Unit-4

Global trends and development in international banking

What Is Cross-Border Financing?

Cross-border financing refers to any financing arrangement that crosses national
borders. Cross border financing could include cross border loans, letters of
credit, repatriable income, or bankers acceptances (BA), for example, issued in
the United States for the benefit of a person in Canada.

Cross-Border Financing Explained

Cross border financing within corporations can become very complex, mostly
because almost every inter-company loan that crosses national borders has tax
consequences. This occurs even when the loans or credit are extended by a third
party, such as a bank. Large, international corporations have entire teams of
accountants, lawyers, and tax experts that evaluate the most tax-efficient ways of
financing overseas operations.

In cross-border financing, currency risk and political risk are also present. If

structuring terms of a loan across nations and currencies, the potential to obtain
a favorable rate could be a challenge; shifting political climates, including
elections or coups, could hinder a deal’s completion, too.

While financial institutions remain with the lion's share of business for many
cross-border loan and debt capital market financing, increasingly private credit
borrowers have supported the arrangement and provision of loans globally. U.S.
debt and loan capital markets overall have remained remarkably healthy after
the 2008 financial crisis and they continue to offer attractive returns for foreign
borrowers.

Why Cross-Border Financing is Important?

In the recent past, many large firms have gone on to avail cross-border loans instead of
debt financing. This move has impacted cross-border financing options, such as
covenant-lite loans. These loans provide borrowers with much-needed flexibility as
compared to regular loan regulations.

Several international companies have opted to avail cross-border financing as they

have global subsidiaries spread across numerous countries. Choosing cross-border
financing over other financing options will allow companies to make the maximum use
of their borrowing ability and resources to go for optimum growth across the globe.

The Five-Step Process

1. The business places an order with the supplier

2. The provider pays the supplier up to 100% of the purchase price of the
goods or raw materials
3. The goods are shipped and delivered
4. The business repays the provider through an invoice finance facility based
on the value of customer receivables raised for the goods
5. The funds available are recalculated after every transaction so the business
is informed every step of the way.

The Benefits of Cross-Border Factoring

One of the benefits of cross-border factoring is that it can provide peace of

mind to importers and exporters as the provider manages supplier payments
for the goods so that the business can meet its customer deadlines and focus
on positioning the business for growth. Additionally, the provider can help
meet the business’ purchasing needs as well as deal with all the
documentation as part of the agreement, which makes the process more
efficient and avoids any unnecessary delays.

Bank Debt in International Markets

One of the components of the world financial market is the global debt market (the loan
capital market). It is a specific sphere of market relations, relating to the circulation of debt
obligations, guaranteeing a creditor a authority to collect debts from a debtor.

Debt obligations according to the methodology of the World Bank are divided into different
forms

Forms of the debt obligations in the global debt market

The global debt market is classified into two markets: an international credit market (the
market of bank loan liabilities) and an international market of the debt securities, on which
financial instruments, certifying debt relations between a creditor and borrower (bonds,
notes, commercial papers etc.) are circulated. The main feature of such division is
possibility or impossibility of free purchase and sale of financial obligations or financial
instruments (transactions on the exchange of today's cost for the future one are designed
as securities, which can be the object of free purchase and sale, and in turn, the credit
transactions, i.e. the obligation of the borrower before a creditor, is not the object of free
purchase and sale). Each of markets includes the Euromarket as a part of international
market of loan capitals [7, p. 152].

The entities of the international credit market are: commercial banks, corporations, financial
intermediaries, nonbank financial institutions (insurance companies and pension funds),
central banks and other public bodies, governments, regional international banks of
development, international financial institutes. However, in most cases the crediting is
carried out by the international banks.
International banks are classified according to the share of international transactions and
incomes in the general volume of transactions and incomes on the followings groups:

• national banks, having a small foreign branch, which provided an insignificant share of
assets and incomes;

• banks, the international transactions of which are accounted from 5 to 10 percents of their
incomes;

• transnational banks, wherein the level of international concentration and centralization of

capital allows them to take part in the economic distributing of world market of debt
obligations;

• offshore banks, incorporated in offshore zones and using the special tax and other
privileges in the carrying out of financial and credit transactions. None of transactions of
TNBs are carried out without them.

The Bank for International Settlements includes such specific types of activities of banks in
the sphere of international credit transactions,

• loans and credits, which are provided by banks for each other both up-country and outside
its national territory;

• loans and credits, provided by nonbank establishments both up-country and outside its
national territory;

• the new interbank depositing (transactions with Eurocurrencies, transactions in offshore

bank markets).

The international transactions of banks are characterized by following basic features:

• transactions on crediting take into account currency, credit and regional risks, which can
be avoided by implementing of different protective measures;

• the greater part of credit operations of international banks is made by credits to the
foreign banks, which are not their branches;

• the international crediting is mainly oriented to the grant of short-term credits to foreign
banks, which are not the branches of this bank;
• the districts of the short-term crediting are more various geographically, than areas of the
long-term crediting.

The currency and financial terms of the international credit

There are following terms of the international credit obtainment: the cost and credit period,
the credit currency and the payment currency, the type of providing and methods of
insurance. The row of factors influences these terms: direction of the use of credit
resources, the character of entities of credit relations, the level of internationalization of
credit markets and their subordination to the national credit control.

The major element of the credit cost is an interest rate .

Interest rates are formed on the base of interest rates of countries - leading creditors (The
USA, Japan, Germany and others) in the world market.

The range of interest rates is enough wide (an average of 7-18%). The difference of interest
rates is determined:

• by a risk degree for a loan;

• by a term, which a loan is provided on;

• by the size of loan (the higher one - on whichever is lower, all other things being equal);

• by the size of taxation (for example, 7% lending interest rate on an untaxed bond is
preferably than the 9% rate on a taxable bond);

• by the terms of competition in the markets of loan capitals.

A substantial indicator upon the provision of credit is a credit sum (limit). It is part of loan
capital, provided to a borrower. When the company crediting is carried out, a credit sum is
specified in a credit agreement. The credit can be provided in the form of tranche of shares,
which differentiate according to the terms.

The following statements influence the term of an international credit: the lending purpose,
the supply and demand situation concerning analogical credits; the contract size; a national
legislative base; the intergovernmental agreements.
There are distinguished the full and intermediate term of credit. A full term includes: the
period of the use of the provided credit, favorable period (the period of grace of the used
credit), the redemption period (when payment of basic debt and interests is carried out). It
is calculated from a moment of the beginning of drawdown to its final redemption.

The intermediate term of credit includes: the full favorable period and half of term of the
use and redemption of credit. It is used for comparing of efficiency of credits with different
terms and shows, with an eye to what period on the average there is the total amount of
loan. According to the terms of redemption, credits are:

• with uniform redemption in equal shares during the agreed period;

• with non-uniform redemption;

• with bullet repayment of the entire amount;

• with equal annual installments of principal and interests.

When the credit is provided, the type of security for a loan is discussed. It can be the
opening of rubricated accumulation accounts or floating charge or the factoring as well.

In the case of international crediting, it is important to define in what currency the credit will
be provided and in what currency the credit debt will be repaid. Due to the right choice of
credit currency, it depends whether a creditor will carry losses or not. Credit currency must
be stable enough, therefore crediting is carried out in freely convertible currency (FCC). The
credit can be provided in national currencies, Eurocurrencies, international payment units.
The choice of credit currency is affected by the level of interest rate, practice of
international transactions, the inflation rate, dynamics of the currency exchange rate. A
credit debt can be repaid in other currency, i.e. it is assumed the difference between the
payment currency and the credit currency.

There are contractual and hidden elements of the credit cost.

Contractual elements are the credit costs, conditioned by an agreement. They are divided
into basic and additional ones. The basic elements include: amounts, which are directly
paid by a borrower to the creditor; interests; expenses on the securitization of commission.
The additional elements of the credit cost include: amounts, which are paid by a borrower to
the third (for the guarantee). Except the basic interest, a bank commission is collected: for
negotiations, for participation, for a management, for an obligation to provide necessary
facilities in the order of a borrower, the agent's commission.

The hidden elements of the credit cost include: costs of obtaining credits, which are not
fixed in the agreement (unreasonably high prices of commodities on the trade credits,
forced deposits in certain sizes in relation to a loan; overvaluation of the collection
commission of documents by a bank etc.).