TYPES OF CREDIT FACILITIES PROVIDED BY BANKS

Fund based facilities

It includes Cash Credit, Overdraft, Working Capital Financing, Commercial Paper and NCDs
on short-term basis. Also, on long-term basis it includes Term Loan, Personal Loan, NCDs
(Negotiable Certificates of Deposits), etc.
Cash Credit: It is like issuing short-term cash loan to a company/business. Here, the bank
lends the money against inventory/receivables. It is a facility whereby the amount of money
can be withdrawn in excess of the amount deposited and is called "limit" or "credit facility".
These are payable on demand.
Overdraft: It occurs when the money withdrawn is more than the money deposited in the
account. In such situation the available balance in the account goes to negative and the
account is then called overdrawn. There is an authorized overdraft limit which is prescribed
beforehand, exceeding which will result in higher cost. These are also payable on demand.
The main difference between cash credit and overdraft is that cash credit cannot be taken
against deposits but only against assets whereas overdraft can be against deposits and assets.
Also in case of cash credit the drawing power is fixed whereas no such restriction is there in
case of overdraft.
Working Capital facility: It is provided for day-to-day operations or business requirements.
Funding requirements are structured to finance procurement of raw materials/stores and
payment towards manufacturing costs and other overheads. Sales are financed against sundry
debtors/ receivables. The banks offer a combination of operative cash credit and working
capital demand loan to meet the domestic working capital requirements of their clients. Fundbased working capital products include cash credit, overdraft, bill discounting, short-term
loans, and export financing (pre-shipment as well as post-shipment). Fee based facilities
include letters of credit and bank guarantees.
Term Loan: These are usually long-term credit facilities ranging from one year to ten years. It
is usually given for acquisition of land, building, machinery, and purchase of vehicles etc. It
can also be extended as composite loans along with working capital.

Non-fund based facilities

It includes Letter of Credit (LC), Bank Guarantee (Financial/Performance) and
Buyers/Suppliers Credit Inland- import and export both on short-term and long-term basis.
Letter of Credit: The basic objective of this is to facilitate orderly movement of trade. It is an
obligation taken by a bank to make payment if certain criteria or fulfilment is met.
Bank Guarantee: It guarantees a sum of money to the beneficiary. This is invoked only if the
opposing party does not fulfil the stipulated obligations signed under the contract.