Types of Credit Facilities: Jaiib/DBF Paper 3 (Module B) Unit-4

Types of Credit Facilities: Jaiib/DBF Paper 3 (Module B) Unit-4

Dear bankers,

As we all know that is Types of Credit Facilities for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Types of Credit Facilities (Unit-4), Legal Aspects of Banking Operations (Module B), Legal & Regulatory Aspects of Banking -Paper 3.

♦Types of Credit Facilities

Credit facilities are classified into two types on funds

  • Fund based Credit facilities
  • Non-Fund based Credit facilities

Fund Based Credit Facilities: Fund based credit facilities involve the outflow of funds meaning there by, the money of the banker is lent to the customer.

  • Cash Credits/overdrafts: Cash Credit (CC) is a short-term loan offered to businesses to meet their working capital requirements, whereas Overdraft facility is funding offered by banks to individuals or companies to withdraw money from the banks even if their account balance is low, zero or below.
  • Term loan/ Demand loans: Term loan/ Demand loans are granted to customers generally for meeting the capital expenditure needs of the business. Short term-1year, Medium Year- 7 years, Long-term loans- Above 7 years.
  • Bill finance: Bill finance is also one of the important facets of lending by banks. Generally, the bill finance is conducted through discounting of bills of exchange drawn by the borrower or third persons on the customer of borrower.

Non-fund Based Credit Facilities: In this type of credit facility the bank’s funds are not directly lent to the customer. There are following types

  • Guarantee facility: A bank guarantee is a type of guarantee from a lending institution. The bank guarantee means a lending institution ensures that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.
  • Letter of Credit facility: A letter of credit (LOC) is a bank document that guarantees a payment.
  • Underwriting and credit guarantee: Underwriting services are provided by some large financial institutions, such as banks, or insurance or investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability arising from such guarantee.

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