Quasi Credit

Facilities
Quasi Credit Facility is also known as Non Fund based
credit facility. Unlike fund based facilities in this fund is not
transferred directly to the borrower. It is offered to third
party as agreed upon by the borrower, on behalf of the
borrower. In this the bank acts as the guarantee provider to
the seller on behalf of buyer that if the payment is not
received by the seller within pre agreed time, the bank pays
the amount to the seller.

Advantages
1. It offers financial security to the seller if the buyer
defaults due to any reason.
2. It offers business expansion opportunities to exporters.
3. Comparative easy monitoring.
Various types of
NFB Facilities
The credit facilities given by the banks where actual bank funds are not
involved are termed as 'non‑fund based facilities'. These facilities are
divided in three broad categories as under:
• Letters of Credit
• Bank Guarantees

Letter of Credit
Letter of credit is, a method of settlement of payment of a trade
transaction. It contains a written undertaking given by the bank on behalf
of the purchaser to the seller to make payment of a stated amount on
presentation of stipulated documents and fulfillment of all the terms and
conditions incorporated therein. The primary liability lies with the bank
only, which collect payment from the client afterwards.
With the rising international trading, Letter of Credit is becoming a
crucial tool to manage the payments between parties that hardly know
each other and live in different countries with different laws. The bank
charges a certain percentage from the buyer as the fees for offering the
Letter of Security.
The advantages of a letter of credit to the buyer is as follows:
• Allows the buyer to trade with the parties from any corner of the
world
• The buyer can edit the terms and conditions that fit him/her after
consulting the seller.
• It acts as a credit certificate for the buyer, and he/she can perform
multiple trades as a major financial institution like Bank backs
him/her.
• Letter of Credit offers better Cash flow to the buyer.

The advantages Of a Letter Of Credit To seller is as follows:

• The seller receives the money on fulfilling the terms mentioned In
the Letter of Credit.
• There is no risk of losing money for the seller if the buyer fails to
pay the money. Seller gets his/her dues from the Bank that has
issued the Letter of Credit.
• If there is a dispute in trading, the seller can withdraw funds from
the Bank even when the case is pending.
Types of Letter of Credit
The 'Letters of Credit' may be divided into following categories :
Revocable letter of credit. This may be amended or cancelled without prior warning or
notification to the beneficiary. Such letter of credit will not offer any protection.
Irrevocable letter of credit. This cannot be amended or cancelled without the agreement of
all parties thereto. This type of letter of credit is mainly in use and offers complete protection
to the seller against subsequent development against his interest.
Transferable Letter of Credit. A transferable letter of credit is one that a be transferred by
the original (first) beneficiary to one or more second beneficiaries. It is normally used when
the first beneficiary does not supply the merchandise himself but is a middleman and thus
wishes to transfer part or all of his rights and obligations to actual suppliers as second
beneficiaries.
Back to Back letter of Credit. A letter of credit which is backed by other letter of credit is
termed as 'back to back' credit and is also used when middleman is involved in a sale
transaction. Such transaction offers additional security of the letter of credit to the bank
issuing back to back L/C.
Red Clause Letter of Credit. All letters of credit as discussed above provide a sort of
guarantee of payment against documents which are drawn strictly in terms of subject letter of
credit. In other words the benefit of L/C accrues only when shipment of goods is completed.
Red Clause Letter of Credit goes a step further and authorises the advising bank to grant an
advance to the beneficiary at the pre ‑shipment stage itself. The advance by the advising bank
shall be recovered at the time of negotiation of documents under that L/C.
Commercial Letter of Credit
This is a direct payment method in which the issuing bank makes
the payments to the beneficiary. In contrast, a standby letter of
credit is a secondary payment method in which the bank pays the
beneficiary only when the holder cannot.

Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws
within a certain limit during a specific time period. It can be useful
if there are frequent shipments of merchandise

Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks
will honor drafts made at certain foreign banks.
Assessment of
LC Limit
The assessment Letter of Credit limits are fixed by banks based on the
annual consumption of raw materials to be purchased against the Letter of
Credit.
Ascertain from the customer the requirement of Consumption of
Material (CM) per annum, which is to be purchased under LC.
Find out Procurement Time or lead time (PT) for importing the materials.
(Procurement Time or Lead time means the time taken in receiving the
goods including the transit period after the LC is opened)
If the material is purchased under credit, add the usance period
or Credit Period (CP) to procurement time.
We get Total Time (TT) when we add the credit period to the
procurement period. TT=PT+CP
If CM is the Annual Consumption of Material to be purchased against
LC.
We can compute the LC limit required by the company by dividing the
annual consumption of raw material to be purchased against LC and the
same is divided by 12 and multiplied by total time.
Thus the formula for LC/LG Limit = CM×TT ÷ 12
Bank Guarantee
Under this type of Credit, Bank offers assurance that under any circumstances, the
Guarantee issuing Bank will fulfill any financial losses incurred by the protected party as
mentioned in the Contract. It is a guarantee given by the bank to the beneficiary on
behalf of the applicant, to effect payment, if the applicant defaults in payment. The bank
offers assurance that under any circumstances the guarantee issuing bank will fulfill any
financial losses incurred by the protected party as mentioned in the contract.
In this the bank assumes liability when the client fails to make payment.

Financial Guarantee
In this type of Guarantee, the Guarantor takes responsibility for the Borrower. This
means, if the Borrower fails to repay the debt, Guarantor will be liable to pay the unpaid
amount.
Performance Guarantee
The Guarantor issued a security bond that assures the lender that the Contractor will
complete the work satisfactorily in the stipulated time. If the counterparty fail to deliver
on the services as promised, the beneficiary will claim their resulting losses of non-
performance from the guarantor – the bank.
It covers guarantees of advance payment & tender guarantees.
Deferred Payment Guarantee
This type of Guarantee is usually given on deferred or postponed payments. The banks
generally offer DPG on the purchase of certain machinery and goods.
Advance Payment Guarantee
It gives assurance that the amount a party gives as advance will be
returned should there be a failure in honoring the contract.
Loan Guarantee
This type of guarantee assures loan repayment even if the borrower
fails to do so. It means that the guarantor has to pay the loan on behalf
of the borrower.
Bid Bond Guarantee
It gives assurance that the bidding process will honor the contract he
or she has bid for as per the terms specified in the contract.
Foreign Bank Guarantee
It gives assurance to those parties taking part in foreign transactions
that each party will fulfill part of their deal in the contract.
Advantages of Bank Guarantees
• Bank guarantee reduces the financial risk involved in the business
transaction.
• Due to low risk, it encourages the seller/beneficiaries to expand their
business on a credit basis.
• Banks generally charge low fees for guarantees, which is beneficial to
even small-scale business.
• When banks analyse and certify the financial stability of the business, its
credibility increases and this, in turn, increase business opportunities.
• Mostly, the guarantee requires fewer documents and is processed quickly
by the banks.

Disadvantages of Bank Guarantees

• Sometimes, the banks are so rigid in assessing the financial position of the
business. This makes the process complicated and time-consuming.
• With the strict assessment of banks, it is very difficult to obtain a bank
guarantee by loss-making entities.
• For certain guarantees involving high-value or high-risk transactions,
banks will require collateral security to process the guarantee.
Discounting under LC
LC reduces the risk involved in international trade by guaranteeing the payment of funds to
the exporter and timely delivery of goods to the importer. While LC assures payment the
exporter still has to wait until after the credit period to receive the sale amount. If the
exporter wants the payment for the shipment to be made immediately, they can avail an LC
backed bill discounting facility from their bank.
LC backed bill discounting is a short term credit facility provided to the seller or exporter by
their bank. It is used exclusively for export transactions backed by a letter of credit document
when the exporter wants to receive payment for their shipment immediately.
Once the exporter and importer have agreed on the transaction and the need for an LC, the
importer shares an LC obtained from their bank. The exporter takes this LC and furnishes it,
along with certain other documents, to their bank.
If everything is in place, the exporter’s bank will make a payment to the exporter as per the
amount mentioned in the bill of exchange after deducting a discount. Through LC-backed
bill discounting, the bank offers the seller immediate payment, and the buyer continues to
enjoy a longer credit period.
The discounting factor is the amount the bank will deduct as its fees before making the
payment to the exporter. These fees are called letter of credit discounting charges and are
generally between 6 percent and 15 percent of the total bill value. The charges might vary
depending on the credit period, invoice amount, and creditworthiness of the buyer. At the end
of the credit period, the bank that issues the LC bill discounting collects the funds from the
importer or importer’s bank if they cannot complete the payment.
The discounting charges are calculated according to the following formula: Discount
charge = [(Funds in use x (Discount margin + Base Rate)]/365) x number of days
The funds in use refers to the total invoice amount which has been submitted for
discounting. Base rate is unique to every bank and the discount margin is usually quoted
as a percentage over the base rate. For e.g., 2 percent over base rate.
Suppose the funds in use are INR 1,00,000 and discount margin is 3% over the base rate
of 3%, outstanding for 90 days, then the discount charges will be - Discount charge =
[{(1,00,000 x (3% + 3%)}/365] x 90 Discount charge = INR 1479.45

Advantages
The following are the advantages of LC-backed bill discounting:
• The LC discounting facility offers the importer a longer credit period to complete
payment.
• The LC bill discounting facility eliminates credit risk, as the issuing bank gives
assurance to the exporter for the buyer’s obligations as stated in the letter of credit.
• On receiving the funds before the due date, the exporter can meet production-related
requirements, fund newer operations, or pay off their suppliers.
• LC-backed bill discounting is a secure mode of getting funds as the bank discounts LC
only after verifying the authenticity of both the parties involved in the transaction.
• This facility puts the exporter in a better position to negotiate on the basis of longer
credit payment terms and helps them build a strong relationship with their trading
partners.
Loan Commitment
A loan commitment is an agreement by a commercial bank or other financial institution to
lend a business or individual a specified sum of money. A loan commitment is useful for
consumers looking to buy a home or a business planning to make a major purchase.
The loan can take the form of a single lump sum or—in the case of an open-end loan
commitment—a line of credit that the borrower can draw upon as needed (up to a
predetermined limit).
Financial institutions make loan commitments based on the borrower’s creditworthiness and
on the value of some form of collateral. In the case of individual consumers, this collateral
may be a home. Borrowers can then use the funds made available under the loan
commitment, up to the agreed-upon limit.

Types of Loan Commitments

Loan commitments can be either secured or unsecured.
Secured Loan Commitment
A secured commitment is typically based on the borrower’s creditworthiness and it has some
form of collateral backing it. Because the credit limit is typically based on the value of the
secured asset, the credit limit is often higher for a secured loan commitment than for an
unsecured loan commitment. In addition, the loan’s interest rate may be lower and the
payback time may be longer for a secured loan commitment than for an unsecured one.
However, the approval process typically requires more paperwork and takes longer than with
an unsecured loan. Defaulting on a secured loan may result in the lender assuming ownership
of and selling the secured asset, at which point they would then be responsible for using the
proceeds to cover the loan.
Unsecured Loan Commitment
A loan that doesn't have any collateral backing it is primarily based on the
borrower’s creditworthiness. Typically, the higher the borrower’s credit score, the
higher the credit limit. However, the interest rate may be higher than on a secured
loan commitment because no collateral is backing the debt. Unsecured loans
typically have a fixed minimum payment schedule and interest rate.

Advantages of Loan Commitments

• Open-end loan commitments are flexible.
• They can be useful for paying unexpected short-term debt obligations or
covering financial emergencies.
• Home equity line of credit (HELOC) have low interest rates, which may make
their payments more affordable.

Disadvantages of Loan Commitments

• Borrowers who take out too much money and are unable to repay the loan may
have to forfeit their collateral. For example, this could mean losing their
collateral.
• Unsecured commitments have a higher interest rate, which makes borrowing
more expensive.
Un Funded Lines of
Credit
A line of credit (LOC) is a preset borrowing limit that can be tapped into at
any time. The borrower can take money out as needed until the limit is
reached. As money is repaid, it can be borrowed again in the case of an open
line of credit.
An LOC is an arrangement between a financial institution—usually a bank—
and a customer that establishes the maximum loan amount that the customer
can borrow. The borrower can access funds from the LOC at any time as
long as they do not exceed the maximum amount (or credit limit) set in the
agreement.
All LOCs consist of a set amount of money that can be borrowed as needed,
paid back, and borrowed again. The amount of interest, size of payments,
and other rules are set by the lender. An LOC can be secured (by collateral)
or unsecured, with unsecured LOCs typically subject to higher interest rates.
An LOC has built-in flexibility, which is its main advantage. Borrowers can
request a certain amount, but they do not have to use it all. Rather, they can
tailor their spending from the LOC to their needs and owe interest only on
the amount that they draw, not on the entire credit line. In addition,
borrowers can adjust their repayment amounts as needed, based on their
budget or cash flow.
Types of Lines of Credit
LOCs come in a variety of forms, with each falling into either the secured or
unsecured category.
Personal Line of Credit
This provides access to unsecured funds that can be borrowed, repaid, and
borrowed again. Opening a personal LOC usually requires a credit history of no
defaults and reliable income. Personal LOCs are used for emergencies, weddings
and other events, overdraft protection, travel and entertainment, and to help smooth
out bumps for those with irregular income.
Home Equity Line of Credit (HELOC)
HELOCs are the most common type of secured LOC. A HELOC is secured by
the market value of the home minus the amount owed, which becomes the basis for
determining the size of the LOC. Typically, the credit limit is equal to 75% or 80%
of the market value of the home, minus the balance owed on the mortgage.
HELOCs often come with a draw period (usually 10 years) during which the
borrower can access available funds, repay them, and borrow again.
Business Line of Credit
Businesses use these to borrow on an as-needed basis instead of taking out a fixed
loan. The financial institution extending the LOC evaluates the market value,
profitability, and risk taken on by the business and extends an LOC based on that
evaluation.
Securities-Backed Line of Credit (SBLOC)
This is a special secured-demand LOC, in which collateral is provided by the
borrower’s securities. Typically, an SBLOC lets the investor borrow
anywhere from 50% to 95% of the value of assets in their account. SBLOCs
are non-purpose loans, meaning that the borrower may not use the money to
buy or trade securities. Almost any other type of expenditure is allowed.

Characteristics
1. Lower interest rates
2. High borrowing limit
3. Cost effective
4. Flexible repayment option
5. Constant access to funds
6. Best for meeting long term projects, temporary cash shortfalls and
emergency
7. Allows for better planning as only actually needed amount is borrowed
Types of Bank
Guarantee
Bank Guarantee a promise made by the bank to any third person
to undertake the payment risk on behalf of its customers. Bank
guarantee is given on a contractual obligation between the bank
and its customers. Such guarantees are widely used in business
and personal transactions to protect the third party from financial
losses. This guarantee helps a company to purchase things that it
ordinarily could not, thus helping business grow and promoting
entrepreneurial activity.
For Example- Xyz company is a newly established textile factory
that wants to purchase Rs.1 crore fabric raw materials. The raw
material vendor requires Xyz company to provide a bank
guarantee to cover payments before they ship the raw material to
Xyz company. Xyz company requests and obtains a guarantee
from the lending institution keeping its cash accounts. If Xyz
company defaults in payment, the vendor can recover it from the
bank.
Performance Guarantee
These guarantees are issued for the performance of a contract or an obligation. In case,
there is a default in the performance, non-performance or short performance of a
contract, the beneficiary’s loss will be made good by the bank. Under a performance
guarantee, compensation of money will be made by the bank when there is any delay in
delivering the performance or operation. Payment will have to be made even if the
service is delivered inadequately.
It must be clearly understood that in a performance guarantee the bank does not
guarantee to perform. It merely guarantees that if its customer fails to perform it will be
liable to pay the guarantee money.
For example, A enters into a contract with B for completion of a certain project and the
contract is supported by a bank guarantee. If A does not complete the project on time and
does not compensate B for the loss, B can claim the loss from the bank with the bank
guarantee provided.
Types of Performance Guarantee
There are different types of guarantees that a bank will offer to its clients and parties.
• Advance Payment Guarantee
Advance taken from the buyer is a very common practice in today’s business. In this
respect, the bank provides a guarantee to the buyer that the money given by him to the
seller against advance payment to deliver the required goods. If the seller fails to comply
with the requirements mentioned in the sale agreement, the seller will be liable to back
the amount to the buyer. The Bank offered the guarantee to back the advance payment for
non-compliance with the conditions.
• Tender Guarantee
This guarantee is also referred to as the ” Bid Bond” guarantee. Both in
International Tender and Local Tender, this guarantee is used where a
contractor/supplier is obliged to comply with the conditions as mentioned in
the agreement.

Financial guarantee
A financial bank guarantee assures that money will be repaid if the party
does not complete a particular project or operation entirely. A financial
guarantee assures repayment of money. (e.g. an advance received on an
electrification contract), in the event of non-completion of the contract by the
client.
Types of Financial Guarantee
• Corporate Financial Guarantees
A financial guarantee in the corporate world is a non-cancellable indemnity.
This is a bond backed by an insurer or other secure financial institution. It
gives investors a guarantee that principal and interest payments will be made.
The guarantee gives investors comfort that the investment will be repaid if
the securities issuer can't fulfill the contractual obligation to make timely
payments. It also can result in a better credit rating.
• Personal Financial Guarantees
Lenders may require financial guarantees from certain borrowers before they can
access credit. For example, lenders may require college students to get a
guarantee from their parents or another party before they issue student loans.

Deferred payment guarantee

A bank or payment guarantee provided to the exporter for a predetermined time
is referred to as a “deferred payment guarantee”. Suppose the buyer’s bank
guarantees that it will pay the buyer’s outstanding debts to the seller.
In that case, the seller will extend credit to the buyer when they purchase capital
goods or machinery. For failing to supply raw materials, machinery, or
equipment, the bank will pay in installments under this kind of guarantee.
 Assessment of Bank Guarantee Limit
Any person who has a good financial record is eligible to
apply for BG. BG can be applied by a business in his bank
or any other bank offering such services. Before approving
the BG, the bank will analyse the previous banking history,
creditworthiness, liquidity, CRISIL, and CIBIL rating of the
applicant.
The bank would also examine the BG period, value,
beneficiary details, and currency as required for the
approval. In certain cases, banks will require security to be
provided by the applicant to cover the BG value. Once the
banking officials are satisfied with all the criteria, they will
provide the necessary approvals required for the BG
processing.
Period of Claim under Bank Guarantee
The Claim Period (legal liability period) with respect to this BG will
be one year only as per Section 28 of the Indian Contract Act.
Earlier it was 3 years with respect to private parties and 30 years for
government agencies. The bankers felt that the long duration of the
claim period is difficult to comply with as the BG accounts are to be
maintained for a long period. It has become a menace for bankers!
Hence they have urged the government to provide a lesser claim
period as in the case of Insurance policy claims.
Accordingly, Sec.28 has been amended. The amendment reduced the
maximum claim period to 12 months only. The wording CLAIM
PERIOD has created confusion. It is not a period to raise a claim on
BG. It is the valid period to file a suit in a court against the Bank if
any dispute exists. After the happening of a specific event (eg. Bank
denied encashing the BG, the Bank has not paid encashed amount,
etc.) the Beneficiary can approach the court within one year from the
date of the incident. Later the same will become a time bar claim.