Description of the current activity
Project description
Management presentation
Personal financial statement
MICONSTRUCT S.R.L
Form: limited liability company
Social capital: 2,000,000 ROL
Trade register number: J/15/371/1998
Fiscal code: 11575640
Number of employees: 12
FINANCIAL RATIOS
Liquidity
Solvency
Risk
Profitability
Sales Trend
Analysis of liquidity
Analysis of solvency
Analysis of risk
Analysis of profitability
ROA2001 = 66.71%
ROA2002 = 37.46%
ROA2003 = 48.17%
Trend of sales
sales rev
3000000
profit
2000000
1000000
0
2001
2002
2003
Element
Value
Score
Element
Weight
Section
Score
Section
Weight
1. Liquidity
A. Current Ratio
B. Quick Ratio
2.92
2.8
4
4
67%
33%
12%
2. Solvency:
A. Equity Ratio
B. Debt to Assets
61.27%
40%
4.5
4.3
60%
40%
4.42
3. Risk:
B.
Financial
Coverage
10.15
100%
Debts
Obj.
Score
2.68
1.32
12%
2.7
1.72
12%
4. Profitability:
A. ROA
B. ROE
48.17
78.7
5
5
50%
50%
5. Trend:
Trend of Sales
157%
4.8
100%
4.8
12%
2.5
2.5
4.8
12%
2.7864
Subjective factors
Industry Characteristic :
4
Company Characteristics:
3
Shareholders& Management: 4
Planning and Prospects:
5
2.7864
Subjective factors scoring: 1.500
Total Scoring:
4.2864
Credit classification:
A
Result: the credit will be granted
Thank you!
TOB
Lecture no 7
Formulates
monetary policy
1
1
4
6
Governors of NCBs
16
Total
22
NCB1
1
1
Total
29
27
NCB2
NCB16
GENERAL COUNCIL
(Advisory Body)
President
Vice President
Governors of NCBs
of all countries
NCB13
NCB24
NCB27
Independence of the
Eurosystem
Institutional Independence:
Maastricht Criteria
Price stability
Public finances
Exchange rate
Long term interest rate
Maastricht criteria
The criterion on price stability
the achievement of a high degree of price
stability;
this will be apparent from a rate of inflation
which is
close to that of, at most, the three best
performing
Member States in terms of price stability
Reference value: average HICP inflation
rate of, at most, three best performing EU
Member States + 1.5 percentage points.
Convergence criteria
The criterion on the government budgetary position
Convergence criteria
The exchange rate criterion
The observance of the normal fluctuation margins provided for the
exchangerate mechanism of the EMS, for at least two years,
without devaluing
ECB examines whether a Member State has participated in
ERM II for at least two years prior to the examination
without severe tensions, in particular, without devaluing its
currency against the euro.
Focus is put on the exchange rate being close to the central
rate against the euro, while also taking into account factors
that may have lead to an appreciation.
Convergence criteria
Maastricht criteria
Romania
2006
2007
2008
Rate of inflation
6.6%
4,9%
(6,3)
5,9%
2.6%
5.4%
10.3%
Exchange rate
+/- 15 % per year
Public deficit
Max 3% GDP
2,2%
2,6%
2,9%
Public debt
12,4%
13%
13,6%
Long-term
interest rate
max 6,6 %
7,2 %
7,1%
7.1%
CASE (1)
Case (2)
Interest rate used by the banks is based
on a formula that uses a reference index
(ROBOR for RON, EURIBOR for EUR si
LIBOR for USD si CHF) plus the bank
margin.
TOB
lecture no 7
Content
ESCB
yes
yes
Issue banknotes
yes
yes
yes
yes
yes
yes
yes
NCBs
yes
yes
yes
Some NCBs
yes
Some NCBs
yes
yes
yes
yes
yes
yes
High employment
Price stability
Stable economic growth
Interest rate stability
Financial market stability
Stability in foreign exchange markets
Instruments or tools
of monetary policy
-Open market operations
-Discount window
-Reserve requirements
Operational targets
- Short term interest rate
- Commercial banks
reserves
- Exchange rates
Intermediate
targets
- long-term
interest rate
- money supply
Price stability
Employment
Growth, etc
This will influence the level of liquidity within the financial system and will affect
the level and structure of interest rate
Discount window
(standing facilities)
Instruments or tools
of monetary policy
Reserve requirements
Instruments or tools
of monetary policy
3). Reserve
requirements
Regulatory environment
Financial sector: one of the most heavily
regulated sectors in the economy
Regulation (specific rules): e.g prudential rules (maximum exposure)
Monitoring (evaluate if the rules are obeyed): e.g. Credit register
Bureau
Supervision (general oversight): new institutions
Rationale:
Financial crisis: failure of regulation systemic risk bank
contagion
Types of regulation
Systemic regulation
-deposit insurance and lender of last resort
function
Prudential regulation
-monitoring of financial institutions (asset
quality and capital adequacy)
Conduct of business regulation
Expansionary monetary
policy (unemployment and
recession)
Low minimum reserves and
low official rate of discount
Quantity of money increases
Rate of interest decreases
Investments increase
Demand increases
Real GDP increases
Basel II
Set up in 2003 by the Basel Committee on
Banking Supervision
minimum capital should be related to the
risks
Three types of risks: credit, operational and
market risk
Compulsory from 2008 (only 4 in 2007)
Costs of infrastructure and expertise: 0.5%
LEASING
A MODERN FINANCING ALTERNATIVE
Lecture No. 8
TOB
CONTENTS
Leasing conceptual approaches
Leasing defined
Method of payment for the use of an asset
Different from renting
A party undertakes to transfer for a
determined period of time to another party
the right to use an asset against a regular
payment
The right of option
Definition:
Parties:
lessor/the financer (locator/finantator/Leasing-Geber)
lessee/the user (locatar/utilizator/Leasing-Nehmer)
supplier (furnizor/Hersteller)
insurance company (companie de asigurari)
Mechanism of leasing
1.
2.
3.
4.
LEASING terms
Economic life :
the period along which a certain good is estimated to be economically usable by one
or more users; or
the number of the production units or similar units that are estimated to be obtained
through using the good by one or more users.
in case of financial leasing: the due quota of the entry value of the good and of the
leasing interest (the average rate of the bank interest on the Romanian market);
Advantages of leasing
financial statements are not "loaded" with expenses
(just the monthly royalty)
- credibility
- future financing contracts
ease of scheduling the expenses
easy replacement of depreciated goods
no need for supplementary guarantee
rapidity of the approval of the operation process
Disadvantages
For the lessee
Credit
Supplementary collateral
Advance required
Advance payment
OUG 50/2010 ref. protectia consumatorului/ Gov.Ord. no.50/2010 regarding the CC agreements:
Aplicarea retroactiva / retroactive application:
Extra-costuri ale finantatorilor si ale clientilor / Extra-costs for credit institutions and
consumers
Nerespectarea Constitutiei/textului Directivei si a principiilor dreptului comercial/ No
respect for Constitution, EU Directive and commercial principles
Incurajarea abuzurilor si a unui comportament nesanatos de plata/ Encouraging abuse and
an unhealthy payment behavior
Confera puteri abuzive unei agentii guvernamentale in aria de decizie legala a BNR/ Gives
abusive power to a Governmental agency on Central Banks legal framework
Codul Fiscal/ Fiscal Code
Cresterea costurilor de finantare a achizitiei prin aplicarea TVA marit / Higher financing costs
due to an increased VAT
Scaderea capacitatii de plata prin cresterea TVA/ Lower payment capacity due to an
increased taxation
48
48
Currency
Euro
Currency
Euro
6,785.73
6,785.73
1,357.15
2,041
Financed value
5,428.58
6,123
Interest rate
10.50 %
Interest rate
12%
Residual value
139.02
Residual value
138.99
Credit installment
161
Management commission
135.71
Management commission
169.62
8,164.41
Total cost
9,479.49
Total cost
7 668
9,878.62
Factoring
TOB
Lecture no 9
Definitions (I)
A factoring operation consists in the transfer of
commercial receivables of the owner to a factor,
which assumes the obligation to cash them in, even
in the case of temporary or permanent incapacity
of the debtor. The factor can pay in advance all, or
only a part of the total amount of the transferred
receivables.
-- Bank of France
Definitions (II)
Factoring is the operation through which a
company sells its Clients accounts to a
factor.
-- Bank of Britain
Factoring Contract
Interested parties
Factor
Adherent (client)
Debtor (s)
Factoring Contract:
Mechanism
Sale of accounts
receivable
Provider of goods
or services
(Adherent)
Factoring contract
Cash payment
(% of credit sales)
Bank or
specialised
institution
Your
company
1
2
BRD
Your
clients
FACTORING
HOW IT WORKS
The factor fully manages your sales ledger and provides you
with credit control and collection services of all your
outstanding debts.
FACTORING
TYPES
Recourse factoring
Export FACTORING
Exporter
Importer
1
5
4
6
Export
factor
Import factor
FACTORING
COSTS INVOLVED
Service charge determined mainly by the annual
turnover, no of customers and invoices
Interest charge typically comparable to normal
secured bank overdraft rates
Two parts
Financing: Financing commission (e.g. 20%)
Servicing - Factoring commission (e.g. 0.85%)
FACTORING
WHY?
Companies have a
better understanding
of the services and
benefits factoring can
provide
Constant innovation,
the guarantor of
varied services which
are regularly updated
to
suit
company
needs
Factoring: Benefits
Establish solid business foundation
Healthy credit history
Healthy payroll and tax payments
Retain customers and employees
Maximise profitability
Cheaper supply
Faster-paying customers
Pay-down debts
Retain equity and business control
Countinuos source of operating capital
Factoring: Shortcomings
Cost is high
The higher the invoice value, the higher the fee
The longer the invoice period, the higher the rate
Large percentage of
business
One-time basis
Consumer-goods
Acerline
sells invoices to BCR
must notify KTech of factoring operation
Case Study:
Two invoices
ROL 300,924,956, due on 05 Nov, 2004
ROL 652,484,021, due on 12 Nov, 2004
Totalling ROL 953,408,977
INVOICE 2:
Value (V2): ROL 652,484,021
Due date: 12 Nov, 2004
Remaining duration (D2): 17 days
Case Study
Documents
Adherent
Information about
adherent
Adherents field of
activity
Information about
adherents clients
Factoring in Romania:
Factors
BCR (Romanian
Commercial Bank)
BRD Groupe Socit
Gnrale
Unicredit
Banc Post
Alpha Bank
Eximbank
Raiffeisen Bank
Abn-Amro Romania
Daewoo Bank
Libra Bank
Volksbank Romania
HVB Bank
Egnatia Bank
Emporiki Bank
FACTORING
FACTORING MARKET
Almost a thousand
companies currently
offer factoring services
(1768), of which 624
are in Europe (Sources:
Factor Chain
International)
FACTORING (2007)
FACTORING IN EUROPE (mil Eur)
United Kingdom
Italy
France
Germany
Spain
Netherlands
Ireland
Sweden
Turkey
Belgium
Norway
Portugal
Russia
Finland
Denmark
Poland
Greece
286 496
122 800
121 660
89 000
83 699
31 820
22 919
21 700
19 625
19 200
17 000
16 888
13 100
12 650
8 474
7 900
7 420
Austria
Czech Republic
Hungary
Cyprus
Lithuania
Slovakia
Estonia
Romania
Latvia
Ukraine
Slovenia
Bulgaria
Serbia
Malta
Iceland
Switzerland
5 219
4 780
3 100
2 985
2 960
1 380
1 300
1 300
1 160
890
455
300
226
25
5
0
FACTORING
FACTORING THROUGHOUT
THE WORLD (IN MIL EURO)
EUROPE: 929,756 (624)
AMERICAS: 150,210 (961)
ASIA : 174,667 (139)
http://www.factors-chain.com/?p=video&lang=en&type=export
http://www.factors-chain.com/?p=video&lang=en&type=import
Payment instruments
TOB lecture no 10
LEARNING OBJECTIVES
Define payments instruments and discounting
operations
Analyze the main types of payment instrument.
Compare and contrast the payment instruments
Calculate the interest, nominal value, discount,
actual value of the commercial papers.
Payment system
1. The cheque
is a payment instrument
connects during the process of its creation 3
persons: the drawer, the drawee (bank) and
the beneficiary.
is created by the drawer, whom, based on an
available amount deposited previously at a bank,
gives an unconditioned order to the latter, which
is in the position of the drawee, to pay at the
presentation moment a fixed amount to a third
person, being in the position of beneficiary.
2. The draft
- negotiable credit titles and paying
instruments which prove the obligation took on
by the debtor to pay at sight or at a fixed
maturity, to the beneficiary or at his order, a
certain amount of money.
- credit title, under private signature, which
connects in the process of its creation 3
persons: the drawer, the drawee and the
beneficiary.
- is created by the drawer as a creditor which
gives an order to its debtor, called drawee, to
pay a fixed sum of money at a certain date in
time, either the beneficiary or at his order.
On May 30th 2003, Co. Omega delivered to Co. Car some equipment with the
value of 14 millions lei. The due date is 1st of July 2003.
Co. Omega must pay the last reimbursement of a credit with the value of 14
millions; the due date is on the 1st of July 2003, too.
Co Omega issues a bill of exchange that must be paid by Co. Car to Bank X.
Starting with the moment the bill of exchange was filled in, Co. Omega is the
drawer, Co Car is the drawee, and the beneficiary of the bill of exchange is Bank
X.
Co. Omega delivers the bill of exchange to Bank X.
On the 1St of July 2003, Bank X cashes the amount written in the bill of exchange
from Co. Car.
In this way the credit granted by Bank X to Co. Omega is reimbursed and the debt
of Co. Car is paid also.
3. Promissory note
Co. A
-Issuer-
Co. B
-Beneficiary-
4. Payment order
is a credit instrument which circulates from the bank of the
payer to the bank of the beneficiary.
Endorsement
Ordinary cession: if not an order
Simple remission: at bearer
Endorsement = act through which
the owner of the payment instrument,
called endorser, transfers to another
person, called endorsee, all the rights
arising from the payment instruments
through a written and subscribed
statement on the instrument in the
moment of its handing over.
-in blank
in full: the sinature of the endorser,
the one of the endorsee, the date of
endorsement
Guarantee
Avalizarea
A personal guarantee through which a
person, called Guarantor (avalist),
guarantees the obligation assumed by one
of the persons obliged through the
payment instrument, called Guarantee
(avalizat), for the amount mentioned on
the draft/cheque/PN or for a part of it.
Important:
- Aval = guarantee in case of nonpayment
- Endorsement = transmission of the
payment right.
Payment
period
Maturiy = the date when the payment instrument has to be paid
The
At
At
At
At
! In the case of the draft and the promissory note, the drawer
can stipulate that the amount shall produce interest only
for the draft or the promissory note payable at sight or in a
certain time from sight.
Discounting
The discounting of the title at the
bank represents the process through
which the owner of the draft or of the
promissory note can obtain through
endorsement money, previous to the
maturity.
Discounting
Establishing the discount. The discount is equal to the interest computed on the
basis of the nominal value for the period of time between negotiation of commercial
titles and their maturity.
A * d * ts
S
360 * 100
a A S; a A
A * d * ts
d * ts
; a A * 1
360 *100
360 *100
Discounting
A
I= 1 oct
a=A-S
D=10 oct
A
M=20 oct
A = A + S1+ S2+S3++Sn-1+ Sn
A
E=30 oct
Discounting
S1
A * d * ts
d * ts
A*
36000
36000
S * d * ts
d * ts
d * ts d * ts
S2 1
A*
, orS2 A *
*
36000
36000
36000 36000
S * d * ts
d * ts d * ts d * ts
d * ts
, orS3 A *
*
*
A*
S3 2
36000
36000 36000 36000
36000
S * d * ts
d * ts
Sn n1
A*
36000
36000
If we note
d * ts
36000
, it means that
Sn A * K n
Discounting
(1 + X + X2 + X3 + .. + Xn) =
A
A'
d * ts
1
36000
1
1 X
Exemple
We
Solution
.
96 7,5
400000
8000 96 7,5
160$
36000
160 96 7,5
3,2$
36000
A
d ts
1
36000
400000
408163,264$
1 0,2
references
Dima,
Methods of Payment
in International Transactions
Lecture no 11
TOB
Methods of Payment:
Advance Payment
Open Account
Documentary collections/ Bill of collection
Documentary letter of credit
Documentary
Collection
Payment after receipt of goods
Advance Payment
Definition:
The importer pays the goods to the exporter
before the latter delivers them.
Advance Payment
Risks of importer:
3.
incorrect documents
non-delivery of goods
delay in delivery
Advantages of importer:
1.
2.
1.
2.
3.
Open Account
Definition:
The seller will dispatch the goods to the buyer with
an invoice requesting payment.
Open Account
Exporter
Advantages
Disadvantages
Open Account
Importer
Advantages
Disadvantages
Documentary collections
Definition:
Documentary collections are commercial documents
that may or may not be accompanied by financial
documents.
Parties involved:
drawer (importer)
Exporter:
Payment on time in the agreed currency
Documentary collections
The mechanism of
documentary collections
Importer
Exporter
Shipment of goods
Payment/
Delivery of
documents
Payment
Collection presentation
Collection
instructions
(presentation of
documents)
Collection order
Payment
Presenting Bank
Remitting Bank
Documentary collections
Exporter
Advantages
Disadvantages
Documentary collections
Importer
Advantages
Disadvantages
Definition:
A payment undertaking given by a bank (Issuing
bank) on behalf of a buyer (applicant/importer) to
pay a seller (beneficiary/exporter) a given amount of
money, on presentation of specified documents
representing the supply of goods within specified
time limits, these documents conforming to the terms
and conditions set out in the letter of credit the
documents to be presented at a specified place.
Commercial Interests
Importer:
Ensuring receipt of goods/completion of
services in due time and in agreed quality
and quantity
Exporter:
Parties involved:
Applicant (importer)
Issuing bank (importers bank)
Advising bank
Beneficiary (exporter)
Functions
The credit has a
Security function:
The issuing bank and the confirming bank,
if any, secure the payment to the
beneficiary against a complying
presentation (presentation of credit conform
documents).
Payment function:
A complying presentation initiates the
payment obligation of the issuing bank and
the confirming bank, if any.
Credit function/Financing function:
The credit is a kind of loan for the applicant
and can serve as a financing instrument for
the beneficiary.
Issuing
Amending
Utilizing
Issuing
Amending
Utilizing
Transport documents
Commercial invoice
Consular invoice
Certificate of origin
Bill of exchange
Other
Types of Credit
Unconfirmed
Credit
Confirmed
Credit
Silent
Confirmed
Credit
Types of Credits
Transferable
Credit
Back-to-BackCredit
Revolving
Credit
Types of Credits
Green ClauseCredit
(Packing Credit)
Red ClauseCredit
(Packing Credit)
Types of Credits
Distressed Letter
of Credit
Standby Letter
of Credit (SBLC)
Advantages
Disadvantages
Advantages
Disadvantages
Fraud
Summary
The documentary credit is a useful
instrument for the handling, securing
and financing of the international
trade. If it is applied in the right way
it can secure both the importer and
the exporter against certain risks.
Two fundamental principles of
the documentary letter of credit:
Independence of the
documentary credit from the
underlying contract
Strict compliance
Thank You!
References
Dima.M. A, coordonator (2012). Banking for Business
Adminsitration, Ed ASE (ASE bookshop)
Dima, M.A., (2010), Credit Analysis. Case studies, Ed. Business
Excellence (available at 4210)
Casu, B., Giraradone, C., Molyneux (2006). Introduction to Banking, Prentice Hall
Course assignments
60% final exam (multiple choice questions,
short open questions)
30% seminar (test, project, cases, active
participation)
10% office
100% total
Max 10 points extra (lecture)
WHAT IS EURIBOR?
Euribor is short for Euro Interbank Offered rate. The Euribor rates are based on the
interest rates at which a panel of 57 European banks (banks with the highest volume of
business in the euro zone money market, with a first class standing, high ethical standards and
an excellent reputation) borrow funds from one another. Euribor is determined and published at
11:00 a.m. each day, Central European Time.
When Euribor is being mentioned it is often referred to as THE Euribor, like theres
only 1 Euribor interest rate. This is not correct, since there are in fact 15 different Euribor
interest rates, all with different maturities, from 1 week to 12 months. Euribor was first
published on 30 December 1998 (value 4 January 1999). 1 January 1999 was the day that the
Euro as a currency was introduced. In the years before, a lot of domestic reference rates like
PIBOR (France) and Fibor (Germany existed).
Since the Euribor rates are based upon agreements between many European banks, the
level of the rates is determined by the supply and demand in the first place. However, there are
some external factors, like economic growth and inflation which do influence the level of the
rates as well. The Euribor rates are important because these rates provide the basis for the price
or interest rate of all kinds of financial products, like interest rate swaps, interest rate futures,
savings accounts.
Euribor and LIBOR are comparable base rate. Euribor is the average interbank interest
rate at which European banks are prepared to lend to one another. LIBOR is the average
interbank interest rate at which a selection of banks on the London money market are prepared
to lend one another. Just like Euribor, LIBOR comes in 15 different maturities. The main
difference is that LIBOR rates come in 10 different currencies.
Eonia is short for Euro OverNight Index Average. The Eonia rate is the 1-day interbank
interest rate for the Euro zone. In other words, it is the rate at which banks provide loans to
each other with a duration of 1 day. Therefore Eonia can be considered the 1 day Euribor rate.
Case questions:
1. Which is the average interbank interest rate in Romania?
2. What is the influence of Euribor on the cost of credit in Romania?
Learning objectives
Financial intermediaries
banks
Building societies
Monetary
financial
institutions
Insurance companies
Pensions funds
Investment funds
Unit trust
Leasing companies
Financial
corporations other
than MFI
liabilities
Customer deposits
Borrowings
Equity
Total
assets
Cash
Liquid assets
Loans
Other investments
Fixed assets
Total
Banking classification
I. Retail or personal banking
- commercial banks
- savings banks
- co-operatives
- building societies
- Credit unions
- Finance houses
II. Private banking
III. Corporate banking
IV. Investment banking
V. Universal vs. specialized banking
1934: banking law was abrogated, all the Romanian and foreign-controlled
banks were liquidated, except for the National Bank of Romania, the
National Company of Industrial Credit and the Savings Bank
Types of institutions
Credit institutions
Non- banking institutions
Assets
(%)
83,70
Investment funds
0,32
3,30
Leasing companies
6,79
Insurance companies
4,12
Other NFI
1,75
The weight of credit institutions share capital in total foreign capital and their market share by
country of origin
Structure
of the
Rom.
Banking
System
Minimum reserves
Credit
500
500
35%
325
325
35%
211
211
35%
137
137
35%
89
89
35%
58
58
35%
38
38
35%
25
25
35%
16
16
35%
10
10
35%
35%
Multiplier effect
Total amount of deposits created: 500
+325+211+.+10+7= 1416
Multiplier effect: total of new deposits created/
amount of original advance
= 1416/500 = 2.8
Level of financial
intermediation in CEE
Financial intermediation
compared
120
114.4
100
80
52.2
60
40
21.1
20
0
UE 15
NSM
financial intermediation 2005
Romnia
Credit classification
according to the risk
Monitoring Institutions
Set up in 1996
Established in 1880
Independent public institution
Only institution authorized to issue money
Set in 1997
Info centre for payment instruments bank & social
Set in 2000
The Central Credit Register (CCR) is a system specialising in the collection, storage and
centralisation of information on the exposure of all reporting entities (credit institutions or mortgage
loan companies) in Romania to the debtors that were granted loans and/or incurred commitments
whose cumulated value is higher than the reporting threshold (RON 20,000), as well as
information on card frauds perpetrated by cardholders.
Central Credit File (CCF), which is updated monthly and contains credit risk information reported
by credit institutions;
Overdue Debt File (ODF), which is updated monthly with credit risk information from the CCF on
the cases of failure to observe the repayment schedules over the past seven years at most;
Debtor Group File (DGF), which is updated monthly with credit risk information from the CCF
about the groups of individuals and/or legal entities representing a single debtor;
Card Fraud File (CFF), which is updated on a real time basis and contains information on card
frauds committed by cardholders, as reported by credit institutions.
Foreign exchange credit, accounting for more than half of total nongovernment loans, displayed a significant development
Sample questions
3) Property that is pledged to the lender in the event that a borrower cannot make his or her debt
payment is called
A) collateral.
B) points.
C) interest.
D) good faith money.
Sample questions
4)
5)
The basic components of the credit analysis are (the five Cs):
a. capital, credit risk, capacity, collateral, character;
b. capacity, credit installments, conditions, characteristics of the credit, cash;
c. collateral, credit history, conditions, capacity;
d. character, capacity, capital, collateral, conditions.
6)
7)
unsecured debt.
secured debt.
unrestricted debt.
promissory debt.
Revision
Financial system
How to explain?
Asymmetric Information
Agency theory analyses how asymmetric information
problems affect economic behavior
Adverse Selection (before the transaction)more
likely to select risky borrower
Moral Hazard (after the transaction)less likely
borrower will repay loan
Adverse Selection:
The Lemons Problem
If quality cannot be assessed, the buyer is
willing to pay at most a price that reflects
the average quality
Sellers of good quality items will not want
to sell at the price for average quality
The buyer will decide not to buy at all
because all that is left in the market is
poor quality items
Financial Intermediation
Reduce Risk
Risk Sharing (Asset Transformation< maturity
transformation)
Diversification: You shoudnt put all the eggs in a
basket
Types
Depository institutions
Commercial banks
Savings and loan associations
Credit unions
Investment intermediaries
Finance companies
Mutual funds
Investment banks
others
Questions
1. Financial institutions that accept deposits and make loans are called
________ institutions.
a. Depository institutions;
b. Investment institutions;
c. Contractual savings;
d. underwriting.
2. When an investment bank ________ securities, it guarantees a price
for a corporation's securities and then sells them to the public.
a. underwrites;
b. undertakes;
c. overwrites;
d. overtakes
Questions
3. An important financial institution that assists in the initial sale of securities in
the primary market is the:
a. investment bank;
b. commercial bank;
c. stock exchange
d. brokerage house.
Lecture no 3
BANKING TECHNIQUES AND OPERATIONS
trust;
the
the
the
the
the
relation:
-
the
the
the
the
the
commercial credit
banking credit
consumption credit
bond credit/promissory credit
mortgage credit.
1 nominal interest rate
D
1
1 inflation rate
1 0.2
1.2
D
1
1 1.09 1 0.09
1 0.1
1.1
E = interest
k = initial capital
t= period, in days
z = interest rate.
E k t z 36000
A= initial capital
E = total capital
R = annual interest rate per 1 unit
N = the number of years.
E A * 1
100
E A * 1
100
or
E=
k *t * z
36000
E A* K n
n
R
R
R p
E A * 1
*
*
A * 1
100 100 q
100
p
E A * K n * 1 * R
q
p
K n 1 * R
q
R p R
E A * 1
* 1 *
100 q 100
n
i
R 1001
1
100 * n
n1
where:
i = annual rate of simple interest
within a year;
n = the number of periods of capitalization
1
a) half year capitalization,
n= 2
2
12
R 1001
1 12.36%
2 *100
12
R 1001
1 12.51%
4 *100
The Central Credit Register (CCR) is a system specialising in the collection, storage and
centralisation of information on the exposure of all reporting entities (credit institutions
or mortgage loan companies) in Romania to the debtors that were granted loans and/or
incurred commitments whose cumulated value is higher than the reporting threshold
(RON 20,000), as well as information on card frauds perpetrated by cardholders.
Central Credit File (CCF), which is updated monthly and contains credit risk information
reported by credit institutions;
Overdue Debt File (ODF), which is updated monthly with credit risk information from the
CCF on the cases of failure to observe the repayment schedules over the past seven
years at most;
Debtor Group File (DGF), which is updated monthly with credit risk information from the
CCF about the groups of individuals and/or legal entities representing a single debtor;
Card Fraud File (CFF), which is updated on a real time basis and contains information on
card frauds committed by cardholders, as reported by credit institutions.
6
R1 1001
1 6.09%
4 *100
8
R 2 1001
1 8.24%
2 *100
n1
R1
R2
E A * 1
* 1
100 100
n2
6.09 8.24
50000 A * 1
* 1
100 100
A= 33 025