Temenos Transact
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Introduction to Factoring and Forfaiting

Bills are receivables represented by invoices or bills of exchange. A business corporate (startups or SMEs or multinational corporates) can sell its bills to a Temenos Transact bank at a discount for a fee. The bank then collects the payments from the corporates customers, which is referred as factoring or receivables financing.

The risk department in a bank may not approve financing of all bills. Such bills are sent for collection with the bank acting as an agent. Occasionally, banks consider accepting a bill as a collateral for extending a line of credit. A bank can extend their services to a corporate customer on the strength of bills. For example, factoring, collections and bill discounting.

Classifying Bills

The bill business from a bank's perspective are classified as follows:

The below are the different types of bills:

  • Trade Bills – The bills that are a consequence of trade finance business by a corporate. This can further be sub classified into:
    • Demand Bills – Payable on demand
    • Usance Bills – Paid after a specified number of days. For example, the days count starts from the date of transport document
  • Direct Bills – The drawer and drawee are the same. These bills have a definite maturity date
  • Clean Bills – These are essentially cheques issued by a bank

After lodgment, the following operations can be performed on bills for a customer of a bank:

  • Collecting invoice amount in part or full and crediting the operative account
  • Discounting or purchase
  • For factoring, individual bills are grouped together and collectively discounted or purchased
  • Using bills as collateral to secure limits

Additionally, the bills module also supports:

  • Retention of margin during advance disbursement
  • Partial disbursement
  • Partial or rebate type of settlement
  • Cross currency disbursement or settlement

Configuring Factoring and Forfaiting

The individual bill types and their nomenclature differs from country to country. The parameters tables (also known as applications in Temenos Transact) are the building blocks for designing the business process flow. It defaults common values to improve accuracy and efficiency.

Setting up Parameter Tables

The parameter tables in the bills module for transaction processing are listed below:

Table Name Short Name Description
BL.PARAMETER BP Company level parameter
BL.TYPE BT Bill type definitions
BL.TXN.TYPE.CONDITION BTTC Bill types and transactions
APPL.GEN.CONDITION AGC Bill contract group definition
BL.GROUP.CONDITION BGC Defining customer or group conditions
Tables are configured in the above sequence, when setting up the parameters.

The explanation on each of the parameter files and its content is given below:

This is the highest-level table defined at the company level in the bills module setup at the time of implementation. The processing characteristics for bills are determined from the settings defined in this section.

Transaction codes, interest amortisation frequency, grace period, interest rates (maximum cap and minimum floor) and delivery messages.

Some of the fields in BL.PARAMETER are explained below:

Field Description
Int Amort Freq
  • Determines the frequency for interest amortisation when a bill is discounted or purchased.
  • Indicates he start period for amortisation.
  • Accepts values, such as Daily, Monthly or Weekly.
  • Updates dynamically when the Close of Business (COB) process is run in the system.
Days Post Maturity Defines the number of days post maturity of the contract after which the records are moved to the history file.
Max Int Rate
  • The value mentioned in this field is used to check if the calculated effective rate of interest is within the permissible limits. 
  • The maximum interest rate should not exceed the rate specified in this field. 
  • When the effective rate comes below the rate mentioned in this field, an override message is generated.
  • This is an optional field.
Minimum Interest Rate
  • The values specified in this field is used to check if the calculated effective rate of interest is within the the permissible limits. 
  • The minimum interest rate should not go below the rate specified in this field. 
  • When the effective rate goes below the rate mentioned in this field, an override message is generated.
Grace Days
  • Determines the number of days within which a bank’s customer has to settle a bill repayment.
  • At the end of this period, a penalty is charged based on the outstanding debit balance on the bill account.

This table defines the parameters defaulted, while lodging a bill. (On daily basis, the bills received at the bank are lodged in BL.REGISTERapplication). The field values are defaulted when a bill is processed. Defines the category for various bill type records (for reporting purposes) and determines the liability customer (in case of dishonour of a bill). One-time setup is done at implementation. However, new BL.TYPE records are subsequently added based on business imperatives. 

The beow table displays various BL.TYPE values and their description.

BL.TYPE Description
1 Discounted bill with recourse
2 Discounted bill without recourse
3 Collection bills
8 Factoring transaction with recourse
9 Factoring transaction non-recourse

Some of the fields are in BL.TYPE are explained below:

Field Description
Category
  • Enters the category of the bill (whether it is discounted or collection or collateral) in which it is reported.
    		•
    Collateral Allowed values are Yes or No. On selecting Yes, the bills type is considered as a collateral.
    Liability Pty Defines the party to be defaulted as liability customer in BL.REGISTER.
    Part Settlement
  • Defines whether a partial settlement is allowed under the product type.
    		•

    This table define the default values for specific BL.TYPE and bill operation combinations. The possible bill operations are collections, discounting or collateral. The default values for each of these operations can be different from each other. The ID of a record in this table are appropriately structured as collection or discount or collateral. Additionally, it is used to define the default values in combinations of bill types and operations.

    A collection bill (bill type ‘3’) is combined with bill operation (discount), to define default values for a collection bill that is discounted.  Such combinations empower banks to reduce entering values in the fields during operations.

    This table contains conditions for transactions. Therefore, a charge or commission code required in bill transactions is defined in the FT.CHARGE.TYPE or FT.COMMISSION.TYPE.

    Charge codes are set for each charge level of BL.REGISTER, BL.BATCH and BL.BILL to be defaulted into the respective application.

    Some of the fields in BL.TXN.TYPE.CONDITION are explained below:

    Field Description
    Grace Days
  • Determines the number for calculation of grace days. For example, 2C – 2 calendar days and 2W – 2 working days. This is an optional field.
    		•
    Currency
  • Indicates the currency in which the charges are defined. The other associated fields areInterest Key,Interest Spread andInterest Rate.
    		•
    Interest Rate Determines the interest rate that is used at the transaction processing level. This is an optional field associated withCurrency,Interest Key andInterest Spread.  
    Max Int Rate
  • Checks if the calculated effective rate of interest is within the permissible limits.  When the interest rate is defined,  the maximum interest rate should not breach the rate specified in this field. An override message is generated when the effective rate is breached. This is an optional field.
    		•
    Minimum Interest Rate Checks if the calculated effective rate of interest is within the permissible limits.  When the interest rate is defined, the minimum interest rate should not breach the rate specified in this field.  An override message is generated when the effective rate is breached.

    Modifies or overrides the values defaulted from a BL.TXN.TYPE.CONDITION. Using this application, different default values (of charge, commission and interest) are defined for an individual or a group of customers, as defined in APPL.GEN.CONDITION.

    Different maximum and minimum amount for charges is defined at an individual customer level or group of customers (with a discount or premium).

    The record ID is <C-customer number> or <GROUP>. For example, C-100315, GROUP1, GROUP2.

    The following fields define the special conditions applicable to specific groups or individual customers:

    Field Description
    Chg Maximum Amt Defines the maximum amount charged for the applicable charge type.
    Chg Minimum Amt Defines the minimum amount charged for the applicable charge type.
    Chg Discount Amt
  • Specifies the amount deducted from the charge amount calculated.
    		•
    Chg Premium Amt
  • Specifies the amount added to the charge amount calculated.
    		•

    Allocates group codes, based on a number of defined conditions and/or local routines for any Temenos Transact application with a STANDARD.SELECTION.

    A contract group is defined in this application, and created based on the category. For example, DISCBILL and COLLBILL is in the category range code from 30000 to 30001 and  30100 to 30120, respectively. The APPL.GEN.CONDITION requires a record with an ID of BL.BILL.

    Defines the status of a process step in the life cycle of a bill. This status is entered at BILL.REGISTER or BL.BILL level. The status of a bill is monitored on a daily basis, when a report is generated from this application. Once the status is defined, the same is used in BL.REGISTER or BL.BATCH application.

    The other setups done at the parameter level are:

    This is a percentage of invoice or bill amount retained by the bank at the time of making advance disbursement to the seller. The value in theRetention Margin field defaults in BL.REGISTER when theBill Type is attached, and theRetention Margin field is set to Allowed in the BL.TYPE application.

    The system calculates and updates the maximum available amount for disbursement based on the retention margin. The retention margin is defined for:

    • Product type  in BL.TXN.TYPE.CONDITION
    • Customer level in BL.GROUP.CONDITION
    • Buyer in BL.BUYER.SELLER.LIMIT

    The order in which theRetention Margin field is defaulted in BL.REGISTER are as follows:

    1. BL.BUYER.SELLER.LIMIT
    2. BL.GROUP.CONDITION – Customer specific
    3. BL.GROUP.CONDITION – Group
    4. BL.TXN.TYPE.CONDITION

    The Cat Ira defines the profit and loss category code in BL.PARAMETER application to which the interest received in advance is posted. On authorisation, this field cannot be modified. However, the change in the existing profit and loss category can be specified in the New Cat Ira field. During COB, the category code is updated as the new category code. Henceforth, the new profit and loss category is used for reporting.

    Similarly, the category of the bill in which it is reported is entered in the Category field of BL.TYPE application. On authorisation, this field cannot be modified. However, to change the existing category code the New Category field is used. At COB, the category code in this field is updated as the new category code Henceforth, all transactions are reported in this category code.

    The E.UPLOAD.BL.REG.ERR.DTLS enquiry displays all the BL.REGISTER records in IHLD status, which can be amended or deleted.

     

    The following setup is done in the system for the enquiry to display the error text and upload record line number.

    The Log Level field in the record Temenos Transact.GENERIC.UPLOAD of EB.LOGGING.PARAMETER is set to Trace.

    TheInt Log File field in SPF is set to Yes.

    Illustrating Model Parameters

    Model parameters consists of the below tables:

    Table Name Description
    BILL.PARAMETER
    • This is a module level parameter file for bills.
    • It is set before entering any bills contract along with the other parameter files.
    • The disbursement, repayment and amortisation transaction code along with the interest rate caps, Profit and loss category for IRA Interest Received in Advance (IRA) are defined.
    • The user can amend these pre-defined and fixed files.
    BILL.TXN.TYPE.CONDITION  
    • This parameter table defines the defaulting values for different combination of bill type and bill operation.
    • ID of the table is DISCOUNT, COLLATERAL and COLLECTION, which are the supported bill operations.  
    APPLICATION.CONDITION ;
    • Contract groups are defined in this application based on category (product) code.
    • This grouping is used to set default charge, commission and interest using the BILL.GROUP.CONDITION.
    • The record ID to this table is BL.BILL to define bill groups.
    BILL.GROUP.CONDITION
    • This parameter table is used to modify or override the values defaulted from a BL.TXN.TYPE.CONDITION record.
    • Default charge, commission and interest can be defined for an individual customer or a group defined in APPL.GEN.CONDITION.
    BILL.TYPE
    • Parameter settings for various types of bills (such as, discounted, collection), which are defaulted while entering a bill register record.
    • It defines the contract category for various bill types and determines the liability customer in case of dishonour of a bill for each defined bill type.
    BILL.STATUS
    • This application defines the status on the movement of bills.
    • This status is given at bill register or bill batch level.
    EB.DUPLICATE.TYPE
    • This application determines the duplicate records created in BL.REGISTER application.
    • The system generates an override when the fields defined in the EB.DUPLICATE.TYPE and BL.REGISTER are same.
    FILE.UPLOAD.TYPE
    • File upload type application allows the user to pre configure the upload directory, application and version details to process the header or item record in the uploaded file.
    • This application displays all the records with value BILL.REGISTER in the Items Upd Appl field.
    PRODUCT.CONDITIONS
    • BL.BATCH.CONDITIONS table defines the conditions for updating the product type in the BL registers based on the default conditions or customer specific conditions.
    • Record ID format is <COMPANY ID-PRODUCT– Default conditions> .
    CHANGE.PRODUCT.CONDITIONS
    • BL.BATCH.CONDITIONS table defines the conditions for updating the product type in the BL registers based on the default conditions or customer specific conditions.
    • Record ID format is <COMPANY ID-PRODUCT– Default conditions>.
    BATCH.CONDITIONS
    • This application defines the soft conditions for determining product types, batching and change product conditions for the bulk upload of invoices.
    BUYER.SELLER. LIMIT
    • This application records the buyer-seller limit for information purpose. This holds buyer's maximum exposure for which the record is setup.

    Illustrating Model Products

    Factoring and Forfaiting (FF) involves the sale of the receivables by the seller to meet their immediate cash needs. FF module supports the below products:

    Product Name Features
    Bills for collection
    • Collection bills that can neither be discounted (purchased) nor taken as collateral.
    • The invoice or bill of exchange amount is credited to a customer’s account only after the credit is made to Nostro account.
    Bills for discounting
    • Collection bill that is discounted (purchased) by the bank for value and the invoice or bill of exchange amount is credited to the customer even before it is realised
    • This loan is extended to the customer (drawee)
    • The loan is settled when the bill is realized or returned without payment
    Bills for collateral Bill collateral product is a trade bill that is taken as a collateral for establishing an account limit for lending.
    Creation of bills contract
    • Lodging a bill in transact system
    • Bill contract involves 3 steps
    Manual upload and batching

    Manual upload and batching provides the users with the options to register, batch and rebatch the receivables with authorisation.

    • Creation of BILL.REGISTER
    • Creation of BL.BATCH
    • Creation of BL.BILL
    Automatic upload and batching Automatic upload and batching provides the users with the options to register, batch and rebatch the receivables with zero authorisation.
    Disbursement and settlement Disbursement and settlement provides the users with the options to input, amend, reverse and delete the disbursed and settled records.

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    Published on :
    Tuesday, May 28, 2024 7:41:00 PM IST