Non-Funded Credit

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What is non-fund based credit ?

The non-fund based facilities are essentially in the nature of promises made by banks in favour of a third party to provide monetary compensation on behalf of their clients if certain situations emerge or certain conditions are fulfilled.

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 Non-fund based credit facilities : Bank Guarantees Co-acceptances Letter of Credit

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Why non-fund based credit ?

Cost Factor Non fund based facility does not require immediate outlay of funds and so cost of such facilities tend to be lower. Off-balance sheet item A bank guarantee or a letter of credit issued by a bank on behalf of its client is an offbalance sheet item.
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BANK GUARANTEE

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Bank Guarantee
Sec 126 of the Indian Contract Act, 1872 defines a guarantee as .a contract to perform the promise or discharge the liability of a third person in case of his default.

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Bank Guarantee
Three Parties to a Bank Guarantee
The Applicant
The client on whose behalf the guarantee is being issued.

The Beneficiary
To whom the guarantee is issued.

The Guarantor
It is the issuing bank.

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Situations where guarantees are issued by banks

Enterprise participating in tenders, auction, etc.. Security required against mobilisation advance given to contractors. When ancillary units supply product/services to parent company. When goods are supplied in terms of the contract. Suppliers provide warranty period to the buyers of products. On submission of such performance guarantees the suppliers receive the proceeds without waiting for the expiry of the warranty period.

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Situations where guarantees should not be issued by banks

Guarantees which promise refund of any types of loans or deposits by NBFCs. Guarantees to banks/offices outside India for the purpose of grant of loans or overdrafts abroad. Guarantees on behalf of customers enjoying credit facilities with other banks. Guarantees in favour of other financial institutions, other banks or other lending agencies on behalf of their borrowers against the loan facilities provided by these lending institutions

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Types of Bank Guarantee

On the basis of nature Financial Guarantee
A certificate issued by the bank regarding the financial ability / worth of its client to meet certain financial obligations, making payments and satisfying the dues, etc..

Performance Guarantee
The issuing bank provides a guarantee to the beneficiary to make good the monetary loss in the event of non-performance or short-performance of a contract by the client (applicant).
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Types of Bank Guarantee

On the basis of purpose
Advance Payment Guarantee
Issued by banks on behalf of customers who are in the business of execution of major export orders, implementation of turnkey projects, construction contracts, major servicing projects, etc

Bid bonds, performance bonds, guarantees for exports

In favour of overseas buyers on account of bona fide exports from India.
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Types of Bank Guarantee

Regulated by Exchange Control Regulations Minor Guarantees Bank Guarantees import under foreign loans / credits. Guarantees for non-residents

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Types of Bank Guarantee

Infrastructure project related bank guarantee Deferred payment guarantee

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Appraisal of bank guarantee requirements of an enterprise

Purpose Frequency Amount of bank guarantee financial or performance. Past records of the applicant. Present balance outstanding against the BG limit. Amount of margin Counter guarantee
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Issue of Bank Guarantee

The bank guarantee is being issued for a definite period. It is enforceable on the happening of a definite event. The amount is specific. The bank guarantee is being issued against a bona fide trade / commercial transaction. It does not stipulate any onerous clause. It does not contain any clause for automatic renewal of the bank guarantee on its expiry.
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 Limitation Clauses Onerous Clause Invocation of Bank Guarantees

Payment of invoked amount

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THANK YOU

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