Fund Based and Non-Fund Based Credit Facilities

Fund Based and Non-Fund Based Credit Facilities

Banks offer various types of credit facilities to their customers which may broadly be classified into two groups on the basis of Funding –

1. Fund Base Credit
2. Non Fund Base Credit.

Fund based credit facilities are those in which an actual outflow of funds from the bank to the borrower takes place, typically involves cash transactions; whereas non-fund based facilities are those, which do not involve such outflow of the bank’s funds or does not deal with cash transactions or funds.

Examples of fund based facilities are term loan, cash credit and overdraft; whereas non-fund based facilities are letters of credit, bank guarantees, letter of comfort, etc.

Fund Based Credit

These are any credit facility which involves direct outflow of Bank’s fund to the borrower means involves cash transactions. Such credit facilities are as follows:

1. Loan: – Loan refers to those credit facilities repayable in a definite period. E.g. Term Loan, Demand Loan.
2. Cash Credit: – Cash Credit is a short term loan approved by banks for businesses, financial institutions and companies to meet their working capital Therefore it is also known as working capital loan. The borrowing company can take money, even without a credit balance, up to sanction limit. The facility is secured by way of hypothecation of Stock/goods and debtors and all other current Assets of the business generated during the course of business. Cash credit can also be secured by way of mortgage of immovable properties (as collateral security).
3. Over Draft: – An overdraft allows a current account holder to withdraw in excess of their credit balance up to a sanctioned limit. It is secured by way of Mortgage of immovable properties, pledge of F.D., Bonds, Shares securities, Gold & silver and any physical asset and Hypothecation of Stock and Debtors and all other current Assets of the business generated during the course of business.
4. Packing Credit: – It is sanctioned to an exporter in the Pre-Shipment stage to purchase raw materials at competitive rates and manufacture or produce goods according to the requirement of the buyer and organize to have it packed for onward export. It is also secured by way of Hypothecation of Stock of goods and Debtors and all other current Assets of the business generated during the course of business.
5. other fund based credit facilities– Bill Discounted , Bill Purchased , Advance against hypothecation of Vehicles (Transport Loan) , House Building Loan , Consumer Loan , Agriculture Loan -Farming -Non Farming , Consortium Loan , Lease Financing , Hire Purchase etc. .

Non Fund Based Credit

These are credit facility where there is no involvement of direct outflow of Bank’s fund on account of borrower rather the outflow of Bank’s fund on account of third party on behalf of borrower. These are:

1. Letter Of Credit: – When a buyer or importer purchase goods from an unknown seller or exporter, Bank issues a LETTER OF CREDIT in addressed to the supplier or exporter and later, supplier or exporter supplies the goods to such unknown buyer or importer. A signed Invoice with Letter Of Credit is presented to the bank of buyer/importer and the payment is made to the seller/exporter directly by the bank.
2. Bank Guarantee: – It is offered by the bank that, in case of an occurrence or non-occurrence of a particular event, the bank guarantees to fulfill the loss of money as stipulated in the contact. Bank Guarantee may be Financial Guarantees, Performance Guarantees and Deferred Payment Guarantee.
3. Buyer Credit: – It is the credit availed by an Importer from overseas lenders (i.e. Banks & Financial Institutions) for payment against his imports. The overseas bank usually lends the Importer based on letter of credit, bank guarantee issued by the importer bank.
4. Suppliers Credit: – Under such credit facility an exporter extends credit to a foreign importer to finance his purchase. Usually the importer pays a portion of the contact value in cash and issues a Promissory note as evidence of his obligation to pay the balance over a period of time. The exporter thus accepts a deferred payment from the importer and may be able to obtain cash payment by discounting or selling such promissory note created with his bank.

See also…
RISKS FACTORS IN THE BANKING SECTOR