TYPES OF CREDIT FACILITIES

Credit facilities are broadly classified into two types based on funds outflow; they are:
1. Fund Based Credit Facilities: Fund based credit facilities involve the outflow of funds meaning
thereby, the money of the banker is lent to the customer. They can be generally of following types:
(a) Cash credits/overdrafts
(b) Term loans/Demand loans
(c) Bill finance
2. Non-Fund Based Credit Facilities: In this type of credit facility the bank's funds are not directly lent to
the customer and they include:
(a) Bank guarantee
(b) Letter of credit facility
(c) Acceptance facility
A cash credit or overdraft is an arrangement by which a banker allows his customer to borrow money up
to a certain limit.
Cash credit/overdraft is a contract of a loan between a bank and its borrower.
The contract of cash credit or overdraft can be express or implied.
Rule in Clayton's Case
In that case, the Courts held that the first sum of money paid into the account, is deemed to repay the first item
recorded on the debit side of the account. For example, if there are two items on the debit side of the customer's
current account. A debit of Rs. 1,000 on 3 March and Rs 500 on 6 March, in a year and the borrower pays Rs. 750
on 12 March; the sum will be appropriated first, by reducing the earlier debit of Rs. 1,000 rather than desecrating a
charge the later debt of Rs. 500. This creates problems for recovery for the bank. Hence, the bankers, to avoid the
rule in the Clayton's case agree on the method of appropriation and treat all debits as one debt.

Bank not to Terminate Overdraft Facility without Notice

Once a bank grants an overdraft facility, then there is a contract between the bank and the customer that is
not be cancellable unilaterally
Term/Demand loans are granted to customers generally for meeting the capital expenditure needs of the
business.
Term loans are granted in one lump sum and are allowed to be repaid over a period in installments the
schedule of which is specified in the agreement itself.
Demand loans are those which are repayable on demand through a repayment schedule is agreed upon by
the bank.
Term loans on the basis of period of repayment are further classified into:
(i)
Short-term Loans,
(ii)
Medium-term Loans,
(iii)
Long-term Loans.

Short-term loans are loans that are repayable within one year, medium-term loans within two to seven
years and long-term loans above seven years periods.
Banks normally grant the short-term and medium term loans.
The development financial institutions usually grant long-term loans.
Banks in certain cases like housing loans sanction long-term loans which are repayable over longer period
of 20-25 year.
Law relating to term loans
(i) Acceleration of Repayment
(ii) Time within which a suit for recovery shall be filed
The limitation period for filing a suit in the case of term loans is three years from the date of default of a
particular/specific installment. However, if by doing so the time limit gets over in case of some earlier
defaulted installments, bank looses its right against such unpaid installments. In the case of a demand
loan the time limit is three years from the date of default.
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
customers of borrower.
The methods of bill finance, depending upon payment obligations incurred by the bank, can be classified
into:
(i)
Bill discounting and bills purchase;
(ii)
Drawee bill acceptance;
(iii)
Bills co-acceptance.
In all these cases, the banker undertakes an obligation and depending on the nature of bill finance, the first
two are fund-based facilities and the last is a non-fund based facility.
Non-Fund Based Facilities
In the business of lending, a banker also extends non-fund based facilities. Non-fund based facilities do
not involve an immediate outflow of funds. The banker undertakes a risk to pay the amounts on
happening of a contingency. Non-fund based facilities can be of following types among other:
(a) Guarantee facility: The banker in his business of lending extends various facilities to its constituents.
Under this facility, the bank undertakes to discharge the liability of the borrower to third parties.
The nature of guarantees includes; performance guarantees, deferred payment guarantees, advance
payment guarantees, guarantees to Government departments, etc.
(b) Letter of credit facility: Letter of credit or documentary credit facility is another non-fund based
facility extended by the bankers to their constituents. Under this facility the banker undertakes to pay on
presentation of documents of title to goods. The banks generally adopt the Uniform Customs and
Practices relating to Documentary Credits 600 (UCPDC 600) framed by International Chamber of
Commerce which defines the obligations and rights of the parties w.e.f. 1 July 2007.
(c) Underwriting and credit guarantee: Besides the above non-fund based facilities, some banks also do
underwriting and credit guarantee business. The risk under this activity involves the obligation of the
banker to provide funds or pay, in the event of the failure of the borrower to raise moneys, or to repay
moneys. After the advent of merchant banking, this type of lending by commercial banks is on the
decline.

(d) Derivative products: In addition to the above traditional non-fund facilities, banks are now
increasingly offering the derivative products to their clients to enable them to hedge their currency and
interest rate risks.
Other credit facilities
A banker besides extending fund based and non-fund based credit facilities, also extends various other
miscellaneous credit facilities depending upon the constitution of the borrower. For example, in the case
of individual borrowers, many of the banks are extending, personal loans for purchase of a house, car, and
other consumer durables. This type of lending, otherwise called 'Consumer Credit' has become very
popular these days and contributes significantly to the profitability of the bank's business.