Revolving loan or revolving credit is the bank facility, where the bank sets the limit of the facility before disbursement, and the borrower can deposit and withdraw the amount within the limit. The borrower can use the fund frequently within the limit. Normally, continuous deposit and withdrawn are observed in the revolving loan.

The revolving loan could be compared with credit card and overdraft where the borrower can continuously use this loan by paying only interest amount. This loan allows the loan taker to use it repeatedly. The interest rate of this loan is extremely high and monthly compound interest is applicable to the loan. It has a low monthly re-payment to keep the credit active.

The bank usually fixes the minimum sum of the monthly payment which the borrower need to pay as installment. But subsequently the borrower can withdraw the amount if it is covered in the limit of the loan. However, if a borrower pays down total sum at each month, the compound interest will not be charged to him.

Advantages of Revolving loan:

• Continuous uses of fund.
• Eliminates fund constraints.
• Deposited installment can be used again.
• Compound interest could be avoided by paying the full amount in each month.

Disadvantages of Revolving loan:

• The interest rate is excessively higher.
• The borrower can not free from debt for continuous uses.
• Annual fees are applied.
• Unnecessary purchases could be made.

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 Definition of UPAS LC

UPAS LC refers to “Usance Payable at Sight”, is the combination of Usance LC and UPAS LC. When the agreement made through Usance LC, the buyer will reimburse after particular time i.e. after receiving the goods the buyer takes time for the payment. Again, sometimes the buyer may not have surplus fund to pay the LC’s amount but the goods is very needed for the importer. What will the importer do for opening LC? The importer will consult with his bank regarding the issue and the bank may assure him to pay on behalf of the importer.

LC Commission is charged by issuing bank on a quarterly basis and the charge interest against the LC settled amount. Two sources of finance of UPAS LC are discounting the Export Bill and buyers credit. Buyers Credit is used as a source of finance to settle the LC payment.

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The situation of UPAS LC happens when the exporter/beneficiary want immediate payment for his goods but the applicant may not have the facility with his bank to issue sight LC’s.

Under this Letter of credit, the exporter will get the payment at sight if the documents are credit compliant. The importer will be charged interest, acceptance commission and other charged as per the terms of LC for using this letter of credit.

On the other hand, if the applicant provides Usance LC and the beneficiary will arrange to get the bill immediately from his bank, is called discounting. Usually, the discount fee and interest will be charged against the account of the beneficiary.

Conditions for using UPAS Letter of Credit

• Customers using UPAS LC must satisfy all conditions exists in LC
• The customer will present the usance draft
• This usance draft will be paid by discount on at the sight basis

Benefits to Exporter

For the following reasons an exporter intends to use UPAS LC:

• The exporters will receive money immediately from the discounting bank
• Reduces “Days Sales Outstanding (DSO)” with receipt of payment “at sight”
• Increases the marketability of products by providing buyers with the incentive of extended payment terms
• Keeps the integrity of the price, as the seller does not need to build in the cost of covering extended payment terms
• Maintains quality of receivables because payment assurance is still secured through the letter of credit
• Strengthens relationships with buyers by allowing for extended payment terms and the availability of lower-cost financing

Benefits to Importer

UPAS LC is flexible not only for the exporter, but also it gives some benefits to the exporter, which are enumerated below:

• The interest rate is comparatively lower than any other finance
• It helps to optimize working capital
• Payment to be deferred up to 360 days
• Foreign currency may be bought at the preferential price
• This is a simple and convenient method
• This LC strengthens the relationships with the exporter by allowing for payment at sight.
• It enhances Days Payable Outstanding (DPO) by providing extended payment terms
• It helps to provide an additional source of liquidity

Cost of UPAS LC and Who will pay? 

The costs of UPAS LC and costs of other LC are almost similar. Following cost are associated with LC/UPAS LC:

The cost will be paid by the importer:

• LC issuing Commission
•  LC Transmission Charge
• Acceptance Commission
• Reimbursement Charge: As beneficiary usually claims full payment, reimbursement expenditure will be borne by the applicant (issuing Bank)
• Interest on funding for UPAS LC

The cost will be borne by the exporter:

• LC Advising Charge
• LC Confirmation Charge.
• Discrepancy Charge
• Payment Charge

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Credit Period of UPAS LC

UPAS Funding for raw materials would be extended to 180 days, but in case of capital machinery, this credit term would be 180 days/ 270 days/ 360 days/ 720 days.

Difference between UPAS LC & Usance LC

The difference between UPAS LC and Usance LC are enumerated as follows:

1. In case of UPAS agreement the beneficiary will get benefit at sight, and in case of Usance LC the beneficiary will get benefit after a certain period of time.
2. Both UPAS and Usance LC, the beneficiary enjoys usance facilities.
3. In case of UPAS LC the bank the bank will make payment at sight by creating a loan against Importer but in case of Usance LC the payment will be made after a certain period of time.
4. Usance LC is the suppliers’ credit and UPAS LC is the buyers’ credit.

Conclusion

There is no basic difference between Usance Payable at Sight Letter of Credit and Traditional usance letter of credit except for interest charge. In this respect, interest is charged additionally for using UPAS LC fund i.e. LC payment made after a particular period of time. Under UPAS LC, the extended payment terms of buyer don’t affect the exporter as exporter receiving payment on due time. The buyer pays its issuing bank at the end of the payment term as mentioned in UPAS LC.

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Bank Guarantee (BG) becomes a very popular commercial tool in present business. The BG is used for several purposes, like, the seller of commodity wants the security of his credit sales revenue, and the client wants the appropriate service from the contractors. If the buyer fails to pay the due amount within a reasonable time or ignores the sellers request, the seller can encash the BG. Again, if the contractor doesn’t perform as per the agreement or as per the specification, the client can also encash the BG. Actually, the Bank is doing all the process and taken the responsibility on behalf of clients.

Definition of a Bank Guarantee:

Bank Guarantee is the promise of a commercial bank where the commercial bank gives a guarantee to settle the liability of a particular debtor if contractual obligations are not met. The bank offers to stand as the guarantor on behalf of a business customer in a transaction. The normal Bank Guarantee fee is 0.5% to 1.5% of the guaranteed amount.

When the customer fails to pay the guaranteed amount, the bank will cover the loss on behalf of customers. Subsequently, the bank will recover the money from the client. Bank Guarantee protects the company from the probable losses.

How Bank Guarantee is initiated?:

Bank Guarantee is the agreement between 3 parties i.e the bank, the beneficiary and the applicant. The applicants of bank guarantee is one who seeks the bank guarantee from the bank and the beneficiary is one who takes the bank guarantee. Business Customer and Individual customer both may use bank guarantees to secure the sales amount. Bank Guarantee is not difficult to obtain. The Account holder contacts the bank and fills out an application that identifies the guaranteed amount of and the reason for the guarantee. Applications mention a specific period of time for which the guarantee should be valid and any special condition for the payment and details about the beneficiary. Collateral may require some time. This can be in the form of a pledge agreement for assets, such as stocks, bonds or cash counts. However, liquid assets are not acceptable for collateral. Bank Guarantee are an important banking arrangement and play a vital role in promoting international and domestic trade.

Types of Bank Guarantee:

There are several types of Bank Guarantee a business can be used, such as:

• Performance Guarantee – is made between a client and the contractor to ensure that work will be done as per the agreement.
• Bid Bond Guarantee – Through Bid bond contractors ensure that the contractors will ensure the bid contracts and will fulfill the job responsibilities at agreed price.
  
• Financial Guarantee – Given the guarantee to take the responsibility for another company’s financial obligation if that company can not meet its obligations.
  
• Advance or deferred payment guarantee

Why Bank Guarantee is Needed?:

Through bank guarantee the bank assures the customers regarding the receivable amount. Before issuing bank guarantee in favour of applicant, bank collects the information of applicant and try to confirm whether the applicant can pay the guaranteed amount within the mentioned time. Bank Guarantee reduces the counter party risks. Normally, financial institution is very sure regarding the financial health of the applicant.

This arrangement is made commonly between a small firm and large organization – Public or Private. The larger organization wants protection against Counter party Risk, so it requires that smaller organization receive a bank guarantee in advance of work.

Examples of Bank Guarantee::

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• Syndicated loan is offered by a group of lenders.
• Usually, large project use syndicate loan.
• Only one Sanction letter is used here.
• Interest or profit is shared among lenders as per agreement

What is Syndicate Loan?

Syndicated Facility is offered by a group of lenders to a single borrower when the loan amount is larger than the normal range.

The group of lenders sanction the loan amount on the same loan agreement i.e. Only one sanction letter uses for disbursing the loan amount. The lead arranger offers to other banks for their participation in the syndication process. Usually syndicate loan offers when the loan amount is larger for the single bank or lender. The common advantage of syndicate loan is that it allows to spread the risk among other banks. The interest rate would be fixed or floating.

Features of Syndicate Loan

1. Loan size is larger than any other finance and uses for new projects, large equipment procures.
2. Less time and effort for financing. Lead Arranger is responsible for doing the preparation of work of establishing the syndicate after the borrower and the arranger have agreed on loan terms by negotiation. At the implementation stage of the loan, the borrower does not need to face all members of the syndicate, and withdrawal, repayment of principal with interest and other management work related to the loans shall be fulfilled by the agency bank.
3. Syndicated Loan may be given in various forms such as fixed-term loans, revolving loans, standby L/C line on requirements of the borrower. Meanwhile, the borrower can also choose RMB, USD, EUR, GBP, and other currency or currency portfolio, if needed.
4. It can help borrowers establish a good market image. Successful establishment of the syndicate comes from the participants’ full recognition of the borrower’s financial and operational performance, by which the borrower can build up their reputation.

Participants of Syndicate Loan

The participants in syndicated loan are usually international banks of a wide variety of countries. Sometimes a borrower may include a lender in his preference list due to personal relationships. The Lead Manager may also include certain institutions as a result of its own business relationships, particularly reciprocity. Besides the lead manager, other syndication members include the co-manager banks, participating banks and the agent bank which are enumerated as follow:

• Lead Manager, or Lead Bank, or Lead Arranger: Lead arranger is the bank who is responsible for arranging the loan. The lead arranger is responsible for the total negotiation like structure, interest rate and other terms of the facility with the borrower. Lead Bank also organizes the participating bank, manages and supervises the preparation of loan documentation.
• Co-Managers: Lead arranger handles most of aspects of the loan and Co-manager will decide who should participate in the syndication process, to determine fees to be charged to the borrower, time table of certain events to be accomplished, determining the expenses and listing the legal documentation.
• Participating Bank: Participating Bank participates in the syndication loan process. The rate of interest usually set with the negotiation of Lead Bank.
• Agent Bank: The Agent Bank acts as the agent of Lenders, not for the borrower. Its main duty is to act as conduit in the channeling payments to and from the borrower. When the borrower repays the capital, it only pays one sum to the Agent Bank and the Agent Bank distributes it to the lenders according their participation. Point to be noted that some times the agent Bank and the lead bank would be the same person.

Contents of Syndicate Loan

Currency: Multiple currencies can be used in a single syndicated loan on demand of the borrower.

Loan Term: Three to five years (3-5) for short term loan, Seven to Ten (7-10) years for medium term loan and Ten to twenty (10-20) years for long term.

Interest Rate: The price of the syndicated loan is composed of loan and fees. The lending interest rate is set according the interest policies of the banks.

Charges: Charges may includes arrangement fees, underwriting fees, agency fees, a commitment fees etc.

Customers of Syndicate Loan

• Borrowers who require long-term and large-amount loan.
• Borrowers with high reputation in the industry, whose operation ability as well as financial and technical strength are recognized by most banks.

Conclusion

Syndicated loans are usually too large for a single lender to handle. The lenders of the Syndicated loan are composed of Big banks. But Financial institutions like mutual funds and the insurance company may also participate in this type of lending.

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Contra entry refers to transaction which affect both Cash and Bank simultaneously, i.e. Where debit and credit are Cash or Bank A/c. The word “contra” means “Opposite” which is a Latin word. The voucher which records contra entry is called “Contra Voucher.”

Again, we can say, any transactions relating to transfer of Cash between one cash a/c to another cash a/c, or one cash a/c to another bank a/c or one bank a/c to another bank a/c or cash a/c, is called a contra entry.

The contra transactions can be transferred in the following manner:

• Cash deposited to Bank A/c
• Cheque withdrawn from the bank and transferred in Cash A/c.
• Transfer from one Bank A/c to another Bank A/c
• Cash A/c to Petty Cash A/c.

The transactions incurred in the above manner, will be considered as a contra entry.

However, a contra entry is also used in the inter company netting to offset receivables and payables between two different legal entities/subsidiaries of a company so that one final amount remains.

Examples of Contra Entry:

Here is the list of transactions from where you can identify the contra entry and non-contra entry. The reasons are stated for your easy understanding:

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Definition:

Share Warrant is a document which is issued by a Public Listed Company (PLC) under its common seal, stating that the bearer of this document is entitled to the shares or stock as specified in the warrant. Without registration, share warrant can be transferred to another person.

Share warrant is a negotiable instrument and mere delivery the transfers the ownership of the shares. In the document (Share warrant), the name of the shareholders is not mentioned, and the coupon rate is attached to the warrant and the date of dividend payment will be mentioned.

The holder of the share warrant can take a share certificate if the holder surrenders the share warrant and pays the required fees for the issue of share certificates. The company will cancel the warrant and issue a new share certificate after completing required formalities and will enter the name in the register of members.

The general rule is that the holder of the share warrant is not the member of the company, but the articles of association can insert the relevant clause and can make it valid.

Conditions for issuing Share Warrant:

The following conditions need to be fulfilled for issuing share warrants:

• Only a Public company can issue share warrants.
• Authorization of Articles of Association is obligatory.
• The shares must be fully paid-up.
• Government Approval is mandatory.

Advantages of Share Warrant:

• Share mentioned in the share warrant can be transferred by share warrant exchange.
• The bank accepts share warrant as a security of the loans.
• Future dividends can be provided by attaching dividend coupons with the share warrants.

Disadvantages/Limitations of Share Warrant:

Besides advantages share warrant has some limitations which are enumerated as below:

• Bearer is not the member of the company
• The Bearer will be considered as the owner of the warrant, but sometimes it can be lost by the real owner.
• The Company may not be careful in case of printing and keeping the warrant safe.
• The stamp duty to be affixed
• Prior approval of the Government is needed
• Number of shares is mentioned in the warrant, is not sufficient for directorship.

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However, sometimes excessive disbursement may happen mistakenly to the permanent and casual employees. Again, sometimes payment may be paid to the workers or employees who didn’t work or who already left the company. Considering these issues an audit is required to minimize the risk of excessive payment and minimize the chance of fraudulent act.

Considering the overall risk area and nature of errors or fraud, I will try to find out some key points which may help to the auditors in planning and performing work on the payroll.

Step 1: Typical Control Objectives of wages and salaries to be tested:

The auditor will consider the nature of internal control system of the company while disbursing the payments. But before evaluating internal control system, the auditors should design a typical control objectives for wages which are described as follows:

1. Whether the payments are made for work done.
2. Whether the payments are made to valid employees.
3. Whether the payments are duly authorized.
4. Whether the payments are made in accordance with contract/employment terms.
5. Whether the wages and salaries are calculated correctly.
6. Whether the payments are recorded in the company’s books of account.
7. Whether the tax or other regulatory compliance properly followed.

Step 2: Evaluation of the Internal Control System:

In this respect the auditor should perform the test of control to confirm whether the internal control system are properly met. To evaluate this part auditor may make a questionnaire and will try to get the answer of this questionnaire and complete the assignment of this part. However, following points to be noted by an auditor to verify the accuracy of the payment:

• Can employees be paid without working?
• Can wages and salaries be paid to fictitious employees?
• Can wages be without approval?
• Can errors occur in wage calculations?
• Can wage costs be incorrectly recorded?

If the auditor confirms the control exists, then he will perform tests of controls. In case of weak controls or absent of the control, an auditor will perform the substantive procedure to determine material misstatement.

However, Considering the Steps 1 & Steps 2, we can make an audit guideline to detect frauds and misappropriation of funds. The following procedures an auditor can take to accomplish this assignment:

• Detection of Frauds and Misappropriation of Cash:

Following steps could be taken by an auditor to detect frauds and misappropriation of cash:

• Whether any fictitious name are entered into wages sheet and salary sheet. This may include dummy workers, ghost workers etc.
• Whether any error committed at the time of recording the wages/salaries
• Whether any fraud committed at the time of recording the wages/salaries
• Whether any clerical error occurred
• Whether resigned or discharged employees are included in the wages/salaries sheet.
• Whether wages rate are overstated.
• Whether Hours of work or days of work are overstated.
• Whether deductions have been done properly i.e Provident Fund, Insurance and advance payment.
• Current month’s wages should be compared with previous month’s wages. If any increase shown, the reasons should inquire.
• Wages/Salaries sheet should be cross checked with Cash Book and Bank Statment.
• Whether unpaid salaries/wages are deposited in the bank.
• Whether Revenue stamp properly affixed.
• The Signature of the workers/employees should verify with last three/four periods.
• Ensure all relevant persons are properly signed on wages and salary sheet.
• The Auditor will also collect the appointment letter to confirm the increment due.

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Key Points:

• The word Coupon represents “Interest.”
• Interest is not paid for the invested amount.
• The difference between discounted purchase price and face value of the bond is the income of the investor.
• The earnings of Zero Coupon Bond are higher than the Regular Bond’s earnings.
• The maturity period of this bond is longer than Regular bond.

What is Zero-Coupon Bond?:

Zero-Coupon Bond is a debt security where the investors will not get any interest against his invested money but he will get a big discount while purchasing the bond. At the time of maturity, when the investor will go to the liquidation he will receive the full face value amount. Normally, a zero coupon bond has a higher return than the regular bond with the same maturity.

Hence, Zero Coupon bond is the bond which has a zero interest and the investor purchase it with lower price than its face value, and reimbursed full face value amount at the time of maturity.

There are different types of Zero Coupon bond. From the start, some company is issued their bond as zero-coupon instruments. Again, some company transforms into zero coupon instruments after a financial institution divest of its interest coupon, and repackages as zero-coupon bonds.

Zero-Coupon bond also known as an accrual bond, and the word coupon represents interest.

Pricing Formula of Zero – Coupon Bonds:

Pricing of bond is important to determine how much amount an investor will be paid at the time of purchasing the bonds. As Zero-Coupon bond purchases with a discount, hence it is important, how much discount to be determined for ascertaining the price. However, to calculate the price of a zero-coupon bond, following formula to be used:

Price of Bond = Face Value/(1+r) n

Where:

Face value is the future (maturity) value of the bond.

r is the required rate of return/interest

n is the numbers of years up to maturity.

This formula uses when the interest is compounded annually. But practically it can be paid semiannually, when the formula will be:

Price of Bond = Face Value/(1+r/2) nx2

The difference between annually and semi-annually formula is:

In semiannually, the ‘r’ is divided by two and ‘n’ is multiplied by two.

Examples of a Zero-Coupon Bonds:

Example -1: Annual Compounding

Robi is intending to purchase a zero coupon bond with a face value of $1,000 and 5 years to maturity. The interest rate on the bond is 7% compounded annually. What price Robi will pay for the bond today?

Price of bond = $1,000/(1+.07)5 = $713.27

Hence, the price that Robi will pay for the bond today is $713.27.

Example 2: Semi-annual Compounding

Robi is intending to purchase a zero coupon bond with a face value of $1,000 and 5 years to maturity. The interest rate on the bond is 7% compounded semi-annually. What price Robi will pay for the bond today?

Price of bond = $1,000 / (1+0.07/2)^5*2 = $709.22

The price that Robi will pay for the bond today is $709.22

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