Credit Facility is an agreement with bank that enables a person or organization to be taken credit or borrow money when it is needed. All types of credit facilities may broadly be classified into two groups on the basis of Funding – 1. Fund Base Credit  2. Non Fund Base Credit

1.      Fund Base Credit is the any credit facility which involves direct outflow of Bank’s fund to the borrower. Various types of it are as follows :-

(i)      Loan: – It refers to credit facility that is repayable in a definite period. (e.g. Term Loan , Demand Loan)

(ii)     Cash Credit: – It refers to credit facility in which borrower can borrow any time with in the agreed limit for certain period for their working capital need. It secured by way of Hypothecation of Stock(goods) and Debtors and all other current Assets of the business generated during the course of business. Cash credit can also be secured by way of mortgage of immovable properties (as collateral security).

(iii)    Over Draft: – An overdraft allows a current account holder to withdraw in excess of their credit balance up to a sanctioned limit. It secured by way of Mortgage of immovable properties and pledge of F.D., Bonds, Shares securities , Gold & silver and any physical asset and  Hypothecation of Stock and Debtors and all other current Assets of the business generated during the course of business.

(iv)   Packing Credit: – It is a credit facility which sanctioned to an exporter in the Pre-Shipment stage. Such credit facilitates the exporter to purchase raw materials at competitive rates and manufacture or produce goods according to the requirement of the buyer and organize to have it packed for onward export. It secured by way of Hypothecation of Stock of goods and Debtors and all other current Assets of the business generated during the course of business.

(v)    Some other fund based credit facilities are Bill Discounted , Bill Purchased , Advance against hypothecation of Vehicles ( Transport Loan) , House Building Loan , Consumer Loan , Agriculture Loan -Farming -Non Farming , Consortium Loan , Lease Financing , Hire Purchase ,  Import Financing – Loan Against Imported Merchandise (LIM) – Payment Against Document (PAD) .

(2)   Non Fund Base credit is a credit facility where there is no involvement of direct outflow of Bank’s fund on account of borrower rather the outflow of Bank’s fund on account of Third party on behalf of borrower. Types of it are as follow:

(i)     Letter Of Credit: – When a buyer or importer wants to purchase goods from an unknown seller or exporter. He can take assistance of bank in such buying or importing transactions.

Bank issues a LETTER OF CREDIT in addressed to the supplier or exporter after it, supplier or exporter will supply the goods to such unknown buyer or importer. A signed Invoice with Letter Of Credit is presented to the bank of buyer/importer and the payment is made to the seller/exporter DIRECTLY by the bank.

(ii)    Bank Guarantee: – It is a guarantee issued by a banker that, in case of an occurrence or non-occurrence of a particular event, the bank guarantees to fulfilled the loss of money as stipulated in the contact. It may of various types like Financial Guarantees, Performance Guarantees and Deferred Payment Guarantee.

(iii)  Buyer Credit: – It is the credit availed by an Importer from overseas lenders (i.e. Banks & Financial Institutions) for payment against his imports. The overseas bank usually lends the Importer based on letter of credit, bank guarantee issued by the importer bank.

(iv)   Suppliers Credit: – Under such credit facility an exporter extends credit to a foreign importer to finance his purchase. Usually the importer pays a portion of the contact value in cash and issues a Promissory note as evidence of his obligation to pay the balance over a period of time. The exporter thus accepts a deferred payment from the importer and may be able to obtain cash payment by discounting or selling such promissory note created with his bank.

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Rishi Goyal,  Articled Assistant, +91-9716665748

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6 responses to “Types of credit facilities provided by banks”

  1. Kritika Sinha says:

    very nice article

  2. deepal says:

    Nice article…thanks

  3. Henry Osuagwu says:

    Cheque can be defined as an instruction or order written by the drawer to a bank to pay a given sum of money to a named person or bearer at a specific date

  4. Lakshmi says:

    good information…

  5. Mohan Thualsingam says:

    Informative. Author unknown.

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