Bank Overdraft facility defines by the Financial Dictionary as “A draft for more than the balance in the account on which the draft is drawn. A bank may honor an overdraft, depending on the importance of the customer and on prior arrangements (if any) to cover overdrafts”.
Apart from being the most commonly used banking asset product world-over. It is also the most abused. Overdraft facility unlike Term Loans are prone to abuse because utilization of overdraft whether structured or unstructured cannot easily be controlled by banks.
The overzealous bank customer especially businesses often deviates from agreed purpose for which the overdraft facility were granted and utilizes such funds for purposes other than what it was meant for. The customers accounts ended up sticky and non performing leaving banks with the option to either restructure or begin recovery efforts with its attendant cost implications.
To mitigate this risk, most commercial banks have developed variants of overdraft that will give the bank some level of control over its utilization for business. Here are some of the new overdraft variants offered by Nigerian banks
1. Stock Replacement Facility (SRF)
This overdraft variant is proposed to retailers and wholesalers of products of manufacturing companies. Such customers must have developed competencies in the sale of such products in the past and must have record of purchases with the manufacturer.
The bank in an effort to control utilization of the facility pays directly to the manufacturer/s of the customer’s product and expect the customer to arrange to pick the products. The bank expect sales proceeds to be paid into the customer’s account as sales are being made and within a reasonable period of time based on customers sales history. The process continues while the bank allows customer draw from its sales profit to meet other business needs.
2. Import Finance Facility (IFF) – Revolving (Against Shipping Documents)
This kind of facility is availed to importer of consumables who must have had the prerequisite Knowledge and performance in the past. Such customer must have imported goods in the past and make sales within reasonable periods.
The bank will pay the customer’s exporter directly via Letters of Credit (LC) while the customer is expected to pay from his existing sales proceeds when the shipping documents arrived. The bank then releases the shipping document to him so he can clear the goods and replenish his stocks. This process is repeated depending on the customer’s stock needs.
3. Key Distributorship Finance (KDF)
This Overdraft variant is very similar to SRF in characteristic, except for its focus on key distributors of multinational company like Nestles, PZ, P&G, Dangote, Lafarge, Nigerian Breweries, Guinness, MTN, Globacom and others. Pre- Lending arrangements which includes pricing and other lending dynamics are sometimes made with the multinational companies who are expected to direct their distributors to the banks where such arrangement must have been made.
4. LPO/IDF/CFF Line
Local Purchase Order Finance, Invoice Discounting Facility and Contract Finance Facility are short circle transactions that are expected to be paid back between 30 days to 180 day or 360 day on exceptional basis. There are however instances where some bank customers needs continuous funding arising from contract with approved Principals for continuous supplies. Such customer are availed facility lines that allows them to continues to access funding while waiting for the principal to pay on jobs already executed.
The list is not exhaustive and it varies from one bank to another. Collateral, pricing and other dynamics and lending conditions may also varies from one bank to another.
Read also: Short term loan