Credit Programme For Axis Bank

Praloy MajumderKolkata

October 25th 2010

Session One

Loans and Advances

Loan Division

Working Capital Term Loan

Loans & Advances Working Capital

Current Assets funding Term Loan

Current Assets Fixed Assets Other non current assets

Term Loan Margin Money for working capital Margin money for other term loan

Loans and Advances Loan Division

Working Capital

Fund Based Non Fund Based

Loans and Advances Loan Division

Working Capital Term Loan

Current Asset Long Term Asset, Current Asset

Fundamental Concept of Credit Assessment

Very important SlideBusiness

Evaluation

Inflow of Fund Outflow of Fund

IncomeP&L

LiabilityB/S

ExpensesP&L

AssetB/S

Very important slide Inflow Outflow Cash and

Bank Balance

Income > Expenses +Liability > Asset +

Income < Expenses -Liability < Asset -

Working Capital

Production

Sales

Realisation

Repayment

Borrowing

Methods of Assessment of Fund Based Working Capital

FB Assessment Method

MPBF CB TO

I II III

Working Capital Facilities Concept of Working Capital Funding MPBF

CA

OCL

LTA

NWC

FB facility

NFB

CA

OCL

WCG

FA

NCA

NWC

LTL

Company’s CMA

WCG

NCANCA

CA

FA

LTL

LTL

Bank’s CMA

NWCBB

BB

MPBF Process..I II III

A CA CA CCA

B OCL OCL OCL

C=A-B WCG WCG WCG

D=Min NWC 0.25WCG 0.25CA 0.25CCA

E=Est NWC Est NWC Est NWC Est NWC

MPBF Min (C-D,C-E) Min (C-D,C-E) Min (C-D,C-E)

Turn Over MethodThis method is applied for small business houses. The

assumption of this method is very simple. The working capital cycle is 3 months i.e. the sales are

rotated four times a year. The total working capital requirement is 25 % of the projected sales.

Out of this total requirement, at least 5% is to be brought in from long term sources. So the remaining 20% would be minimum amount of fund based working capital to be given to a company.

This is mainly followed for fund based working capital limit of up to Rs 500 lacs.

Export Credit Export Credit

Pre Shipment Post Shipment

Rupee Foreign Currency Rupee Foreign Currency

Export Credit

Receipt Of Order

CompletionOf Order

On board Realisation

OC = RM+WIP+FG

Pre Shipment Credit

OC = Receivable Cycle

Post Shipment

Assessment for FB Limit for Export Credit

As mentioned earlier, the packing credit is the fund based working capital facility given by the bank to meet the expenses incurred till the shipment stage . The following expenses are incurred by an exporter till the shipment stage : 1)    Expenses incurred for purchase of raw material 2)  Expenses incurred for conversion of raw material to

finished goods 3)Expenses incurred for ware housing of finished goods 4)Expenses incurred for putting the goods on board.

As mentioned earlier, the total assessment is carried out in the same manner as the assessment for the domestic working capital and the required NWC of 25% of the current assets is to be brought in by the company

Assessment for FB Limit for Export Credit

Since the fund is disbursed under concessional interest rate, there should be some mechanism that the fund is going for the export purpose.

So any packing credit is disbursed against either LC or confirmed order and the disbursing bank make an endorsement on the LC or Export order so that the company can not avail the export packing credit against the same order from bank. Moreover, the fund under packing credit needs to be repaid from the post shipment credit and for this purpose bank maintains a diary of shipment .

If it is liquidated from the domestic sources, a penal interest rate well above the market is imposed. This prevents the company to misuse the packing credit for domestic purpose.

 

Assessment for FB Limit for Export Credit

After the goods is put on board of ship, the bank provides a post shipment credit to the company.

The post shipment credit is provided on the cost of the goods plus Insurance plus freight . This is popularly known as CIF value.

For promoting export, apart from the concessional interest , the bank do not insists for any margin on Post Shipment Credit.

The entire amount which is disbursed against post shipment credit would be credited to the pre shipment account and the pre shipment credit is closed.

 

Assessment for FB Limit for Export Credit

 So when the bank disburses the packing credit his main concern is the shipment of the goods.

Once the shipment takes place, the packing credit is liquidated.

In the case of post shipment credit , the risk of the bank increases .

This is because in the pre shipment stage , the bank has the finished goods as the security in the post shipment stage the bank is having only receivable which a piece of paper only.

Assessment for FB Limit for Export Credit

To reduce the risk of any delinquency, bank insists on the following :

Generally bank asks for Letter of Credit for Post Shipment Credit

When LC is not available, banks gets credit rating of the overseas buyer from the reputed agencies like Dun and Broad Street

Bank also insists for Export Credit Guarantee Commission ( ECGC) coverage for Post Shipment Finance. This is an insurance coverage for counter party risks.

Bank does not provide the Post Shipment Finance for exporting to countries where there are significant country risk involved

Assessment for FB Limit for Export Credit

After the post shipment finance is disbursed, the same precaution to be taken so that the purpose of concessional interest is not defeated.

The post shipment finance is to be realized only from the Realisation of export proceeds and the export proceeds to be realized in all cases ( except the case of capital goods export) within one year.

If it is not realized within 180 days , details to be given to RBI and the writing off of export receivable requires fulfilment of many formalities.

These formalities would act as deterrent for reaping unscrupulous benefits of concessional interest rate.

Important aspect of Export Credit

The export credit should be used for export purpose not for domestic purpose .

To ensure that bank must ensure the following : At the time of assessment :

Operating Cycle should not be exceptionally long ; Longer operating cycle means export credit is enjoyed by the borrower for longer period. ABC Limited’s actual operating cycle for export is 30 days and cost per day is Rs 1 lacs the current asset is Rs 30 lacs .

If borrower projects an operating cycle of 60 days and cost per day kept at same at Rs 1 lacs the current asset is Rs 60 lacs.

The borrower can get more export credit than required and it can use Rs 30 lacs additional fund in other than export .

Important aspect of Export Credit

This can also be method for money laundering :Higher profit margin means higher inflow of

dollars ;From this dollars , payment is made to Indian

local marketing agent ;This marketing agent may be part of money

laundering racket. KYC is very important in export credit.

Post shipment credit Post Shipment

Credit

Bill Discounting Advance against Bills for collection

Advance against Duty draw back

Receivable

Liquidation Source Liquidation

Source

Specific Export

Bill

Other Unfinanced Export

Bill EEFC Account

Session Two

Different Working Capital Products

Cash Credit Working Capital demand Loan Bill Discounting

Drawer Bill Drawee Bill

MIBOR Linked Products LIBOR Linked Products

Cash Credit Fund Based working capital Limit can be

availed in the form of Cash Credit Cash Credit is like a current account Borrower can deposit and withdraw any

number of times during the period The maximum amount of outstanding would be

the Drawing Power or Limit whichever is lower The borrower has to submit stock statement

on a periodic basis and based on the stock statement the drawing power is fixed

Cash Credit Interest rate is linked to Base Rate Interest rate is charged on the amount of

outstanding on the daily basis The interest needs to be paid generally on

monthly basisThis is the most popular working capital productDrawback :

Cash Management at the hand of bank Bank should charge higher interest rate

Working Capital Demand Loan

In the case of working capital demand loan , the borrower would mention at the time of borrowing for what period it is borrowing

The borrower has to repay the money within the stipulated time frame

The cash management is at the hand of the borrower

Interest rate charged for this loan would be lowerDrawing power and issues related to stock

statement would be same like cash credit

Bill Discounting Bill Discounting

Drawer Bill Discounting

Drawee Bill Discounting

With LC Without LC

Bill Discounting Bill Discounting

Drawer Bill Discounting

Drawee Bill Discounting

Receivable Financing

Replacing Receivable Financing with

Bill

Replacing creditor in OCL with

Other bank

Drawee Bill Discounting

Buyer ApproachesSelller

Buyer/Drawee

Seller/DrawerSeller Asks

Buyer to Open LC

LCIssuing

Bank

Approaches for LC

O

pening

Advising Bank

LC opened

Advises

Sends Bills of Exchange And other Documents

Accepts docum

ents and deposits

Negotiating Bank

Sends documents

Seller gets Paym

ent

Goods dispatched

Pays on due date

Pays on due date

Bills Discounting outside MPBF

Finance for Bill Discounting is part of receivable financing .

If the drawer enjoys fund based working capital facility it is getting finance for current asset : Inventory Financing Receivable Financing

Under receivable financing : Open Account Receivable financing : Invoice Financing Bills Receivable

If other banks provide drawer bill discounting financing , the payee bank under bill discounting has to follow the following practice :

Bills Discounting outside MPBF

No Objection in Lending from existing lender .Failure of this would mean violation of existing

contract with borrower and existing lender Negative covenant

The disbursed amount to be credited by A/C Payee cheque to the existing lender of the drawer and the payee bank under bill discounting has to take care of this formalities.

The same amount would have to be reduced from the drawing power of the drawer up on receipt of the A/C Payee cheque of the payee bank.

Under no circumstances , this is outside the MPBF .

Commercial Paper-Who can issue CP??

A company, Primary Dealer and All India Financial Institutions can issue CP. In the case of a company the following criteria needs to be fulfilled :o The TNW of the company as per latest audited balance sheet

should not be less than Rs 4crores;o The Company has been sanctioned a working capital limit by

Banks and /or all India Financial Institutions o The Borrowal Account is classified as Standard assets by the

bank/FIs. In the case of Primary Dealer and All India Financial

Institutions , RBI permits them to issue CP to meet their short term funding requirement within an umbrella limit specified by the RBI .

Interest Rate SituationGDP Low Low High

Inflation Low High High

Interest Low ? High

Interest Rate Situation- IndiaGDP 9% 8.5%

Inflation 6% 10% Low/High

Interest Increased

Interest Rate Situation- USGDP 4% 1.5%

Inflation Low

Interest Low

Conclusion Domestic rate would be higher LIBOR related rates would be lower LIBOR borrowing would be preferred

compared to domestic borrowing LIBOR rates are also associated with

exchange riskThis needs to be taken into account before

borrowing

Foreign Currency Borrowing India has USD 280 billion FX Reserve FX Reserve means amounts of dollar India has This balance has been built up by net of Inflows and Outflows:

Inflows : Export Capital Account Inflows

Loans Investment in Capital Market Recovery of assets

Out flows : Import Capital Account Outflows

Purchase of Assets Repayment of Loan

Foreign Currency Borrowing Permanent foreign currency is when country is having

trade surplus India is trade deficit country Dollars are not India’s dollarsThis is outsiders money So RBI would not allow this lenders to lend in the short

term market easily So restriction on Short Term Lending in the form of

Foreign Currency would always be there

Foreign Currency Borrowing Foreign Currency

Borrowing

Short Term

( Maximum Restriction )

Medium Term( Medium

Restriction )

Long Term( Minimum

Restriction )

Foreign Currency – Short Term Borrowing

Short Term

Import – Yes Export – No

Only through TC for the imported

Portion

Import – No Export – Yes Only through

PCFC and PSCFC For export portion

Only

Import – NoExport – No

Only through FCNR(B)

Suppliers credit Supplier would :

Inform Indian buyer that it would arrange the fund

Indian buyer has to give a guarantee LOU SLC

Overseas lender would be lending to Indian buyer on the strength of suppliers recommendation and LOU/SLC

Buyers credit Buyer would be arranging foreign credit on its own

other than the buyer’s own working capital banks Buyer would be charged higher rate in case of

borrowing in the form of domestic rupee sourcesBuyer would be approached by other banks to arrange

the fund in foreign currency Buyer would be asking its own working capital bank to

give the LOU/SLC

Sources of Buyers Credit Indian Banks would get a sanction of Foreign

Currency Limit from the over seas bank BOM would get a sanction limit from JPMC for

USD 200 million The interest rate for this limit would be

primarily depend on : Country’s strength Country’s banking sector strength Individual bank’s strength

Sources of Buyers Credit The difference among banks for borrowing cost from

JPMC would not be very high The competitive advantages would be very less among

banks in this form of funds The spread would determine the product selling aspect The spread is dependent on the Individual bank’s

marketing policy as well as cross subsidisation policy .There is a huge opportunity on this area.

Session Three

Non Fund Based Product

Letter of Credit

Issuing Bank/Opening Bank

Applicant/Buyer/Drawee

Beneficiary/Seller/

Drawer

Advising Bank/Confirming

Bank

Sends Invoice

Applies to bank

Bank Opens

LC

Advises LC

Negotiating Bank

Ships Goods

Submits

Docum

entsFor N

egotiation

Payment

Made

Sends Documents

Sends documents for

Acceptance

Accepts

documents

Sends Confirmation

Payments M

ade to B

ank

Payment Transmitted

Goods Receipt

LC for routine operation Purpose of LC :

Purchase of RM ;Finding out total RM to be purchased

Cash Purchase Credit Purchase

With LC Without LC

Assessment of LCSl NO Particulars Source

I Estimated/ Projected consumption of Raw Material & Spares

Form II

II Opening Stock of Raw Material & Spares

Form III

III Closing Stock of Raw Material and Spares

Form III

IV Purchase of Raw Material and Spares

1+3-2

Assessment of LCSl NO Particulars Source

V % of Purchase on Cash

VI % Of Purchase on Credit

VII % of Credit Purchase on LC

VIII Average lead time

IX LC amount ( Limit) (VII/360/VIII)

Importance of operating cycle and LC payment

Applicant would pay LC from selling proceeds of materials purchased under LC.

This is operating cycle of the company .If a company is having an operating cycle of 6

months and LC usance period is 3 months , portion of LC payment has to be arranged from someone else.

Bank may have to think providing CC limit or Trade credit during time.

Bank Guarantee ( BG) BG are of two types :

Performance Financial

Financial guarantees are required :For submitting tender For taking mobilisation advance For taking secured advance

Different Banks involved in a LC

Issuing Bank : The bank which issues the LC. If the applicant does not pay , Issuing Bank has to pay

Proper assessment of applicant’s repayment capability Proper terms and conditions stipulations so that real goods

are shipped Advising Bank : The bank which advises the LC.

The authenticity of LC is the prime concern Confirming Bank : The bank would pay if the issuing

bank does not pay. Confirming bank would take a call on issuing bank Confirming bank would take a call on the applicant

Different banks involved in LC

Negotiating Bank The bank which discounts the bill and make the

payment to the beneficiaries. Negotiating bank would be seller’s bank Proper scrutinising of documents under UCPDC

600 is the main function Negotiating bank can be another branches of

issuing bank and confirming bank

Types of LCLC :

Import Inland

LC :Revocable Irrevocable

LC :Restricted Un restricted

Types of LCLC :

Green Clause Red Clause

LC :Back to backTransferable

LC:Revolving Non revolving

Time scale of BG of a construction Company

Bid Bond

Award

Performance GuaranteePerformance Measurement

Mob Advance

Progress Report

Performance Guarantee

Retention Amount

Bank Guarantee ( BG) Performance Guarantee is required for

releasing retention money. Bank must comprehend the entire process .Finding out the requirement at each stage.Number of issued guarantees to be returned

during this period.Closing balance of bank guarantee.

Bank Guarantee Assessment –Fresh Guarantee

Activity Type of Guarantee

Calculation Average Tenure

Participating in a Tender

Financial guarantee

(100/Success rate) * targeted

job

Tenure of Bid Bond

For mobilisation advance

Financial guarantee

Mob advance % of the contract * contract to be started during

the year

Tenure of BG for Mod Advance

Secured Advance Financial Guarantee

Secured advance % * job for which secured advance

is eligible

Tenure of BG for Secured Advance

Retention Money Performance Guarantee

% of works completed

Defect Liability Period

Bank Guarantee Assessment –Fresh Guarantee

Type of Guarantee

Opening

Balance

Fresh Guarante

e

Expiry of existing

Guarantee

Closing Balance

Financial guarantee – Bid

BondFinancial

guarantee- Mob Advance Financial

Guarantee- Secured Advance

Performance Guarantee-

Retention Money

Total Guarantee Limit

Important Terms and Conditions

Mobilisation advance diversion Guarantee issuing bank is at riskProper monitoring of progress of the projectAt the time of issuance of Mobilisation

advance Projected performance report Projected cash flow statement Reading of the contract

Important Terms and Conditions

Monthly progress report In the same format as to be submitted to the

authority External engineering appointment in case of

necessity Meeting with the department Necessary action in case of any difficulty

Difference between LC & BGLC is paid for performance of the beneficiary

and BG is paid for the non performance of the applicant

LC is paid most of the times , BG is not paid most of the times

LC is less riskier where as the BG is more riskier

LC can be discounted , BG can also be discounted

Type of Banking Sole banking Arrangement : When the entire

working capital facility is taken from a single bank it is called sole banking arrangement .If the working capital requirement is not very large , a company would prefer sole banking arrangement.

Type of Bankingo Consortium Banking Arrangement : When the working capital

requirement is large, a single bank may not be willing to lend such large amount .In that case , the company must go for a banking arrangement where more than one bank is involved. One type of banking where more than one bank is involved is called Consortium banking arrangement. Under this method, a bank assumes the role of a leader and the bank is called Lead Bank.

o Lead bank assesses the limit and then informs other bank about the limit. The other banks joins an association and this is called as Consortium. Once the leader assess the limit it informs the other member bank and other member banks carry out its own assessment and inform the lead bank about the share they are taking . Once this is formalized , a meeting called consortium meeting is called and the process for disbursement of fund takes place.

Type of Bankingo Multiple Banking : When the requirement of working

capital is large, more than one banking would be involved. In this case, apart from the consortium banking , multiple banking arrangement is also possible. Under multiple banking arrangement , the limit is assessed by individual banks and individual banks take exposure.

o The benefit of multiple banking is that in case of consortium banking there is lot of rigidity from the point of view of the company. In case there is more requirement of working capital and even though other member banks wants to disburse their share , they can not do anything unless the lead bank approves the limit. This cause some delay which can hamper the business of a company. In case of multiple banking , such problem is not there.

Primary Security …A Primary Security with respect to a particular

type of finance is defined as the security which is created out of that finance. For example, when working capital is provided , current assets are build up from the working capital . In this case, the current asset is called as Primary security.

Similarly for term loan the Primary security would be the fixed assets.

Collateral Security …A collateral security with respect to a particular type of

finance is defined as the security on which charge is created even though the security is not created from the sad finance. For example, in case a charge on the fixed asset of a company for working capital loan is created, the collateral security is the fixed asset.

Procedure for Charge Creation

Lien : Under this process, security is created on financial asset. The name of the liability holder is marked on the face of the financial instrument as lien. Under this system, the ownership is with the borrower where as the possession is with the lender. The security is created on financial assets.

Pledge : Under this process , security is created on both financial and physical assets. In the case of Pledge, the ownership is with the borrower where as the possession is with the lender. The lender can keep the assets in its own premises or in other premises.

Procedure for Charge Creation

Hypothecation : Under this process, security is created on physical assets. In the case of hypothecation, both the possession and ownership is with the borrower. For creation of hypothecation, charge needs to be created for limited company.

Mortgage : For immovable property, mortgage is created. In the case of mortgage, the possession and ownership is with the borrower. But mortgage is created on the immovable property where as the hypothecation is created on movable physical assets.

Comparison…Name of Process

Ownership of the Asset

During the tenure of the

loan

Possession of the Asset

During the tenure of the

loan

Type of Asset on

which charge is created

Governing Statute

Lien Borrower Lender Financial Asset

Indian Contract Act

Pledge Borrower Lender Both Financial Asset and Movable Physical Asset

Indian Contract Act

Hypothecation Borrower Borrower Movable Physical Asset

Indian Contract Act

Mortgage Borrower Borrower Immovable Physical Asset

Transfer of Immovable Properties Act

Security Borrowing

Secured Unsecured

Senior Subordinate Senior Subordinate

Exclusive

Paripassu

Exclusive

Pari passu

Exclusive

Pari passu

Exclusive

Paripassu

Comparison of Hypothecation and Pledge

Pledge versus HypothecationA pledged article can be sold in case of default without

any reference to a court of law, but not a hypothecated article.

The only apparent benefit of hypothecation is it allows the borrower owner of the hypothecated asset continuous use of the asset without any hindrance.

But this is no big deal as in pledge too the asset after taking possession of by the creditor can be given back to the pledger borrower who holds the assets in trust for and on behalf of the pledgee creditor.

Pledge versus HypothecationLegal positions may be different but for all practical

purposes, (i.e. use of the assets for business) are served with same effectiveness.

A pledger merchant can run his business without the tribulation of taking the assets to and fro the bank’s warehouse as if he were a mere hypothecator.

However, in hypothecation the creditor’ position gets more weakened than what is suggested by the absence of an amorphous property interest.

Pledge versus HypothecationSince in pledge the debtor holds the securities in trust on

behalf of the creditor and since a breach of trust is a criminal offence in most jurisdictions, if the borrower removes the assets or sells the assets and does not deposit the sale proceeds in the loan account he becomes liable to be charged for the criminal offence of breach of trust

In addition to the civil liability he carries - of an undischarged debtor.

On the other hand, in hypothecation the lender only gets a charge, which entitles him priority in recovering dues from the sale proceeds of the assets without any element of 'entrustment of the property‘

Pledge versus HypothecationConsequently misappropriation of

hypothecated asset generally does not give rise to any criminal offence and the lender cannot invoke the majesty of State to his aid which he invariably does in case of misappropriation of a pledged asset entrusted to the borrower.

Mortgage The transferor of the interest is called a mortgagor, the transferee a

mortgagee; the principal money and interest of which payment is secured with the property are called the mortgage-money, and if mortgage is created by a document that document is called a mortgage-deed.

Mortgages, in some jurisdictions, can indeed be created without a mortgage deed. An example of such a mortgage (i.e. mortgage without a mortgage deed), by far the most common form of mortgage in India, is mortgage by deposit of title deeds.

In such a mortgage a person (mortgagor) delivers to a creditor (mortgagee) document of title to immovable property, with intent to create that property a security for an existing or prospective loan. The mortgagor must be the title holder and must be deriving his title from the documents being deposited, and must deposit the title deed with an intent to create a mortgage.

MortgageDifference between a “legal mortgage” and an “equitable

mortgage”:This requires appreciation of differences between law and

equity; not equity of finance and economics which denotes ownership (as in home equity loan) but equity of law which resembles natural justice and which has given us such a useful word as equitable.

The practice of transferring some property right by deposit of title deeds was common in England and British administrators allowed it at selected centres in India.

Though there was no provision for mortgage by deposit of title deeds in any law (before 1882), such a mortgage has been as effective as a simple legal mortgage so far as availability of legal remedies is concerned.

Mortgage In India there are five types of mortgages recognized in the Act.

A simple mortgage is created by a mortgage deed and gives only a non possessary interest to the mortgagee, just like a mortgage by deposit of title deed.

In another type called mortgage by conditional sale, the property is sold to the mortgagee but the sale is conditional, which becomes absolute in case of default and becomes void on repayment of mortgage money.

In yet another type of mortgage called usufructuary mortgage the mortgagee enjoys the benefits of the property (rent or crop etc) until the mortgage money is repaid. Usually this benefit is adjusted against the mortgage money.

MortgageIn India there are five types of mortgages recognized

in the Act. In English mortgage the mortgager makes absolute

transfer of the property but retains the right to redeem it by repaying the mortgage money as per agreement. (Incidentally English mortgage is no longer valid in the UK.)

In a rare instance of fresh open mindedness the Indian law provides for a sixth type of mortgage describing it as a mortgage which is not one of the five types described earlier!

MortgageLet us take a look at the interest passed on to the

mortgagee in these different types of mortgage. In simple mortgage, usufructuary mortgage and mortgage

by deposit of title deed the mortgagee needs to obtain court order fro selling the property.

In other two, viz. mortgage by conditional sale and English mortgage the mortgagee can sell the property, without requiring a court's permission, if mortgagor fails to repay the mortgage money.

In both these cases the registration of mortgages attract stamp duty and court fee as applicable in transfer of properties.

Negative LienNegative lien does not relate exclusively to immovable

properties. Negative lien does not create any encumbrance on the

property. Negative lien denotes that the issuer of the debt will not create any charge or encumbrance on its unencumbered property in favour of any body in future without creating same charge in favour of those who would be subscribing to the present debt issue.

Since it is a conditional promise to create a charge it does not create any security.

Meaning of chargeA charge is not passing of any property interest in any

asset from the charge-giver to the charge-holder, as evidently is the case in pledge and mortgage.

Having a charge means having a priority in recovery of one’s dues from the liquidation proceeds when the charged asset is liquidated.

It can be described as the creation of a right of payment out of an immovable or movable asset. It entails no transfer of interest.

Position of 1st Charge vs 2nd Charge…

Let us take an example .A lender provides a working capital loan of Rs 25 lacs against a first charge on current assets of the company values at Rs 32 lacs. In the case of liquidation of the company, the lender on liquidation of the current assets would get Rs 32 lacs and it would first appropriate Rs 25 lacs and the remaining Rs 7 lacs would go to the second charge holder if any.

Generally, the working capital banker would take the first charge on current assets and second charge on fixed assets . The term lender on the other hand take first charge on fixed assets and second charge on current assets of the company .The purpose of taking second charge of a company is to increase its security coverage.

Exclusive v/s Pari Passu Charge

Now the first charge can be on the basis of exclusive charge or can be on pari passu basis. In the case of exclusive charge , a lender gets the entire realization obtained from the liquidation of the asset. However , when the credit facility is significantly large, more than one bank is involved .

For example, a company has been sanctioned a working capital limit of Rs 50 crores and the total amount of working capital facility would be provided by say 4 banks each providing Rs 12.50 crores . Since all the banks are lending against the same current assets of the company , the charge is created on pari passu basis.

Now if the value of the security is say Rs 60 crores, in case the charge is created on pari passu basis, each bank are entitled to get Rs 15 crores each from the realization of the current assets of the company.

Thank You