Types of credit facilities
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What is a fund-based credit facility?
A fund-based credit facility involves actual outflow of funds from the bank, such as term loans, cash credit, and overdrafts, where the bank directly disburses money to the borrower.
What is a Standby Letter of Credit (SBLC)?
A contingency guarantee issued by a bank on behalf of a client.
What is a non-fund-based credit facility?
A non-fund-based facility does not involve immediate outflow of funds; instead, the bank provides a contingent commitment such as a Letter of Credit or Bank Guarantee on behalf of the borrower.
What is the primary purpose of a Revolving Letter of Credit?
It reinstates automatically after each drawing up to the original limit.
What is the purpose of a Cash Credit (CC) account?
A Cash Credit account is a running account that allows the borrower to withdraw funds up to a sanctioned limit to meet working capital needs, with interest charged only on the amount actually utilized.
What is an Irrevocable Letter of Credit?
An LC that cannot be modified or cancelled without consent of all parties.
How does an Overdraft (OD) facility differ from a Cash Credit?
An Overdraft is typically allowed against securities like FDs, shares, or property and is more short-term, while Cash Credit is specifically designed for business working capital and is usually secured by stocks and book debts.
What does the term 'credit limit' mean in banking?
The maximum amount a borrower is authorized to borrow from the bank.
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