Types of Credit Facilities
Relevent for JAIIB PPB | CAIIB ABM | CCP Module A
Why It Matters in Branch:
Choosing the right credit product for the right need is the first job of a credit officer. Wrong product selection leads to misuse of funds and NPA.
SHORT NOTES
Credit facilities are broadly classified into Fund-Based and Non-Fund Based facilities:
FUND-BASED FACILITIES (Actual disbursement of funds)
1. Cash Credit (CC): Running account facility for working capital. Borrower operates within a limit. Interest charged on daily drawing balance, not on the sanctioned limit. Best for businesses with fluctuating working capital needs.
2. Overdraft (OD): Similar to CC but typically against specific securities — FD, property, LIC policy. Used by individuals and businesses. Interest charged on outstanding balance.
3. Demand Loan: Lump sum disbursement repayable on demand or in instalments. Used for short-term needs.
4. Term Loan: Fixed repayment schedule — monthly, quarterly EMIs. Used for capital expenditure, machinery purchase, construction.
5. Bills Finance / Bill Discounting: Bank purchases or discounts bills of exchange. Provides immediate liquidity against receivables.
- Clean Bills: Without documents
- Documentary Bills: With shipping/trade documents
NON-FUND BASED FACILITIES (Contingent liability — funds flow only if invoked)
1. Letter of Credit (LC): Bank’s guarantee of payment to seller on behalf of buyer, subject to terms. Reduces counterparty risk in trade.
2. Bank Guarantee (BG): Bank guarantees performance or payment on behalf of customer. If customer defaults, bank pays.
3. Co-Acceptance: Bank accepts bills drawn by seller on buyer — bank becomes co-acceptor and is primarily liable.
4. Deferred Payment Guarantee (DPG): Bank guarantees payment of instalments for machinery/equipment purchases.
KEY DISTINCTION: In fund-based limits, bank pays out money immediately. In non-fund based, bank’s liability is contingent — money flows only if customer defaults.
BRANCH CONTEXT
✦ The most common confusion I see in branch is customers asking for ‘a loan’ when what they actually need is a CC limit. A trader whose stock cycles every 30 days does not need a term loan — they need a revolving CC. Getting this right at sanction stage prevents future account irregularity.
