Demand Loan-Forced Loan

Definition of Demand Loan/Forced Loan: The loan created by a bank to honor its own commitment may be defined as Demand Loan or Forced Loan. Usually this type of loan, a banker is forced to create to meet up its import obligations.
Nature of Demand Loan: There are mainly two types of Demand Loan. The Loan which is created against import obligation where imported cargo is not in Bank’s possession such as, Demand Loan for importation of Garments Raw Materials, Capital machineries imported under deferred or acceptance basis. On the other hand, bank sometimes being forced to create demand loan for encashment of own guarantee issued without receiving of coverage against counter guarantee there against.

Causes of Demand Loan

1. Failure of exporter to perform the export order.
2. Non-repatriation of export proceeds on or before maturity of import bills.
3. Shortfall of fund due to export made at discount price.
4. Misappropriation of export proceeds.
5. Short shipment for miss-assessment of the manufacturer at the time of
   accepting of export order.
6. Non-performance of the principal against guarantee.

Export Failure

Back to Back L/C’s under Readymade Garments sector (RMG) are opened with the plea that payment or import bills shall be made after realization of export bills. It is to be stated here that banks do not retain any margin opening of Back to Back L/c’s. So, successful export performance and timely repatriation of proceeds there against is the only desired expectation of bank for making payment of import bills at maturity. But the garments
manufacturers sometimes fail to execute the export order in time. For which banks are forced to create demand loan to honor their own commitment.
Causes of Failure:
(a) Non-receipt of Raw materials in due time.
(b) Refusal of the buyer to accept finished goods for inferior quality.
(c) Failure to effect shipment in due course for non-completion of timely
the production
(d) Non Co-operation of buyer’s agent for issuance of necessary documents as asked for in the credit i.e. inspection certificate.
(e) Space problem at the time of shipment for designated shipping line.
(f) Failure of electricity, strike in the country etc. which hampers normal production of the RMG Factories.
(g) Refusal of the buyer to accept goods for delay shipment.

How to avoid demand Loan

In order to avoid demand loan, bank should take special care for opening back to back L/C. The related export L/C to be scrutinized carefully. Any defective clause, appears in the export L/C to be suitably amended before opening of BB L/Cs. Production capacity of the factory must be assessed properly. At the time to opening of BB L/Cs, the following points must be taken into consideration:
(a) Workable machineries installed in the factory.
(b) Monthly production capacity of the factory
(c) Existing work in hand.
(d) Quantity of proposed order.
(e) Shipment date of the export L/C
(f) Country of procurement and mode of shipment of raw materials to be procured with proposed shipment date.
(g) Undertaking regarding extension of shipment date of export L/c should not be entertained.
(h) Physical verification of supplied goods at buyer’s factory premises by
bank officials should be mandatory for local BB L/Cs.
(i) Opening of BB L/Cs for local accessories should be discouraged
before delivery of fabrics at buyer’s factory premises.
(j) Import documents with discrepancies likely, Quality of Fabrics, Late
shipment etc. under BB L/Cs should not be accepted if it may hampers
the ultimate export of finished goods.
(k) Shipping guarantee for clearance of imported goods against discrepant
documents should never be entertained
(l)No BB L/Cs to be opened against contract, except contract executed
between well reputed/established buyer and financially solvent exporter.
(m) No BB L/Cs to be opened with the assumption that production of
finished goods may be made on sub-contract basis.
(n) Incase, sub-contract is unavoidable prior information to be given to the
bank and in that case disbursement of packing credit facility should be
restricted.
(n) For quota item, no Back to Back L/Cs to be opened without quota allocation of EPB.

Steps to be taken after creation of Demand Loan

Before creation of demand loan a stock report of stock-lot to be obtained from the exporter. This stock report should be verified physically by the bank official and it should be identical with the imported goods of related commercial invoice or export order in case of finished products. After creation of demand the matter to be informed to the concerned custom commissioner, and International Division. After affecting payment of import, bills by creating demand loan post facto approval to be obtained from international Division. At regular intervals, stock lot goods to be physically inspected by the bank officials, Exporter to be kept in constant pressure to export the stock lot goods. For any unauthorized utilization of stock lot goods, the matter to be informed to all concerned authorities.

Steps to be taken for adjustment of Demand Loan

1. For adjustment of demand loan, the party to be kept in constant pressure to export the stock lot goods.
2. A suitable percentage to be deducted from each and every subsequent
   export bill towards adjustment of Demand Loan
3. Packing credit facility may be considered at curtailed rate
4. Demand Loan must be re-scheduled to avoid classification in case of running party.
5. Additional collateral may be asked for.