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Non-Funded Credit

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What is non-fund based credit ?

The non-fund based facilities areessentially in the nature of promises madeby banks in favour of a third party to

provide monetary compensation on behalfof their clients if certain situations emergeor 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 facilitydoes not require immediate outlay of fundsand so cost of such facilities tend to be

lower.

Off-balance sheet item A bankguarantee or a letter of credit issued by a

bank on behalf of its client is an off-balance sheet item.

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BANK GUARANTEE

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Bank Guarantee

Sec 126 of the Indian Contract Act, 1872 definesa guarantee as .a contract to perform thepromise 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 areissued by banks

Enterprise participating in tenders, auction, etc..

Security required against mobilisation advance given tocontractors.

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 ofproducts. On submission of such performance

guarantees the suppliers receive the proceeds withoutwaiting for the expiry of the warranty period.

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Situations where guaranteesshould not be issued by banks

Guarantees which promise refund of any types of loansor deposits by NBFCs.

Guarantees to banks/offices outside India for thepurpose of grant of loans or overdrafts abroad.

Guarantees on behalf of customers enjoying creditfacilities with other banks.

Guarantees in favour of other financial institutions, otherbanks or other lending agencies on behalf of theirborrowers against the loan facilities provided by theselending 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 certainfinancial obligations, making payments and satisfyingthe dues, etc..

Performance Guarantee The issuing bank provides a guarantee to the

beneficiary to make good the monetary loss in theevent of non-performance or short-performance of acontract 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, constructioncontracts, 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 ControlRegulations

Minor Guarantees

Bank Guarantees import under foreignloans / credits.

Guarantees for non-residents

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Types of Bank Guarantee

Infrastructure project related bankguarantee

Deferred payment guarantee

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Appraisal of bank guaranteerequirements 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 adefinite period.

It is enforceable on the happening of a definite

event. The amount is specific.

The bank guarantee is being issued against abona 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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