TYPES OF CREDIT FACILITIES:

These credit facilities have been divided into two categories:

1. Fund-based lending: The fund-based credit includes facilities such

as Overdrafts, Bills Finance, Cash Credit A/c, Term Loans & Demand
Loans etc. wherein there is an immediate flow of funds to borrowers.

2. Non-fund-based lending: These non-fund-based credit facilities

include the issuance of a letter of guarantee, Letter of Credit (LC) for
which the banks charge fees for these facilities. But under these
facilities, there is no immediate outflow of funds from banks.
CASH CREDIT SYSTEM
• Here in debit balance is sanctioned up to the drawing power limit which is based on the stock
holding.

• This limit is generally sanctioned for one year.

• After that, the limits get renewed (enhanced or reduced, as per the customers working capital
requirements).

• The borrower also has needs to submit periodic stock statements.

• The period depends on the cycle of operation, turnover, cash budget, or projected balance sheet.

• Sometimes it is also available against jewelry, national Savings certificates, LIC policies, and other
personal assets of the borrower. In such cases, they are not required to submit stock statements.

• CC is offered generally against hypothecation or pledge of the borrowers prime security which
could be raw material or book debts.
• The borrower does not need to do the whole amount at once but can withdraw the
money whenever the need arises.

• The borrowers can transact in their CC account to do their normal business

activities. So, there is no need for them to open a new account whenever they
need to withdraw the money from the CC account.

• Under the CC account, the limit gets prescribed on yearly basis.

• Bank sanctions the CC limit for a particular use, which most commonly, is
for working capital. But the bank can’t really verify whether the funds have actually
been used for the purpose for which the credit facility has been sanctioned or not.
OVERDRAFTS
Banks offer two types of overdraft facilities mentioned below:

• Secured overdraft
• Temporary overdraft or clean overdraft
Temporary overdrafts: These overdrafts are purely allowed the owner
personal credit to the customer for the purpose to enable them to meet
some emergency situations in real cases. If a bank has allowed a
customer to draw against his cheques, then that also falls under the
category of temporary overdraft.

Secured overdraft: This kind of overdraft is offered to the customer

against some security that is tangible in nature, for example, LIC policy,
NSC: National security certificates, bank deposits, shares, and other
similar kinds of securities. They can also get it by a simple application
process and after completing documentation formalities
DEMAND LOANS

• These are secured loans that need to be repaid on demand. They are
granted by marking a lien on FDs, LIC policies (having adequate
surrender value), national Savings certificates, etc.

• These loans have a high liquidity period, which can we make from
months, quarters, half-yearly installments only one lump sum
payment and the end of the credit period in one go.

• Sometimes it can also be closed from the proceeds of the security

against which it has been offered.
 Term Loan account
➢ Given for the purpose of purchasing any fixed
assets for Business Purpose or for personal
individual requirements.
➢ Ex: Housing Loan, Education Loan, Machinery
Loan etc.
➢ Repayment is made in installments i.e. EMI
(Equated Monthly Installments)
 Bank Guarantee
This is a kind of bank’s promise that the liabilities
of a debtor will be met in the event that if one fails
to fulfill his contractual obligations.
✓ Financial Guarantee.
✓ Performance Guarantee.
✓ Deferred Payment Guarantee.
A letter of credit gives the exporter an irreversible guarantee that the bank that
issued the letter of credit will pay the exporter if the products and/or services are
delivered to the importer as per contractual conditions and with compliance
papers (the bank of the importer).

It also guarantees the importer that the products and/or services bought will be
delivered by the compliance documents and any contractual terms included in
the purchase agreement.

The issuing bank's responsibility to pay the letter of credit's recipient, most
commonly the exporter, is therefore contingent on the exporter delivering the
item as described in the letter of credit, as well as all other terms stipulated in
the documented credit.

A Letter of Credit is similar to a guarantee made by a bank on behalf of its client

that the bank will make payment to the beneficiary if the beneficiary shows the
documents specified in the LC.
Parties to a Letter of Credit
• Applicant-Buyer-Importer-Opener: This is the individual who
applies for a Letter of Credit with the bank.

• Issuing Bank: The bank that opens the Letter of Credit at the
request of the applicant/buyer is known as the issuing bank.

• Beneficiary-Exporter-Seller: The individual who is eligible for a

Letter of Credit benefit.

• Advising Bank / Notifying Bank: The bank in the

Beneficiary/Exporters Country that advises the beneficiary of the
letter of credit.
• Negotiating Bank: The bank that negotiates the bills in the
beneficiary/exporter country (i.e., make payments on the bills drawn
by the seller and accepts the documents.) The Negotiating Bank,
also known as the Nominated Bank / Paying Bank, is the bank
specified in the LC. If the LC does not identify a bank, however, any
bank can act as the negotiating bank.

• Confirming Bank: The advising bank is merely needed to notify

the beneficiary of the credit. However, if the advising bank confirms
the credit in addition to advising it, the advising bank becomes the
confirming bank.

• Reimbursing Bank: The Issuing Bank appoints this bank to

compensate the Negotiating, Paying, or Confirming Bank.
Types of Letters of Credit
Acceptance Credit: Ordinary Letters of Credit are often sight credits, which require
quick payment of bills drawn by the beneficiary. Acceptance Credit or Time Credit are
letters of credit from which usance bills can be drawn.

Revocable Credit: A revocable credit can be changed or terminated by the issuing

bank without prior notification to the beneficiary.

Irrevocable Credit: A credit that cannot be altered or cancelled without the

beneficiary's approval.

Confirmed Credit: If a bank that advises the credit to the recipient adds its
confirmation to the credit, it is referred to as a confirmed credit. The only credit that is
irreversible can be confirmed.
Transferable Credits: As a result, the beneficiary's rights under an LC cannot be transferred. A
transferable credit allows the recipient to assign his rights to third parties. An LC is not
transferrable unless indicated.

Back-To-Back Credits: The beneficiary who receives an LC utilises it to acquire another credit
from his (beneficiary's) bank in favour of the supplier. Three banks are active in this sort of LC.
(The issuing bank, the advising bank, and the third bank that provided an ancillary credit against
the security of the initial credit.)

Anticipatory Letter of Credit:

1. Red Clause Letter of credit: In a regular LC transaction, the beneficiary is only entitled to
payment after delivering the documentation and invoices issued under the LC to the negotiating
bank. However, in some cases, the recipient will be entitled to a price advance. These credits
include a "Red Clause," which allows an intermediate bank to advance funds to the recipient
before shipping.

2. Green Clause Letter Of Credits: This is an improvement on the "Red Clause." This sort of
LC not only allows for pre-shipment advances but also for exporter advances to cover storage at
the port of shipment. Anticipatory Credits are the Red Clause and Green Clause credits.

3. Revolving Letter of Credit: Although the amount of credit is fixed, it can be renewed as soon
as the previous payments are paid.
The International Chamber of Commerce has created a uniform
documentary credit application form (ICC). Uniform Customs &
Practices for Document Credit was also published by the ICC. In
publications made accessible by the ICC, the rights and duties of
purchasers, sellers, and participating institutions in international
letters of credit transactions are outlined in great detail.
The flow of papers and information in the issuance of a letter of credit is given
below.

• Step 1: The buyer accepts the seller's offer to acquire items. A purchase
order, a formal contract, an accepted Pro-forma invoice, or an informal
exchange of communications can all be used to create this agreement.

• Step 2: The buyer signs the bank's letter of credit application form to apply
for a letter of credit.

• Step 3: The issuing bank issues the real letter of credit instrument and
delivers it to the seller after approving the application (beneficiary).
• Step 4: The vendor ships the products to the customer after receiving a
payment guarantee from the issuing bank.

• Step 5: The seller prepares and provides the paperwork required by the
letter of credit to the issuing bank.

• Step 6: The documents are examined by the issuing bank. The issuing bank
pays the seller if the papers meet the letter of credit's requirements.

• Steps 7: The issuing bank collects payment from the application (buyer) in
line with the letter of credit agreement's provisions and sends the paperwork to
the applicant.

Step 8: The applicant picks up the product from the carrier with the
paperwork, finishing the letter of the credit cycle.
Letter of Credit
In international trade, where
buyers and sellers are far
apart in two different
countries, or even continents,
the Letter of Credit acts as a
most convenient instrument,
giving assurance to the
sellers of goods for payment
and to the buyers for
shipping documents, as
called for under the Credit.