Credit, Debt, and Finance

Guarantee is issued in favour of the beneficiary, who requires security against the risk of the principal’s non-performance or default under the primary contractual obligation.

Conditional Payment Undertaking – This is an instruction to the bank from an account holder to pay a sum of money to a creditor on completion of certain conditions. This bond is a post contract instrument that is used to pay off agents and contractor on completion of a project.

Second beneficiary is one of the other parties involved in Letter of Credit. Second beneficiary who represents the first beneficiary or original beneficiary in their absence, wherein the credits belonging to original beneficiary is transferable as per terms.

Correct Answer: All of the above are correct.  All given options are correct as per the Banking Regulations Act.

Mortgage by conditional sale is where, the mortgagor ostensibly sells the mortgaged property on condition that on default of payment of the mortgage-money on a certain date the sale shall become absolute, or on condition that on such payment being made the sale shall become void, or on condition that on such payment being made the buyer shall transfer the property to the seller, the transaction is called mortgage by conditional sale and the mortgagee becomes a mortgagee by conditional sale.

A charge means an interest or right, which a lender or creditor obtains in a property of a company by way of security that a company will pay back the debt. When a charge is created, it has to be registered with the Registrar of Companies.

Section 2(16) of the Companies Act, 2014 defines charges so as to mean an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.

SARFAESI Act, 2002 gives powers of “seize and desist” to banks. Banks can give a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. If the borrower fails to comply with the notice, the Bank may take recourse to take possession of the security for the loan, sale or lease or assign the right over the security and manage the same or appoint any person to manage the same.

The expression “property” is defined in various laws in India, the latest being Section 2(1)(t) of the SARFAESI Act which defines property as: 

(i) immovable property (ii) movable property (iii) any debt or any right to receive payment of money whether secured or unsecured (iv) receivables, whether existing or future (v) intangible assets, being know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature.

The Debt Recovery Tribunal (DRT) can hear claims of banks only if the amount claimed is Rs. 10 lakhs and above. 

Forfaiting is the purchase of a series of credit instruments such as drafts drawn under time, letters of credit, bills of exchange, promissory notes or other freely negotiable instruments on a "non-recourse" basis (non-recourse means that there is no comeback on the exporter if the importer does not pay). The forfaiter deducts interest (in the form of a discount), at an agreed rate for the full credit period covered by the notes.

In recourse factoring, the factor does not take on the risk of bad debts. The factor will be able to reclaim his money from you even if the customer does not pay. The factoring agreement will specify after how many days of the due date, you must refund the advance. 

Credit risk may take the following forms: In the case of direct lending, principal/and or interest amount may not be repaid. In the case of guarantees or letters of credit, funds may not be forthcoming from the constituents upon crystallisation of the liability. In the case of treasury operations, the payment or series of payments due from the counter parties under the respective contracts may not be forthcoming or ceases. In the case of securities trading businesses, funds/securities settlement may not be effected. In the case of cross-border exposure, the availability and free transfer of foreign currency funds may either cease or restrictions may be imposed by the sovereign.

Factoring may broadly be defined as the relationship, created by an agreement, between the seller of goods/services and a financial institution called the factor, whereby the latter purchases the receivables of the former and also controls and administers the receivables of the former. Since the client’s debts are purchased by the factor and amount is paid to the client, it serves as off-balance sheet finance and appears in the balance sheet only as a contingent liability in the case of recourse factoring. In case of default by the buyer, the client will have to refund the finance amount to the factor. But in case of non-recourse factoring, it does not appear anywhere in the financial statement of the borrower. Thus, factoring services help the client to improve the structure of balance sheet.

Bond is a negotiable certificate evidencing indebtedness, a debt security or IOU, issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bondholder periodic interest payments over the life of the loan.