BANKING PRODUCT II

A. Credit Facilities
B. Trade Credit
C. Consumer Product
D. Corporate Product
OUTLINES
A. CREDIT FACILITIES:

I. OVERDRAFT
II. TERM LOAN
III. HOUSING LOAN
IV. PERSONAL LOAN
V. Bridging Loan/End Financing
VI. HIRE-PURCHASE
VII. LEASING
VIII.FACTORING
IX. BLOCK DISCOUNTING.
I. Overdraft (OD)
 An overdraft is a short term credit facility operated through
a current account.
 The borrower is allowed to overdraw his current account.
 The borrower needs to apply the OD facility from the bank
and is given a credit limit once the OD is approved.
 If the account is overdrawn, daily interest will be charged
on the outstanding balance at the end of each day but will
only debited into the borrower’s account at the end of the
month.
 If the OD facility is not fully utilised, a commitment fee will
be charged on unused amount.
II. Term Loan
A loan with a specified amount given for a specified period of time,
commonly between 2 to 10 years.

Purpose to finance capital expenditure, i.e. purchase fixed asset for

business expansion, e.g. machinery.

The assets purchased may serve as partial or full collateral on the loan.

The risk is higher compared to OD. Therefore, interest charge should be

higher & usually depend on the repayment schedule: monthly or quarterly
repayment.

Banks imposed protective covenants (specify specific condition) to protect

the bank from loan default such as specifying maximum dividend the
borrower can pay to its shareholders each year. This is to endure borrower
has sufficient cash to repay its loan on time.
III. Housing Loan
A loan to finance the purchase of a house.

The house will be pledged as a collateral as security

to the bank.

The maturity or tenure of housing loan between 10 to

30 years depending on the borrower’s age, income
and other factors.

A bank usually would not give loan up to 100%

financing of the purchase price of the house to ensure
borrower has commitment towards the loan
instalment.
IV. Personal Loan
A loan given to an individual above 18 years old for personal
financing purposes.

Maturity or tenure of 6 months up to 10 years.

Service or pay the loan through monthly instalment.

Usually bank officer will require a copy of applicant’s IC, pay

slip and EA form.

Bank needs to do credit evaluation of the applicant before

approving the loan.
V. Bridging Loan/ End Financing
Bridging loan helps to bridge the developers’ cash
flow during construction and pending receipt of sale
proceeds from end purchasers and/or their end
financiers.

This is to ensure the continuation of the project

until completion.

The company must has track record on property

development .
VI. HIRE-PURHASE
 Sec 2(1) of Hire-Purchase Act 1967:
“a letting of goods with an option to purchase & an agreement
for the purchase of goods by installments”

 The hirer has every intention to purchase & become the

owner of the goods.

 Ownership does not pass to the hirer until he exercise the

option to purchase: Ownership of the goods belongs to the
bank until the hirer pays all the installments plus interest.

 The owner (retailer/finance company) has a statutory right

to repossess the goods to enforce the security.
 VII. LEASING
 A contract between two parties, namely the lessor & the
lessee, where:
1. Lessor (leasing company) agrees to buy a certain specific
chattel & rents it to the lessee (user of the equipment).
2. The lessee agrees to rent the specific chattel from the
lessor at a specific sum of rental over a specified period
of time.
3. Whereas the lessee has the right to use the chattel,
lessor retains the ownership.
 The lessor retains ownership of the equipment & seeks to recover
the capital cost of the equipment plus an amount equivalent to a
financing charge out of the lease rentals receivable during the
period of the lease
How leasing works?
1. Lessee identify the equipment that he wants.
2. Lessee enquire the price from manufacturer or
supplier.
3. Apply to lessor to finance the purchase of the
equipment.
4. Lessor assess the credit worthiness of the lessee.
5. Lessor purchase the equipment & allow lessee
the exclusive use of the equipment.
6. Lessee pays lessor periodic rental for a specified
period.
 Forms of leasing
1. Financial lease
 Lessor act as a financier.
 Payments by lessee over the lease period
cover the full cost of the asset plus interest to
the lessor for his investment.

2. Operation lease
 Usually for a short period of time.
 Does not cover the useful life of the asset
 Rental does not fully recover the cost of the
asset.
VIII. FACTORING
 Definition
 The purchase of Account Receivable (AR) on a
without recourse notification basis.
 Not a loan to customer; amount of AR in the book
keeping reduced by the amount factored.

 Characteristics
 The outright purchase of the AR by the factor (bank).
 Risk of non-payment is assumed by the factor.
 Customer’s buyers are notified of the factoring
arrangement & are told to make payment direct to
the factor.
VIII. FACTORING
 Process
1. Goods are delivered by the supplier.
2. Original invoice plus a copy raised by the supplier
is sent to the factor.
3. Factor will advance up to 80% cash of the value of
the invoice to the supplier; 20% retain as security.
4. Factor will forward invoice to the debtor &
responsible to administer the AR.
5. At the end of credit period, debtor pays directly to
the factor.
6. Factor will issue the receipt.
 IX. BLOCK DISCOUNTING
 Block discounting is a credit facility for
motor dealer, credit or leasing companies
to enhance their working capital
requirement.
 They may face shortage of funds for immediate
business usage.

 They can get the fund needed by

discounting their hire purchase, credit or
leasing agreements for cash.
OUTLINES:TRADE CREDIT

I. Letter of credit (LC)

II. Banker’s Acceptance
III. Export credit refinancing (ECR)
IV. Bank guarantee
V. Shipping guarantee
 I. LETTER OF CREDIT (LC)
 An undertaking of payment made by a bank (on the
buyer’s/importer’s behalf) to the exporters bank.
 Payment normally be against presentation of sight bill.
 LC is applied by importer/buyer.
 Importer needs to fill in the form, submit a copy of the
insurance policy (if purchase is on CIF terms), and import
permit. (CIF – COST INSURANCE AND FREIGHT)
 The bank guarantees that they will pay the exporter in the
event that the importer becomes insolvent.
 LC serves to facilitate smooth transactions in international
trade.
II. BANKERS ACCEPTANCE (BA)
 A bill of exchange drawn by the customer to his
order, and accepted by his banker, and payable on
a specified future date.

 BA shows a bank accept responsibility for a future

payment on behalf of its customer, commonly for
international trade transactions.

 An exporter sending goods to importer whose

credit rating is unknown prefer bank acts as
guarantor.
II. BANKERS ACCEPTANCE (BA)
 By accepting the BA, the bank is guaranteeing payment of the
BA on the specified due date.

 The bank facilitates the transaction by stamping ACCEPTED on

a draft, which obligates payment at a specified point in time.

 Importer in turns will pay the bank what is owed to exporter

along with a fee to the bank for guaranteeing the payment.

 Exporter can hold the BA until date where the payment is to be

made, but they frequently sell it before maturity at a discount to
obtain cash immediately.

 The investor who purchase the BA would look to the accepting

bank for payment on the maturity date.
III. EXPORT CREDIT REFINANCING
 A credit incentive to assist exporters so that more foreign
exchange business can be earned.

 Loans are advanced by Exim Bank to facilitate the production

of eligible goods for export prior to shipment and to promote
backward linkages to benefit the indirect exporters (local
suppliers).

 Funds is channels through commercial bank.

PRE-SHIPMENT ECR
 Available to direct (final) & indirect (domestic
supplier) exporter.

POST SHIPMENT ECR

 Available to exporters who export eligible goods on credit
terms.

 Exporter can have the export payment proceeds credited to

its account without having to wait for the payment from
importer.
 IV. BANK GUARANTEE
 A guarantee from a lending institution ensuring that
the liabilities of a debtor will be met. In other words, if
the debtor fails to settle a debt, the bank will cover it.

 Used as an instrument for securing performance or

payment especially in international business.
 V. SHIPPING GUARANTEE (SG)
 A guarantee from a bank to a shipping company.
 A letter of indemnity to the shipping company, signed
by the importer & countersigned by the bank.
 The guarantee authorizes the release of the specified
goods to the importer without the proof of bills of
lading (BL).
 SG replaces the BL that may arrive late from the
exporter of the exporter’s bank.
 SG can save costs to the importer.
 SG enables the importer to have immediate
possession of the goods.
C. CONSUMER PRODUCTS
ATM
CREDIT CARD
DEBIT CARD
CHARGE CARD
ATM CARD
(Automated Teller Machine )

 A payment card issued by a bank for their customer

to access the automated teller machine (ATMs).

 ATM card is installed with a chip that contain

information on card number and other relevant
security information such as card verification value
code (CVVC) to prevent the credit card fraud.

 Other payment card such as debit and credit cards

are function as ATM cards.
 26

ATM CARD
(Automated Teller Machine )
 ATM Cards are used to:
√ Withdrawal or deposit of money.
√ Payment on bills, credit cards, loans and
insurance premiums.
√ Check account balances.
√ Transfer funds between accounts (own and
third party).
√ Submit share applications for new IPO
CREDIT CARD
 A payment that issued by a bank allowing the cardholder to
purchase goods or services on credit.

 Cardholder agree to pay back the credit used plus other agreed
charges in case of the payment is not paid on time.

 Cardholders are required to pay annual fees.

 Different from other payment card, a credit card requires the

balance to be repaid in full each month.

 In case of full payment is not made each month, the cardholder

is allowed to have a continuing balance of debt but is subject to
some amount of interest charged.
 E.g. Citibank
CREDIT CARD
CREDIT CARD
 Credit cards have higher interest charged on the unpaid
amount than other forms of consumer loans and lines of
credit.

 The above made credit card different from the ATM or debit
cards which can be used to withdraw cash by the owner of the
card.

 Unlike a charge card where the cardholder simply defers

payment until a later date, credit card involve payment from
the banks to the third party, i.e. the merchant.

 Many banks provide the cardholders the line of credit that

allow them to borrow money in the form of cash advance. The
borrowing limit is pre-set based on card holders’ credit rating.
DEBIT CARD
 A card that can be used instead of cash by directly debit or use the money from
cardholders’ bank accounts when making payment for purchases.

 A debit card is usually given along with other banking products, e.g. new savings
or current account (cards are linked with these accounts).

 When cardholder swipes the card at the merchant, the money is withdrew from
the bank account and automatically transfer into the merchant’s account. The
merchant receives the money immediately.

 It is similar to an ATM card, there must be a sufficient amount of funds in the

account for the purchase made using debit card.

 It has the advantage of allowing its cardholder to debit money at any authorized
merchant as long as the account is funded.

 Unlike a credit card, debit card involve immediate transfer of funds directly from
the cardholder's bank account when performing a transaction. 
DEBIT CARD
 An annual fee is charged on debit cards.
 A maximum limit is imposed to cardholder for their bills.
 Some transactions may not allowed to use debit cards , e.g. some
online transactions or purchases from certain merchants.
 Security verification in the form of signature or a PIN number may
be required.
 Cardholder may enjoy benefits of reward point, cash back or
discount and privileges offered by banks and participating
merchants.
 E.g.
RHB Platinum Debit Card
Public Bank Visa Electron
AFFIN ISLAMIC Debit MasterCard
RHB Tesco-RHB Debit Card
CIMB Debit MasterCard
DEBIT CARD
CHARGE CARD
 A card that allowed the cardholder to use the card and make the
payment later. The banks or the card issuer would pay to the
merchant on cardholder’s behalf when the transaction takes place
and bill the cardholder later.
 There is a credit limit to the total amount of expenses the
cardholder can carry on credit.
 Expenses incurred on the card are accumulated and are billed to
cardholder via the monthly statement.
 Cardholder must settle the outstanding balance in full by the
payment due date. Failing to do so would result in the charge card
being frozen.
 Charge cards have been falling out of popularity in recent years to
the more popular alternatives cards such as credit and debit cards.
 E.g. American Express and Diners Club.
D. Corporate Product
Electronic Data Interchange
(EDI)
ELECTRONIC DATA INTERCHANGE (EDI)
 An electronic transmission of business information
via standardized business documents, e.g. purchase
orders and invoices between trading partners.

 It is a process which allows one company to send

information to another company electronically rather
than using paper.

 EDI replaces the mail preparation and handling

associated with traditional business communication.
 EDI
 Companies create invoices using a computer system, print a
paper copy of the invoice and mail it to the customer. Upon
receipt, the customer enters it into its own computer system.

 The entire process involves the transfer of information from the

seller's computer to the customer's computer.

 EDI makes it possible to minimize or even eliminate the manual

steps involved in this transfer.

 The EDI improves the process:

An EDI document Exchange of a purchase order normally occurs
overnight and can take less than an hour.
A traditional document exchange of a purchase order normally takes
between three and five days.
 From: https://www.up.com/suppliers/order_inv/edi/what_is_edi/
References
 Madura, J. (2018). Financial Markets and
institutions. Cengage Learning.
 Materials from i-learn, UiTM Aug 2017.
 www.bnm.gov.my
 Malaysia commercial banks’ websites.
 https://www.up.com/suppliers/order_inv/edi/what_
is_edi/

TBH, 2019
References
 Madura, J. (2018).
 Letter of Credit pg. 143
 Banker’s Acceptance pg. 143
 Bank loan pg. 488
 Bridge loan pg. 656
 Factors pg. 611