The content presented below is not prepared by the author of the blog and is rather taken from relevant sites(sources mentioned).

Concept (Source)

  • Banker’s Guarantee/Standby Letter of Credit

    Provide payment assurance to your beneficiaries

    Reassure your buyer or seller of payment with a Banker’s Guarantee/Standby Letter of Credit. In the event that you fail to fulfil your contractual obligations, we will honour payment to your beneficiaries upon receipt of a claim that complies with the guarantee terms.

    How does a Banker’s Guarantee/Standby Letter of Credit work?

    1. Applicant and beneficiary enter into a contract and agree that a Banker’s Guarantee is required
    2. Applicant approaches DBS (issuing bank) to issue a Banker’s Guarantee in favour of the beneficiary
    3. DBS issues the Banker’s Guarantee, and
      1. sends a financial instruction to an advising bank, which is usually located in beneficiary’s country, or
      2. couriers the hardcopy Banker’s Guarantee to the beneficiary, or
      3. notifies the applicant of self-collection at any of branches
    4. Once the advising bank receives the Banker’s Guarantee, it will advise it to the beneficiary

    Why choose DBS Banker’s Guarantee/Standby Letter of Credit?

    • Grow your business with the Best Trade Finance Bank in India and the bank that was named the Rising Star for the Transaction Bank category, both awarded by The Asset in 2013
    • Leverage DBS Bank’s AA- and Aa1 credit rating to provide your beneficiary with payment assurance upon receipt of claims made out in compliance with the guarantee terms
    • Submit your application through any DBS Branch, or IDEAL™ (our online banking platform) for greater convenience

    There are two types of SBLOC

    1. Performance SBLOC (Source) – Used to guarantee some sort of performance of a contractual obligation. For example, a construction company building a highway bridge might be required by the highway department to put up a performance standby letter of credit ensuring that they will complete the project contracted or to warranty the work. Under normal circumstances the standby would not be drawn upon, however if the contractor abandoned the project midway through completion or if the bridge were unsafe, the standby letter of credit could be drawn upon for its specified dollar amount.

    2. Financial SBLOC (Source) – Financial standby letters of credit are irrevocable undertakings by a bank guaranteeing the beneficiary repayment of the purchaser’s financial obligation.

    • Pricing
    Item Pricing
    Issuance Performance: 1.80% p.a., min one quarter and INR 1,500
    Financial: 2.00% p.a., min one quarter and INR 1,500
    Amendments Financial: 2.00% p.a., min one quarter and INR 1,500
    Non-financial: INR 1,500 flat
    Payment INR 1,500 flat
    Cable INR 750
    Courier – Local Local: INR 250
    Overseas guarantee Additional 0.25% per quarter, min USD 500


    • Product Features
    • A Banker’s Guarantee/Standby Letter of Credit can be used as a:
      • Payment Guarantee – This protects the beneficiary in the event that the applicant fails to honour the payment under their contract
      • Bid Bond – This enables the applicant (bidder) to use DBS’ credit to support the bid, and can also be used to insure the successful bidder that the contract will be met
      • Performance Bond – Some bidding contracts require the successful bidder to provide a performance guarantee to protect against a default
      • Financial Guarantee – This helps the applicant’s overseas subsidiaries obtain financing or credit facilities from banks
    • The Guarantee can be issued by DBS India or by our overseas branches/correspondents, according to the guarantee format provided by the applicant
    • Guarantees issued in favour of beneficiaries must be for a specific amount, expiry date and claim period
    • Guarantees should not be assigned to other parties
    • Guarantees are subject to Indian law and the jurisdiction of the Indian courts

    Tricks (Source)

    In banking parlance, SBLOC – or, standby letter of credit – is no different from a guarantee that a bank gives; it’s an instrument that has been in vogue for years. But today, it’s emerging as a tool to avert default, downgrade, erosion in market cap, and, of course, bad press. It keeps the banker as well the borrower happy. And, no rules are broken.

    What is the deal they cut? Consider a bank in India with Rs 3,000-crore loan exposure to a company that is unlikely to fork out the Rs 1,000-crore that would fall due in the next one year. Both the lender and borrower know that a default is staring in the face. That’s when SBLOC comes in handy. The lender issues an SBLOC on behalf of the company, promising to pay another bank if the company fails to pay up. Unlike usual letters of credit, SBLOC may not be linked to trade and is not contingent on the company doing anything.

    The company uses its wholly-owned, offshore subsidiary to discount the SBLOC from a bank abroad. The local bank – which issues the SBLOC – communicates through the SWIFT, the Society for Worldwide Interbank Financial Telecommunication, to inform financial institutions across markets and authenticates the veracity of instrument. The funds obtained by encashing the SBLOC is remitted by the overseas arm to the parent India. The money goes into repaying the local bank.

    Three senior bankers and an investment banker ET spoke to confirmed that the SBLOC route is being used selectively by some of the large public sector banks as well as a few private ones to ‘evergreen’ accounts of big borrowers belonging to sectors like steel, pharma and energy equipment. The bankers did not wish to be named as the transactions involve peers and clients.

    Offshore banks have no qualms in discounting SBLOCs because they have to recover the money from another bank and not from a company. “What the India bank does is that it converts its fund exposure that would have turned into non-performing asset and impacted earnings, into non-fund exposure… Technically, it is not violating RBI norms,” said the CEO of a leading private bank.

    The terms of SBLOCs are between eighteen months and two years. This is the time the bank and the corporate buy in pushing back the problem. If the borrowing company does not repay the local bank by then, the Indian bank takes a hit as it has to pay the offshore bank on the due date. Lenders realise that in many cases they are simply postponing the inevitable. Lest RBI inspectors and auditors describe the deals as a variant of “asset evergreening”, they back it up with statements like “the lender believes that the borrower is facing only a temporary mismatch in cash flow and has faith in intrinsic strength of the company”.

    According to an analyst, while such deals are difficult to point out, they will manifest in the off balance-sheet exposure of some banks and show up in their final numbers for FY14.


    In certain cases, companies use their clout to obtain refinance from the lending bank – or local banks in the consortium – months before a slice of the loan becomes due. “If Rs 3,000 crore is coming for repayment as against the outstanding of Rs 6,000 crore, the banks give a fresh loan with the stated purpose of ‘refinancing’ the old loan. Here, the fresh loan is given on easier terms and has a staggered repayment schedule,” said the credit head of a private bank. This too is a way to help a company tide over difficult liquidity situation without referring it to the corporate debt restructuring (CDR) forum. “CDR carries a stigma and many large companies want to avoid it. It suits the bank as no extra provisioning is needed on the loan account,” said the person.

    According to India Ratings & Research, a Fitch Group company, bank loans worth an estimated around Rs 2 lakh crore to many top corporates are due for refinancing in the next 12-15 months. This amount is around 27-29% of the aggregate net worth of the banking system as of end-FY13.


Few statistical concepts(VaR, ES, Frequency Distribution, Kurtosis, Skewness) with regard to Indian 10Y bond price.

VAR ES FD Kurtosis Skewness (Download Excel)

Brief description on concepts

VaR – Value at Risk is measured in three variables: the amount of potential loss, the probability of that amount of loss, and the time frame. For example, a financial firm may determine that it has a 5% one month value at risk of $100 million. This means that there is a 5% chance that the firm could lose more than $100 million in any given month. Therefore, a $100 million loss should be expected to occur once every 20 months.

Source :

Expected Shortfall – Expected Shortfall is defined as the average of all losses which are greater or equal than VaR.

Source :

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Just did a math. When I buy a 60Day CD at 9%, it cost me INR 24,63,55,292. Now because asset managers value investment on accrual basis I did the same.

Accrual income per day  = (25,00,00,000-24,63,55,292)/60

                                                = INR 60745.

So every day I will add 60745 to my portfolio. I did this for next 50days and my portfolio then was valued at 24,63,55,292+(60745*50) = 24,93,92,567.

Now the maturity of the paper drops to 10days. When I value the price of CD at 9%, it comes at 24,93,85,078 which is lower than what I valued above by ~INR 7488. Why is it so?

If I sell the paper at 9% than probably I add only +60745-7488 = 53256 for the day which pulls down my daily(for that particular day) return at 7.9%.

What is that I am missing?

CD Valuation  – Excel for reference

Read my note on liquidity for December.

Liquidity Monitor Jan 2014

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The Reserve Bank of India left repo and consequently reverse repo rate unchanged at 7.75% and 6.75% respectively. It also left CRR unchanged at 4.0%. This comes at a time when participants were debating over a 25bps or 50bps hike after steep rise in wholesale and retail inflation.

Key Facts:

Every governor has been peculiar in decision making and Mr. Rajan is no different. After an extreme uptick in WPI and CPI, primarily on the back of food articles, market more or less priced in a hike of at least 25bps with a tad hawkish stance.

Food article inflation which has been a structural issue is hovering in double digits since 11th five year plan. Last dozen of data shows this is continuing in the next five year plan as well.  Rajan from start is pretty clear over its objective to tame inflation and inflation expectation.

RBI’s decision of status quo is drawn from steady core inflation. They believe food and vegetable prices will soon come off bringing down the headline wholesale and retail inflation substantially.

RBI said that at a time when uncertainty surrounding short term path of inflation is high, and given the weak state of economy there is merit in waiting for more data to reduce uncertainty.

More importantly RBI said it will be vigilant and check if the expected softening of food inflation does not materialize and translate into a significant reduction in headline inflation in the next round of data releases failing to which the Reserve Bank will act, including on off-policy dates if warranted.


RBI’s action pulled down yields considerably down by ~12bps from ~8.90% to ~8.78%. Aggressive buying was limited as rate hike risk still persists after RBI clearly stated to act on off-policy dates as well.

Short term CD/CP rates receded after RBI’s surprising move. 2M/1Y CD rates fell ~30/15bps. Banks and corporates aggressively jumped in the market to raise funds via CDs and CPs respectively. Frugal government is expected to keep liquidity tight for a prolonged period.

Coming Inflation and growth numbers will hold a key importance in RBI’s decision making process. Anecdotal data suggests that vegetable prices have receded by ~40-60% m-o-m in early December. This if continues can bring down next number considerably down compelling RBI to keep rates untouched.

Bond market has taken a hit from a number of domestic and global factors. OMOs, which mightily supported bonds in the second half, are almost absent. Fiscal worries as well are driving investors jittery to some extent, this is even after Chidambaram succeeded in limiting previous year’s deficit at announced level.

Traders will wait for an update from US over its quantitative easing programme using which it had added more than a trillion dollars in the financial system. Strong pullback in its buyback quantum will be negative for the economy however the impact is not expected to be severe on the bond side. Note that FIIs cumulatively has sold bonds worth ~835bn since 22nd may when Fed first hinted pulling back its stimulus.

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India Macro & Debt Update

Read my note on India Macro & Debt Market Update

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Read my note on liquidity for December.

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Read my note on Iran Nuke Saga & Economic update on UK, Eurozone and India.

Good piece from professors of NIPFP. Fiscal multiplier gives one an idea about how government spending/revenue impacts the final output of the economy. India’s growth has tumbled to a decade low due to a number of reasons. Faltering growth has only exacerbated government’s concern with regard to fiscal deficit. Authors in the paper present a framework for the estimation of fiscal multipliers.


Accordingly they list down below numbers after their assessment:


Capital Expenditure Multiplier: 2.45

Other Revenue Expenditure Multiplier: 0.98


Corporate Tax Multiplier: -1.02

Every 100rs increase in capital expenditure will boost country’s GDP by Rs.245. Similarly for every rise in Rs.100 via direct tax collection GDP falls by Rs.102.

Not listing transmission mechanism (in the paper) but one should read it.

They conclude

Despite policy targets that have sought to raise the capital expenditure by the government, allocation for capital account expenditure continues to be a residual expenditure as observed in recent budgetary exercises. The high value of the estimated capital expenditure multiplier points to a high multiplier effect of capital expenditure on output, and underscores the need to prioritize capital expenditure.

Government is widely expected trim its plan expenditure in addition to payment delays and other stuff to limit its deficit number at 4.8% of GDP. Plan expenditure has two components – Capital and Revenue expenditure. In the previous year FM saved heavily on plan expenditure (primarily on revenue expenditure). Among other ministries rural is the one which is expected to take a big hit on its budgeted amount. Last year government set aside ~763bn for Ministry of Rural Development out of which they were allowed to spend only ~550bn on the back of last minute austerity. This year budgeted amount of the ministry was set at ~801bn. Let’s see how situation pans out this time. If post monsoon harvest falls out of line then probably a double whammy for rural population.

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Must read..


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