ConnectPlus is a unique automation and management suite for Banks’ Trade Finance services that enables customers to view images of trade finance documents such as Bank Guarantees, Letters of Credit and Bills through Corporate Internet Banking.
Sometimes you might come across a situation where your client asks you to provide a financial guarantee from a third party. A bank guarantee can be of huge help in such circumstances.
Let us take the example of a company XYZ, who bags a project from, the Department of Telecommunication (DoT) to build 200 network transmission towers. Companies from all over the world would have applied against an RFP (request for proposal) raised by DoT. The selection would be made on the basis of lowest cost and track record as submitted in the proposal form.
However, the DoT has limited ability to assess all participating companies for financial stability and credit worthiness. Therefore to ensure that the project is done satisfactorily and on time, DoT asks for XYZ to furnish a guarantee given by one or more banks. In banking nomenclature, the company XYZ is an applicant, its bank is the issuing bank and the DoT is the beneficiary. Usually, the bank guarantee is for a specified amount, which is a percentage of the total money required for the contract.
Obviously, the bank will not just issue such guarantee without doing its own due diligence as they are at risk too, in case the client defaults. This amount is called a limit and the bank will issue guarantee provided the company has not exceeded its overall limit for bank guarantees. If DoT is not satisfied with the performance of the contract at a later date, it can invoke the bank guarantee. In this situation, the bank will have to immediately release the amount of the bank guarantee to the DoT.
While there are similarities between a bank guarantee and a letter of credit, they’re actually quite different. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn’t go as planned.
A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed.
A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
For example a letter of credit could be used in the delivery of goods or the completion of a service. The seller may request that the buyer obtain a letter of credit before the transaction occurs. The buyer would purchase this letter of credit from a bank and forward it to the seller’s bank. This letter would substitute the bank’s credit for that of its client, ensuring correct and timely payment.
A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can’t pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction.
These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don’t have established business relationships. The instruments are designed to reduce the risk taken by each party.
Banks usually have a Bank Guarantee / Letter of Credit Module in the Core Banking System they may be using for automation, but a CBS is limited to the process of issuing the instrument for the host bank. There are four major different parties involved in any Trade Finance product like BG or LC.
Custodian Bank (Importer/Buyer/Bidder’s Bank)
Target Bank (Seller/Exporter/RFP Owner’s Bank)
Hence, the Tracking and Management process becomes very critical, because there are a lot of interaction points between the concerned parties. Furthermore, there is a blackout period when the bills and goods are in transit, and at that time, nobody in the loop is aware of the status.
The Bank Guarantee document and Customer Details are to be captured from the KYC already completed by the verification process in the Core Banking System. The movement of the documents takes place manually and although the banks have the physical documents and other credentials of the customers, they have no clue of the corresponding bank and the party at the other end, with whom the bank does not have any direct interaction.
The solution Cognix has come up with is a web-based wrapper application, which takes the LC/BG data from the core banking solution via CIB (corporate Internet Banking) and allows the concerned parties to interact, submit documents and credentials, and provide a real-time status update. This solution is called Connect Plus.
LC/BG details from the CBS can be imported to the Management module and can be made available for the Banks’ own customer to view via a secure net banking extension.
Ability to create the user IDs of authorized personnel for the corresponding party of the customer (both Makers and Checkers Login)
Ability to create the User IDs of authorized personnel for the corresponding bank (Beneficiary’s bank)
Options for submission of the documents (scanned or softcopies) for all concerned partners to verify and accept.
Options to make real-time acceptance or rejections based on the feedback.
Online tracking of the process maturity from issuance to expiry or revoking. This would mitigate some major risks as the process becomes transparent. Preventive and corrective actions based on the status can be initiated in real-time.
Opens opportunity for business development as most of the corporates would welcome an online portal especially for LC and Performance Based Bank guarantees. They can view their trade finance portfolio statuses without visiting the branches.
Even if the bank decides to charge service charges for a premium, the average trade finance customer would be more than willing to pay and utilize the services.
Reports and dashboards can be built for customer-wise portfolios without compromising the safety of the core banking servers, albeit through secure net banking channel. The following can be made available via a customer wise Dashboard/Report :
Invoked/ revoked LC/BG
Credit Limit Utilization Chart
Customer Profile (Financial KYC)
Such services can be utilized for the purpose of generating new international customer bases for the bank’s own branches that exist in the target country.
Connect Plus is a unique product. It is an automation and management suite for Banks’ Trade Finance services. Connect Plus has a unique platform that enables our customers to view images of trade finance documents such as Bank Guarantees, Letters of Credit and Bills through Corporate Internet Banking.
Bank Guarantee module
Bill Presentation module
Direct Bills module
Connect Plus integrates a powerful BPM+ engine at its core and a robust document management system to deliver a sleek and seamless connectivity of resources.
Connect Plus links the bank with its customers who are availing bank guarantee facilities and also the beneficiaries (who may not be the customer of the bank, but may be the customers of another bank in another country).
Highly parameterized, it consists of an internal rules engine which can be used to configure any and all workflows.
Role based access rights for each user type, access is restricted to specific users.
Comprehensive user management (customers as well as non-customers/beneficiaries)
Bank wide bills and business related documentation can be available for reference with one click in archive mode as well as online mode.
Seamlessly integrates with the existing corporate internet banking portal.
All the modules have one maker and ‘n’ checker workflows built into them.
‘n’ checkers are configurable in the system for each module at both the beneficiary/exporter end as well as the importer/bank end.
Links the corporate customers to their customers via bank’s portal / internet banking suite. This can facilitate cross selling for various products at overseas branches.