Here is the next quiz in the quiz/MCQ series for Principles and Practices of Banking subject of JAIIB. This post covers the topics of Factoring Forfaiting MCQ and Bank Guarantee MCQ. Answers are given at the end of the quiz.
Q1. What is the maximum debt period permitted under factoring?
Factoring is commonly identified as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. The maximum debt period permitted under factoring is 150 days
The maximum debt period permitted under factoring is 150 days inclusive of a maximum grace period of 60 days
A bank guarantee is a contract between the banker, the beneficiary and the person or the customer, whereby the bank gives an undertaking to pay the beneficiary a definite sum of money, or arrange the performance of the obligations of the client in the possible event of his default.
Under full factoring arrangement, a factor renders services of collection of receivables and maintains sales ledgers, credit control and credit protection.
When factoring with recourse, the business selling its invoices to a factoring company receives the usual benefit of the service: an immediate influx of cash. However, if the customer who is to pay the invoice fails to pay for any reason: they do not, will not, or cannot pay, the business selling the invoice agrees to repay the factor.
When you factor invoices, you can expect to receive about 80% of the value of your accounts receivable upfront. You’ll get the other 20%—minus the factor rate—once the client pays their invoice.
International factoring usually have two factors viz. export factor and import factor. The export factor looks at financing the exporter and collection of account receivables. The import factor evaluates the importer in respect of collecting the dues in time and assessment of chances of default by the importer.
The Uniform Customs and Practice for Documentary Credits (“UCP”) 600 are international rules published by the International Chamber of Commerce (ICC) with the aim of standardising international banking practice in relation to LCs
Forfaiting is a type of export financing used only for international trade. In forfaiting, an exporter sells its claim to trade receivables to a financial institution (the “forfaiter”) and receives payment immediately. The time frame for forfaiting is usually longer, several months to as long as several years, in some instances. Although forfaiters also demand a discount, the exporter typically can obtain 100 percent of the value of its trade receivable by incorporating the cost of the discount into its selling price.
The bank who gives the guarantee is called the “surety or guarantor”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor or beneficiary”
Non fund based lending, where the lending bank does not commit any physical outflow of funds. The funds position of the lending bank remains intact. For example, bank guarantee
Generally, there are three separate transactions in a letter of credit transaction.
A red clause letter of credit is a specific type of letter of credit in which the buyer can extend the facility of advance payment to the seller against a certain documentary requirement. In other words, under the red clause letter of credit, the issuing bank will make an advance payment to the exporter i.e. the seller before the seller ships the goods to the importer i.e. buyer.
Green Clause Letters are an extension of the Red Letter, as it enables the advance of not only the purchase of raw materials, processing and packaging of goods but it also takes pre-shipment warehousing at the port of origin and insurance into account
Forward Rate Agreements are agreements between the bank and borrower in which the bank agrees to lend the borrower at an agreed certain interest rate on a nominal principal at a time in the future. It is a tool to hedge interest rate risk
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Tags: Factoring Forfaiting MCQ JAIIB, Bank Guarantee MCQ JAIIB, Factoring Forfaiting MCQ, Factoring Forfaiting MCQ Series
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