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