Page 21 - Banking Finance June 2022
P. 21

COVER STORY








          A HOLISTIC APPROACH


          IN ASSESSMENT OF


          NON-FUND BASED



          LIMITS AND IT'S



          PRECAUTIONARY


          MEASURES











               n assessment of the working capital of a borrower,  by a solvent person like bank subject to the compliance of
         I     banks shall consider the two types of facilities i.e. Fund  terms and conditions as mentioned in the related trade
                                                              instrument.
               based and  Non-fund  Based facilities. Fund based
               facilities refer to the facilities for drawing cash and
          funds as per requirement of the concerned borrower. In  Non fund based facilities are not sanctioned in isolation. For
          other Non-fund based facilities given by the bank where  example, a customer wanting to import machine would be
          actual funds are not involved. Through these facilities banks  sanctioned a term loan and the LC will be opened to import
          facilitate trade transactions by offering their commitment/  the machinery. Alternatively, it could be a customer with
          promise/undertaking to pay in case the buyer (banks  working capital who will need to open an LC for importing
          customer) fails to pay the seller and seller remains unpaid.  some material. A guarantee will be given to a customer who
                                                              is executing an order and is enjoying a working capital or
          The financial guarantee/ assurance is offered by banks to  term lending facilities.
          facilitate  the  trade  transaction  through  a  suitable
          instrument to cater to the needs of buyer and seller. Non-  Given this non-fund facilities will, eventually get converted
                                                              into term loan or working capital. In view of this non-fund
          funded instruments are designed in such a way whereby the
                                                              facilities will call for almost equal level of credit appraisal.
          seller of the goods or services gets financial commitment
                                                              In addition to it there will be due diligence which is unique
                               About the author               to the type of non-fund limit. The non-fund facilities are
                                                              divided in to three broad categories as under:
                        N Mohammad Ali
                                                                 Letter of Credit
                        Msc (Agri), CAIIB, Chief Manager (Faculty)
                        Union Bank of India                      Guarantees
                        Staff College, Bengaluru
                                                                 Co-acceptance of Bills

            BANKING FINANCE |                                                                 JUNE | 2022 | 21
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