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Purchase of trade finance loan / portfolio of other banks from secondary market. Banks are extending trade finance to its customers by way of Bills discounting, suppliers credit, Trade credit, Banker Acceptance and other trade lines such as issuance and confirmation of Letter of Credit, advance payment guarantees etc.
After extending the trade finance under the LC of obligor bank or extending trade loans to obligor bank sometimes these banks (seller Bank) approach other purchaser banks for participation in these transactions and float these transactions to buyer bank under risk participation. For undertaking such type of transaction it is mandatory that a Master Risk Participation Agreement is signed between seller bank and purchaser bank.
The refinancing rates/interest rate depends on the maturity period of the assets and the quality of the assets. The purchaser bank, after completing the due diligence of the underlying transaction, extends finance support at a mutually agreed rate based on the size and tenor of the transaction.
On the due date, the Obligor Bank remits the amount along with interest to Seller Bank and seller bank will remit the participated amount along with interest to purchaser bank.
The rate of interest proposed to be charged should be competitive depending upon the prevalent market conditions, branch’s cost of funds, amount and tenor of the loan etc.