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Buyers Credit Digest

Buyers Credit Digest
Buyers Credit Digest
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Buyers Credit Digest 66 Buyers Credit Digest Blog
Saravana Bhaskar Oct 25, 2017
Buyers Credit Digest

Understanding EEFC Accounts

EEFC Account: EEFC Account or Exchange Earners Foreign Currency Account, is an account in the foreign currency denomination with an AD Category - I bank. It is a facility extended to the exporters/software companies or individuals who receive foreign currency. 100 % of their foreign exchange receipts can be received into their EEFC account.An EEFC account can only be opened as a current account, hence interest isn’t payable on the EEFC accounts.As mentioned earlier, 100% foreign exchange earnings can be credited to the EEFC accounts, all the credits accumulated in the account during a calendar month should be converted into Indian Rupees on or before the last day of the subsequent calendar month. However, if the exporter has some future payment commitments like import payments or buyer’s credit settlement, EEFC balances can be retained in the account beyond the last day by submitting a request letter to the respective bank along with the proof on the future payment dues.                                                                                                                                                                                                                                                                                                            Permissible credits to EEFC account are:Any inward remittances can be credited to EEFC account apart from foreign currency loans, foreign investments.Advance remittances received towards export of goods or services.Payments received in the foreign currency by a firm in the Domestic Tariff Area for the supply of goods to a company in the Special Economic Zones (SEZ).Inward remittances received by an exporter from an account maintained with an authorized dealer for the purpose of countertrade. (Countertrade is an arrangement involving adjustment of value of the goods imported into India against value of goods exported from India in terms of the Reserve Bank guidelines).Professional fees including directors’ fee, consultancy fee, lecture fee, honorarium and other earnings received by a professional for providing services in his individual capacity.Re-credit of unutilized foreign currency earlier withdrawn from the account.The disinvestment proceeds received by the resident account holder on conversion of shares held by him to ADRs/GDRs under the Sponsored ADR/GDR Scheme permitted by the Foreign Investment Promotion Board of the Government of India.Permissible debits into EEFC account are:i) Outward Payments towards permissible current account transactions permitted as per Foreign Exchange Management (Current Account Transactions) Rules, 2000] and capital account transactions permissible as per Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000].ii) Any payments in foreign currency towards the purchase of goods from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Parkiii) Payment of customs duty in accordance with the provisions of the Foreign Trade Policy.iv) Trade-related loans, provided by an exporter to his importer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.v) Payments to a person resident in India for the supply of goods/services including payments for airfare and hotel expenditure.EEFC balances can also be hedged against any foreign exchange fluctuations.
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Understanding EEFC Accounts

Understanding EEFC Accounts

Kranthi Tilak Reddy
EEFC Account: EEFC Account or Exchange Earners Foreign Currency Account, is an account in the foreign currency denomination with an AD Category - I bank. It is a facility extended to the exporters/sof...
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Exporter's Understanding on Bill Discounting and Bill Negotiation

Most of the times, we would hear our working capital bankers discussing Bill Discounting or Bill Negotiation on our export bills, although, the outcome of both the products are one and the same. It ensures the realization of export bills along with proceeds of the exports into your account. As an exporter, you get money for the completed exports irrespective of it being bill discounting or bill negotiation.Export Bill Discounting: Bill Discounting takes place generally for DA bills where there is an USANCE period. Upon shipment, Exporter(Seller) generally prepares all the required documents which are required as per the trade commercial contract which includes Invoice,Packing List,Bill of Lading (BL) or Airway Bill, Bill of Exchange and other documents if any called for and will be routed through Exporters bank to the Importer(Buyer) which allows Importer to retire the documents basis acceptance and release the goods.Export Bill Discounting is generally a post-shipment facility and is not backed by LC’s. This limit generally forms a part of CAT 1 limits and it is needless to mention it as a product with recourse.For exporters who got Bill Discounting facility, all the required documents as a part of the trade contract will be submitted to the bank counters and the bank typically discounts 80%-90% of invoice value and credits your account to ease the working capital. Upon receipt of this payment from the Importer, the outstanding will be knocked off along with interest portion and the remaining bill value will be credited back to the Exporter’s account.Bill Negotiation:Bill Negotiation is a term used when the documents of the exporters are negotiated at the counters of banks and a facility is drawn out of it, post shipment. This particular product is availed for shipments done under the documentary credit.As an exporter, one needs to exercise caution while preparing documents under the documentary credit, to ensure it's a clean bill and not a discrepant document. Clean Bill Negotiation is where the client limits are not used and discounted under bank lines depending on the availability of limits/lines between the Exporters and Importers bank.Clean Bills are negotiated and credited to exporters account upon receiving acceptance from the bank who issued the LC.This forms a part of CAT 2 limits when it is offered to exporters without recourse and limits drawn on bank lines. This is an off-balance sheet product.From a banker’s perspective, Bill Negotiation is a low-risk trade product as it is backed by LC compared to Bill Discounting.If you need any further clarification, please write to us Bhaskar@savedesk.coTo Read about Foreign letter of credit discounting click here
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Exporter's Understanding on Bill Discounting and Bill Negotiation

Exporter's Understanding on Bill Discounting and Bill Negotiation

Saravana Bhaskar
Most of the times, we would hear our working capital bankers discussing Bill Discounting or Bill Negotiation on our export bills, although, the outcome of both the products are one and the same. It en...
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Advantages of Taking Buyer’s Credit Quotes from a Consultant

Buyer’s credit is a low-cost import-financing product available in the market for a while. It allows the importer more time to make the payment at a very low additional interest cost, while the exporter immediately receives the payment, making it an ideal product for the importers.The importer can either go to his bank for availing Buyer’s Credit or to a consultant who deals with arranging Buyer’s Credit quotes. A bank in India typically might have 5-10 tie-ups with their own subsidiaries outside India or associate FI’s who would provide quotes. However, a consultant of repute might have more than 50 tie-ups across the globe and various time zones helping them to provide much better or cheaper quote vis-a-vis a bank’s quote. Typical costs associated with Buyer’s credit are as below:Interest Cost (Charged by the overseas bank funding the transaction) + LOU Charges (Charged by the importer’s bank for letter of undertaking issuance) + Arrangement Fee (Charged by the the Consultant for arranging the quote. Few banks also charge this on top of LOU issuance) + Withholding Tax (Only in cases where it is applicable).Availing the Buyer’s Credit quotes from the consultant in most cases can result in interest reduction of 50 to 100 bps or more, making it more affordable than a quote from the bank. Considering the rest of the process, until funding remains the same, it makes more rational for an importer to evaluate the overall cost before proceeding with the transaction either with the bank or the consultant.Few other Benefits:A reputed consultant can also help with following up on timely funding, obviating delays in exporter receiving the payment.Consultant can guide the customer from end to end, making the whole process convenient especially for the importers who are availing such products for the first time.Right consultants can also advise the importer on various hedging solutions, limiting the risks associated with adverse movement of foreign exchange.Can help the importer understand the pulse of the market on buyer’s credit and associated costs making it easier for them to avail the same in future.
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Advantages of Taking Buyer’s Credit Quotes from a Consultant

Advantages of Taking Buyer’s Credit Quotes from a Consultant

Kranthi Tilak Reddy
Buyer’s credit is a low-cost import-financing product available in the market for a while. It allows the importer more time to make the payment at a very low additional interest cost, while the expo...
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Difference Between Letter of Credit and Bank Guarantee

As the name indicates Letter of Credit (L/C) is a financial instrument, which is issued by banker basis Buyers creditworthiness. Usually, the terms “L/C” and “Bank Guarantees” are used interchangeably by finance person as they share certain similarities. However, there is a difference in how banks look at these products in terms of liability on their book. Definition of Bank GuaranteeAs the name indicates, a guarantee given by a bank on behalf of his customer (account holder) to the beneficiary, for assurance of payment in the event of default by its applicant is called bank guarantee. Bank guarantee is the usual practice in public tenders/govt related works in domestic markets. Bankers charge commission up to 1.5% per annum on the issuance of bank guarantees.  There are two types of bank guarantees:Financial GuaranteePerformance GuaranteeDefinition of Letter of CreditA letter of credit is a financial instrument, which is issued by a buyer to the seller, confirming a payment. A typical LC will have certain clause/terms which have to be met by both buyer and seller for the successful execution of the transaction. Basically, for Buyers/Importers, it will clearly mention terms of payment by the seller.For the seller, it will contain terms like type/quantity & condition of goods & documentary evidence along with relevant shipment bills etc. Once all the terms and condition are met, the bank will transfer funds . This Product is availed by Exporter/Importer.Types of Letter of Credit Sight L/CUsance L/CRevolving L/CIrrevocable L/CStandby L/CConfirmed L/CRed Clause L/CTypical cost of LC can run up to 2% of transaction cost which can be collected under various heads like-LC Opening Charges LC retirement Charges Forex MarginsKey Differences Between Letter of Credit and Bank GuaranteeGuarantee is an instrument given by the applicant’s bank to the beneficiary, confirming payment in the event of default, whereas the Letter of Credit is a payment assurance given by the applicant’s bank, subject to certain terms and condition.Under Bank Guarantee, a bank takes responsibility for payment when the client fails to honor commitment. In Letter of credit, Primary Liability lies with the bank to collect payment from the seller.The number of parties involved in Bank Guarantees is restricted to the applicant, beneficiary and banker, whereas in case of LC, it can be more than three, i.e applicant, Applicant/issuing bank, beneficiary, advising bank, negotiating bank and confirming bank.Bank Guarantee is used for domestic transactions, whereas the letter of credit is used for import/export transactions.Under LC, payment is honoured under successful acceptance of terms and conditions. Under bank guarantee, payment is made under default of certain terms and conditions.More about Bank Guarantee & Letter of credit can be read on-https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6523
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Difference Between Letter of Credit and Bank Guarantee

Difference Between Letter of Credit and Bank Guarantee

Saurabh Jain
As the name indicates Letter of Credit (L/C) is a financial instrument, which is issued by banker basis Buyers creditworthiness. Usually, the terms “L/C” and “Bank Guarantees” are used interch...
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How Does Export Factoring Function

Export factoring means funding an exporter through purchase of their invoices and collection of short-term receivables based on goods and services provided to an importer.Export factoring generally is a comprehensive product that’s a combination of working capital financing, credit protection and collection of receivables. A “factor”, is either a bank or financial institution that funds an exporter through purchase of invoices or receivables. Typically a “factor” purchases or funds 80% of the invoice value post entering an agreement with the exporter. This facility is generally provided without recourse. Working model:Post signing of an agreement between the exporter and the factor, an “import factor” is identified, who generally is a correspondent of the “factor” in the exporter’s country. An “import factor” does the necessary checks and establishes the creditworthiness of the importer before approving the facility. An importer places the order for goods under an “open account” terms, then the exporter ships the goods and submits the invoice to the factor locally. Invoice is then transferred to “import factor” that manages collection of receivables and payment.Types of export factoring:Discounting Factoring: The factor pays the exporter in advance against the receivables and then the funds are collected from the importer. The cost of this facility basically depends on the volumes and tenor of discounting.Collection Factoring:In this, the factor pays the exporter after deducting the commission during the maturity time of receivables from importer. This obviates the risk of importer not paying during the maturity.  The commission could range between 2-4 % based on volumes, importers country risk etc. Advantages of factoring:Obviates the risk of non-payment by the importer.Improves the cash flows as it’s an off balance sheet product.Exporter gets an edge in the global market on pricing as he can opt for open account terms with the importer and avoid banking costs associated with D/A, D/P and Letter of credit.Collection of receivables is handled by the Factor.It’s cheaper than long term financing through banks or any other unsecured domestic loans.Disadvantages of factoring:It is relatively expensive than export credit insuranceThis product is generally not available for receivables that have usance period of more than 180 days.It is more suitable to an established exporter than export company, which is new, as factors generally prefer significant yearly export volumes.
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How Does Export Factoring Function

How Does Export Factoring Function

Kranthi Tilak Reddy
Export factoring means funding an exporter through purchase of their invoices and collection of short-term receivables based on goods and services provided to an importer.Export factoring generally is...
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Processing and Settlement of Import Payments through Online Payment Gateway Service Providers (OPGSP’s)

Keeping in mind the ever growing e-commerce business in India, RBI has decided to permit AD category-1 banks to facilitate import payments by entering into an arrangement with OPGSPs. The latest guidelines for the same are as below- AD Category-1 banks should diligently report each such arrangement to Foreign Exchange Department, RBI.(i) Banks have to carry out due diligence on the OPGSP that they are making an arrangement with.(ii) Maintain separate Export and Import Collection accounts in India for each OPGSP.(iii) They have to make sure the transactions are genuine and ensure purpose codes reported to the RBI are in line with the actual transaction.(iv) Any Pertinent information relating to such transactions should be submitted to RBI as and when advised to do so; (v) AD Category-1 banks have to do the reconciliation and conduct an audit of collection accounts on a quarterly basis.Foreign companies, operating as OPGSP should open a liaison office in India after an approval from RBI before entering into such arrangement with any AD category-I bank. OPGSPs have to strictly adhere to the below mentioned conditions.(i) Adherence to the Information Technology Act, 2000 and all other applicable laws / regulations for such transactions.(ii) There has to be an infallible system for resolution of disputes and complaints related to these transactions. Any issues related to payments should be resolved by the concerned OPGSP.(iii) There have to be reserve funds, in line with their refund on returns policy.(iv) Sellers should be signed up after conducting necessary due diligence.Domestic companies, which are intermediaries for electronic payment transactions and want to take up cross-border transactions, should have separate accounts for both domestic and cross border transactions.Import transactions through OPGSPThis facility is only available for import of goods and software, as permitted in the latest Foreign Trade Policy, and transaction value cannot exceed USD 2,000.All the funds received in the import collection account should be sent to the respective exporter immediately and can’t be held beyond two days from the date to credit to the collection account.OPGSPs have to submit copy of invoice and airway bill to the AD Category-1 bank to authenticate the import.Below mentioned credits are permitted to the import collection account of OPGSPs-Collection/payments received from Indian customers for online purchases from overseas sellers, through credit card, debit card and net banking andCharge back from the overseas sellers.Below mentioned debits are permitted in the OPGSP Import Collection account-Payments to respective overseas exporters in permitted foreign currency.Payments to Indian importers for returns and refunds.Payment of commission at rates defined under the contract to the current account of the OPGSPAny Bank charges
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Processing and Settlement of Import Payments through Online Payment Gateway Service Providers (OPGSP’s)

Processing and Settlement of Import Payments through Online Payment Gateway Service Providers (OPGSP’s)

Kranthi Tilak Reddy
Keeping in mind the ever growing e-commerce business in India, RBI has decided to permit AD category-1 banks to facilitate import payments by entering into an arrangement with OPGSPs. The latest guide...
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Forfaiting In Trade Finance

Forfaiting, the literal meaning is to give up (something) as a necessary consequence of something else. In Trade Finance, “Forfaiting” is a mechanism of financing short to medium terms post-shipment exports.  Capital goods exported usually come with credit terms from the importer , due to which exporter finds issues with his current cash flows. To address this issue, Forfaiting product was introduced in 1960. In simple words, it's a medium term foreign currency loan extended by foreign bank (also termed as forfaiter) against  shipped goods by exporter.Forfaiting is usually carried out by-a. Discounting export receivablesb. Bills of exchanges or promissory notes There are 5 parties involved in Forfaiting-i. Exporter ii. Importer iii. Exporter’s bank iv. Importer’s bank v. The ForfaiterModus operandi :-Post negotiating invoice (referred as sales contract), Exporter approaches Forfaiter ( foreign Bank ) to ascertain contract terms for funding.Forfaiter does due diligence about importer, supply and credit terms, documentation, country risk, credit risk etc.Forfaiter quotes the discounting rate usually quoted in LIBOR/EURIBOR.The Exporter quotes a contract price to the overseas buyer/Importer by adding cost of funds,commitment fee,arrangement fees etc. on the exported goods.Upon acceptance of the above  pricing, Exporter and Forfaiter sign a contract.Export takes place against documents guaranteed by the importer’s bank.Forfaiter discounts the bill and presents the same to the importer’s bank for the payment on due date or even sell it in secondary market. Costs of Forfaiting: Forfaiting typically involves below costsCommitment Fees :-  Ranges between 0.5% -1% PaDiscount Fees :- Interest cost charged in LIBOR/EUROArrangement Fees – Facilitator fees will be charged by Bank/Consultant in India.BENEFITS OF FORFAITING SERVICES The benefits to importer are abundant, some of them are listed here:1)  Seller receives immediate credit of funds in account, thus increasing liquidity position.2) Since risk is borne by the forfaiter, payment default from importer will not affect the Seller.3) Exporter is hedged against any interest rate risk and exchange rate risk since contract is executed at a fixed rate.4) 100 per cent of the invoice/contract value can be credited5) Cost of Forfaiting can be borne by Importer as well , depending on the credit terms.For more details on RBI policy, please refer https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=7354#b23
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Forfaiting In Trade Finance

Forfaiting In Trade Finance

Saurabh Jain
Forfaiting, the literal meaning is to give up (something) as a necessary consequence of something else. In Trade Finance, “Forfaiting” is a mechanism of financing short to medium terms post-shipme...
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BUYERS CREDIT PROCESS FLOW INFOGRAPHIC

 
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Factoring

A financing method in which a Financier buys debt or invoice from another company, so basically seller surrenders accounts receivable at a discount to a factor (Financer) to raise capital. Upto 80% of account receivables can be discounted with factoring services. The biggest advantage of Factoring is that it is an out-of-balance sheet product and it does not create liability on balance sheet.So a Factor is :-A Financial Intermediary Buys invoice/book debts Take responsibility of collection of paymentsParties involvedSeller Debtor/Buyer Financial Institution ( Lender) Types of Factoring:Recourse Factoring:- Factoring with recourse, as the name suggests. In case of non payment of invoice, liability of paying of discounted amount from Factor will still be with the seller.Non Recourse Factoring :- Under this facility, Factor not only discounts bills, but also provides guaranteed credit protection. In case of non payment, Factor will bear the risk of bad debts.Maturity Factoring:- In Maturity Factoring, the Factor agrees to pay amount to exporter/seller on the agreed date.Cross Border Factoring: - Also referred to as two Factor system of factoring, it is almost similar to domestic factoring, except that 4 parties are involved. They are:Exporter Export Factor ImporterImport Factor Client (Exporter) enters into arrangement with Export factor in his country & delegates export receivables to him. Export Factors enters into arrangement with Import Factor & organises for credit evaluation & collection of payment for an agreed fee.Import factor collects payment from Importer and remits it to export factor , which in turn passes credit to exporter.Advantage of Factoring:1. Factoring helps to improve the current ratio,  which in turn adds liquidity to the company. This reduces working capital cycle gap.  Seller therefore can offer better credit terms and increase orders.2. Increase in the turnover of stocks. Since the cash recovery is fast, overall topline of company increases.3. It ensures prompt payment and reduction in debt.4. It helps with credit protection.5. Reduces work of collection/recovery department.Responsibility of collecting the dues solely lies with ‘Factor’/Financer.Cost involved:-Commission/Fees of 0.5-1.5% for rendering factoring services Interest Cost for discounting is charged for the specified tenor debt receivable usually varies between 10-12%.More can be read on associated links as below https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10125
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Factoring

Factoring

Saurabh Jain
A financing method in which a Financier buys debt or invoice from another company, so basically seller surrenders accounts receivable at a discount to a factor (Financer) to raise capital. Upto 80% of...
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Pre-closure of BC(Buyer’s Credit)

Importers in India are allowed to settle/pre-close their buyer’s credit facility availed from overseas lenders. However, the same is regulated on RBI Master Circular on Import of Goods and Services & RBI Master Direction – Import of Goods and Services, RBI Master Circular on External Commercial Borrowings and Trade CreditsFrom importers perspective, following are commonly known reasons why importers prefer to pre-close the buyer’s credit.Un-hedged buyer's credit outstanding is settled considering favourable exchange rates.Demanding business requirement to prepay buyer’s credit, so as to use the same available limits for other purpose.Conditions from Foreign Lenders:Most of the foreign lenders offer letter on buyer’s credit that does not  cover specific conditions against pre-closure of the said credit. However,  traditionally most of them allow importers to pre-close provided the followingPart-Payment is not allowedInterest along with Principal is paid completely .Foreign Lender is kept informed about the pre-closure at the time of Offer letter issuance and their consent on the same.Principal & Interest outstanding is paid for the complete Loan tenure including the unexpired tenure i.e.,Buyers credit availed for say 120 days can be prepaid anytime before, provided interest for 120 days along with Principal is paid at the time of pre-closure. We need to ensure that the cost of borrowing at anytime should not exceed All-in- ceiling cost* prescribed by RBI for Trade Credits i.e., 350 basis points over 6M LIBORRelevant Extract from RBI Master Direction & Circular relating to Import of Goods & Services,External Commercial Borrowings & Trade Credits for reference:Interest on Import BillsAD Category – I bank may allow payment of interest on usance bills or overdue interest on delayed payments for a period of less than three years from the date of shipment at the rate prescribed for trade credit from time to time.In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance, at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.Disadvantages of Pre-closure:Cost of interest to be repaid for contract tenure of buyer’s credit in full at the time of closure .Cost of LOU paid at the time of availing buyer’s Credit for full tenure .Increases the overall cost of the import.For any other clarifications relating to your Buyer’s Credit, please write to advisor@savedesk.co or  Click here
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Pre-closure of BC(Buyer’s Credit)

Pre-closure of BC(Buyer’s Credit)

Saravana Bhaskar
Importers in India are allowed to settle/pre-close their buyer’s credit facility availed from overseas lenders. However, the same is regulated on RBI Master Circular on Import of Goods and Services ...
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