Types of Credit Facilities: Free JAIIB Notes PDF | Oliveboard

Types of Credit Facilities: Credit Facilities are the various methods in which individuals, organizations, businesses, etc can obtain monetary help. This comes in the form of loans and credit. It is the borrowing of money in the confidence of paying it back with interest at a later date.

This topic is a part of the Legal and Regulatory Aspects of Banking paper, which is the third paper of the JAIIB exam. The date of this exam is 20 November 2022. This e-book will contain the various aspects of credit and means to avail credit that candidates should be aware of.

Types of Credit Facilities: Free e-book Download

Types of Credit Facilities

Overview

Know about the types of credit facilities categorized into Fund Based Credit and Non-Fund Based Credit from this article. Keep reading to receive comprehensive study material for JAIIB exams.

Every business needs capital at some point to run smoothly. There are several finance options accessible in the market for businesses. Bank credit facilities are one such source. It is an agreement or understanding between the borrower and the banks that allows the borrower to borrow money for a longer period. Companies use credit facilities largely to meet the financial requirements for diverse commercial operations. Banks, on the other hand, make money by charging interest on the principal amount lent to the borrower. Get the notes for the JAIIB exams below.

Types of Credit Facilities

Credits facilities are of two kinds:

• Fund Based Credit
• Non-Fund-Based Credit.

Fund Based Credit

Fund Based Credit is one in which the bank distributes the funds directly to the borrower without the intervention of a third party. It often entails an instantaneous transfer of cash to the borrower’s account. Loans, CCs (Cash Credit), ODs (Over Drafts), Consortium loans, PAD (Payment Against Documents), and so on are examples.

Fund-Based credit has several advantages:

• The fund-based credit provides the borrower with quick money.
• The fund-based credit provides direct finance for company activities.

The following are the many forms of fund-based credits:

1. Loan

A loan is a sort of Fund-Based Credit in which the borrower has to return the credit within the agreed-upon term and interest. Businesses avail loans to cover different operating expenditures such as production, distribution, and expansion. Companies might be able to avail large sums of money depending on their needs. However, in financing instances involving a substantial amount of capital, Credit Monitoring Arrangement Data reports are constantly watched to assure the safety of the funds’ return.

Let’s look at the many forms of loans.

 Demand Loans & Term Loans

• Demand loan: Demand Loans, also called working capital loans, are short-term loans provided by the lender to the borrower. As the term implies, the lender can demand the loan from the borrower who has to return it. There is no set period for repayment. The borrower can pay back the loan early without incurring any pre-payment penalties. People typically make these loans in exchange for actual assets or equivalent securities.
• Term Loan: These loans have a predetermined repayment plan and term. Due to the fixed duration, the borrower has to pay certain pre-payment costs in early installments. They are typically provided for significant finance requirements.

 Unsecured Loan & Secured Loan

• Unsecured Loan: These loans are provided to the borrower without the need for security, although they often have a high-interest rate. This implies that if the borrower fails to repay the debt, lenders will be unable to acquire any of the borrower’s assets, whether tangible or intangible. These debts include both personal loans and student loans.
• Secured Loan: Lenders make these loans available against any tangible or intangible assets, such as a home, land, or automobile. If the borrower fails to make a payment, the lender may seize his or her assets. Home loans and loans against property are examples of secured loans.

2. Cash Credit

Business owners use cash credit to meet their monthly business costs. In Cash credit, the borrower is made accessible to a current account from which they can take funds up to a predetermined limit for a certain period. Rather than the borrowing limit, the account’s daily closing balance is the factor in calculating the interest.

3. OverDraft

This Credit Facility allows Current Account holders at a single bank to borrow funds over their existing amount for a set length of time. In certain situations, these credits are backed by actual assets, the promise of FDs, securities, or the mortgage of some immovable property.

4. Credit Card

Under this option, a Credit Cardholder can use a set amount of money on the card provided by the bank. The user is required to pay the credits used throughout the time frame specified regularly. Failure to pay outstanding invoices on time will result in a penalty from the bank.

5. Export Finance

Export finance is a type of financing offered by banks to help exporters achieve their production and export demands. The many types of export financing are as follows:

  Packing Credit Advances

These sorts of credits are provided to exporters to cover the costs of manufacturing and packaging items for export by the buyer’s specifications. The credit is extended in exchange for the hypothecation of the borrower’s goods stock and other assets.

  Post Shipment Finance

These kinds of credits are given to exporters when they sell their products to purchasers. These credits help to fulfill the exporter’s temporary financial requirements. Exporters can avail of this credit based on the documents and invoices indicating that the export is completed.

6. Hire Purchase Finance

When a consumer wants to purchase an expensive item, this sort of financing is available. It is decided that the buyer will make a down payment, and the remainder of the sum will be paid in installments under this credit.

7. Bill Finance

In bill financing, a bank obtains a bill of exchange from another bank to transfer cash owing to the credit extended to the borrower. The many types of bill financing are as follows:

 Bill Discounted

This credit permits the sellers to borrow money from the bank in advance against a payment that the seller will receive in the future. Once the buyer submits the payment, the bank deducts certain charges as fees.

 Bill Purchased

This credit enables the seller to borrow funds based on a sales document that is not drawn on the Letter of Credit. The lending bank sends this documentation to the buyer’s bank in exchange for payment.

8. Leasing Finance

The owner of an asset grants the borrower the right to utilize that asset in exchange for payment of a particular sum under this credit facility. It is a significant source of medium and long-term financing. When the owner leases their property, they are the ‘lessor’. The person to whom they lease the property is the ‘leasee’.

9. Retail Credit

Banks provide credit or loans to borrowers for them to acquire specific moveable or immovable assets, durables, automobiles, or similar things. This credit is made available to the borrower depending on his or her credit history. This service is available for both business-to-business and business-to-customer transactions.

Non-Fund Based Credit

Non-Fund Based Credit, on the other hand, occurs when the Fund is not delivered directly to the borrower. It is offered to a third party on behalf of the borrower, as agreed upon by the borrower. Typically, the bank acts as a guarantee giver to the seller on behalf of the buyer. If the money is not obtained by the seller within the agreed-upon time frame, the bank reimburses the seller. Bank Guarantee, Letter of Credit, Buyer Credit, Supplier Credit, and so on.

The following are the benefits of Non-Fund Based Credits:

• It provides financial assurance to the seller if the buyer defaults for any reason.
• It provides exporters with prospects for business growth.

The many sorts of non-fund-based credit are as follows:

 1. Letter of Credit

A letter of credit is a guarantee given by the bank to the seller on the buyer’s behalf that the seller will receive payment from the buyer at regular intervals. It further indicates that if the buyer failed to repay the seller for whatever reason, the bank would be liable for the balance of the payment or the entire payment.

Letters of Credit are issued in exchange for cash or certain securities as security. With the rise of international trade, the Letter of Credit is becoming an increasingly important tool for managing payments between parties who may not know one another and who live in countries with differing legal systems. The bank charges the buyer a percentage as a fee for providing the Letter of Security.

The following sections make up the Letter of Credit:

• Sight Credit: This credit letter is more expedient than others. By presenting a bill of exchange and a sight letter of credit, the borrower can obtain monies from the lender.
• Revocable & Irrevocable Credit: The issuing bank can revoke or terminate revocable Letters of Credit at any time without prior notice to any party. The issuing bank cannot rescind or cancel an irrevocable Letter of Credit. Once the borrowing party produces the LOC, the bank must honor the letter.
• Confirmed Credit: A bank other than the issuing bank adds its confirmation to the Letter of Credit in this type of credit. Only irrevocable letters of credit are eligible for confirmation.
• Back-to-Back Credit: The exporter requests that the bank provide an LC to his or her local supplier under this sort of credit. The export LC that the exporter obtains from an international customer predicate the request. Back-to-Back Credit refers to when an LC is awarded based on an export LC.

2. Bank Guarantee

Under this form of credit, the bank guarantees that, under all circumstances, the Guarantee issuing bank will pay the insured party’s financial losses as specified in the contract. Let us examine several guarantees.

• Financial Guarantee: The Guarantor assumes responsibility for the borrower in this sort of guarantee. This implies that if the borrower fails to repay the obligation, the Guarantor must pay the unpaid amount.
• Performance Guarantee: The Guarantor provided a security bond, which guarantees the lender that the Contractor will execute the work adequately and on schedule.
• Deferred Payment Guarantee: This guarantee is typically issued on deferred or postponed payments. Banks typically give DPG when purchasing specific machines and items.

3. Letters of Comfort For Availing Buyers Credit

When a bank of the importer or buyer issues a guarantee, that guarantee is a letter of comfort. The importer can use this Letter of Comfort to get Buyer’s Credit from overseas banks. The Importer or Buyer’s Bank will charge a fee for providing the Letter of Comfort.

4. Derivative Products

Derivatives are financial securities or financial contracts that are supported by underlying assets. These underlying securities can range from currencies to bonds, commodities, and equities.

5. Buyer Credit

It is a short-term finance option provided by the bank to Indian buyers or importers to operate their import business. Importers can obtain loans from overseas financial organizations that offer credit at reduced rates by using Buyer’s Credit. Buyer’s credit is available for practically all sorts of capital and non-capital items.

6. Supplier Credit

This sort of credit financially helps importers in India. Any foreign Financial Institute or Supplier can provide the Importer credit at Libor rates, which are rather inexpensive. The Letter of Credit given to the Importer via the Importer’s Bank backs up this credit.

An exporter provides credit to a foreign importer to help him fund his purchase. The importer usually pays a part of the value of the contract in cash and releases a Promissory note as proof of his commitment to pay the remainder over time. The exporter accepts the importer’s deferred payment and may be able to acquire cash by discounting or selling the promissory note established with his bank.

Conclusion

We hope that this article has given you a thorough understanding of the JAIIB exams types of credit facilities categorized into Fund Based Credit and Non-Fund Based Credit and other details. If you have any questions, please contact Oliveboard.

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