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Fund Based Credit Facilities
- Cash Credits / Overdrafts – Cash credit /Overdraft is an arrangement by which a banker allows his customer to borrow money up to a certain limit.
- Term Loans
- Bill Finance
Non-Fund based Credit Facilities
- Bank Guarantee
- Letter of Credit Facility
Guarantee is defined in section 126 of Indian Contract Act.
- There are three parties to a contract of guarantee namely principal debtor, creditor and surety.
- The liability under guarantee is a contingent liability and surety is liable on default by the principal debtor.
- Once there is a default, the liability of the surety is co extensive with the principal debtor. That is he is equally liable as principal debtor.
- Performance Guarantee: These are guarantees issued by banks on behalf of its customers whereby the bank assures a third party that the customer will perform the contract entered into by the customer as per the conditions stipulated in the contract, failing which bank will compensate the third party up to which the amount specified in the guarantee.
- Deferred Payment Guarantee: Under this type of the guarantee, the banker guarantees payment of installments over a period of time. This type of the guarantee is required when the customer on credit purchases goods/machinery and payment is to be made in installments on specified dates. A deferred payment guarantee constitutes an undertaking on the part of the bank to make payment of deferred installments to the seller (beneficiary) on due dates in the event of default by the customer (buyer).
- Statutory Guarantee: These are guarantees issued by banks favoring Courts and other statutory authorities guaranteeing that the customer will honor his commitments imposed on under law, failing which bank will compensate to the extent of the amount guaranteed.
Difference between Indemnity and Guarantee
Contract of Indemnity |
Contract of Guarantee |
There are 2 parties
(Indemnifier and Indemnified) |
There are 3 parties
(Debtor, Creditor/Beneficiary, Surety) |
Risk is contingent |
Liability is subsisting |
The Indemnifier is required to make good
the loss as soon as it occurs |
The Surety’s liability is secondary and the principal debtor is primarily liable |
There are only two parties to a contract of
indemnity |
There are at least three parties in the contract of Guarantee |
An indemnity is for the reimbursement of a loss |
Guarantee is only security to the creditor |
Letter Of Credit
A Letter of credit is a form of guarantee given by banks on behalf of its customer.
Parties to a Letter Of Credit
- Applicant-Buyer-Importer-Opener : He is the person who applies to bank for Letter of Credit
- Issuing Bank : The bank which opens the Letter Of Credit on the request of applicant/Buyer.
- Beneficiary-Exporter-Seller : The person who is entitled to receive the benefit under Letter of Credit.
- Advising Bank / Notifying Bank : The bank in the Beneficiary/Exporters Country through which the letter of credit is advised to the beneficiary.
- Negotiating Bank : The bank in the Beneficiary/Exporters Country which negotiate the bills (i.e. make payments on the bills drawn by the seller and accepts the documents.) If the LC specifies a bank then that bank is the Negotiating Bank and is also called the Nominated Bank / Paying Bank. If the LC however does not specify the bank, than any bank can be negotiating bank.
- Confirming Bank : The advising bank is only required to advise the credit to the beneficiary. If however in addition to advising the credit the advising bank were to confirm it, then the advising bank will also become confirming Bank.
- Reimbursing Bank : It is the bank which is appointed by the Issuing Bank to make reimbursement to the Negotiating, Paying or confirming Bank.
Revocable Credit
Where the credit terms can be unilaterally altered or cancelled by the issuing bank.
Revolving Credit
Where the amount is fixed but can be utilised again and again as and when the earlier bills drawn are paid.
Transferable Credit
Where rights under an LC can be transferred to third parties.
Red Clause Credit
Where the beneficiary is entitled to advance payment before production of documents
Green Clause Credit
Credits where in addition to advance payment, the beneficiary is entitled to payment of storage / warehousing charges.
Deferred Payment Guarantee
Deferred Payment Guarantee: A is an unconditional and irrevocable guarantee issued by the bank assuring payment in installments and interest on due dates. DPGs are usually insisted upon when capital goods are imported and seller/exporter requires an additional assurance that the instalment payment allowed by him to the buyer/importer is met.
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