Non Fund Based:

Non Fund Based Credit Facilities (BG & LC)

1. NON - FUND BASED CREDIT FACILITIES

2. NON-FUND BASED FACILITIES

Non-fund based facilities are such facilities extended by banks which do not involve outgo of funds from the bank when the customer avails the facilities but may at a later date crystallise into financial liability if the customer fails to honour the commitment made by availing these facilities. The banker undertake a risk to the amount on happening of a contingency.

3. ADVANTAGES OF NON-FUND BASED FACILITIES

  • No immediate outlay of funds;
  • Future or contingent deployment of funds;
  • Risks are similar to funded exposure and procedure is same;
  • Earnings by way of Up Front commission, fees and exchange income;
  • Source for mobilisation of deposits;
  • Comparative easy monitoring;
  • Costs less to Banker;
  • Low probability of default.

4. VARIOUS TYPES OF NON BORROWING FACILITIES

  • – Letters of Credit
  • – Inland LCs –Foreign (Import) LCs
  • – Guarantees –Inland Guarantees
  • – Foreign Guarantees

5. BANK GUARANTEE

6. GUARANTEE

Section 126 of Indian Contract Act,1872 defines guarantee: “A contract to perform the promise or discharge the liability of a third person in case of his default.”

7. GUARANTEE PARTIES INVOLVED

The parties to the contract of guarantee are:

a. Applicant : The principal debtor : The person at whose request the guarantee is executed.

b. Beneficiary : The person to whom the guarantee is given and who can enforce it in case of default.

c. Guarantor : The person who undertakes to discharge the obligations of the applicant in case of his default. Thus, a contract of guarantee is a collateral contract, consequential to a main contract between the applicant and the beneficiary.

8. GUARANTEE TYPES

Guarantee may be classified by nature as under:

1. Inland Guarantee and Foreign Guarantee.

2. Financial Guarantee and Performance Guarantee.

9. BANK GUARANTEE

Guarantee issued must be unconditional and for:

  • Definite period
  • Definite amount
  • Definite purpose

Guarantee may be based on location of beneficiary, Purpose and Currency: Inland: Issued with in India in favour of beneficiary located in India for any contract or purpose originating within India. Foreign: Issued in India in favour of beneficiary located in any other country in Foreign Currency.

10. VARIOUS TYPES OF BANK GUARANTEES

As per nature of contract, Bank Guarantees are classified in three types;

  • 1) Financial Guarantee
  • 2) Performance Guarantee
  • 3) Deferred Payment Guarantee

11. FINANCIAL GUARANTEE

Financial Guarantees are issued by bank on behalf of customer’s requirement to deposit a cash security or earnest money.

Most Government department insist that before contract is awarded to contractor, insist on a Earnest Money Deposit.

Issued in respect of Excise / Custom duties and Octroi under dispute etc.

Issued in respect liabilities towards tax, excise duties, custom duties etc. to Govt. authorities in relation of specific transaction;

Issued for covering payments for supplies/services favouring Oil Companies, SAIL, Railways etc.

12. PERFORMANCE GUARANTEE

Performance Guarantees are issued by the bank on behalf of its customer whereby the bank assure a third party, that the customer will perform the contract as per condition stipulated in the contract.

These are issued on behalf of customer, who enters into contracts to do certain things on or before a givendate.

It involves a contractual obligation.

13. DEFERRED PAYMENT GUARANTEES

It is issued in favour of suppliers to guarantee payment of installments for capital goods purchased on deferred payment basis.

It required when goods or machinery are purchase on long term credit and payment is made through cheque or bills of different dates.

Bank issue guarantee of payment of installments on due date, in event of default by buyer.For example:

Rs. 50 Lacs is cost of Machinery. Repayable in 5 yearly installments.

Default in payment by the buyer.

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