Non-Fund Based Facilities – Letter of Credit/Bank Guarantee
Non-fund based facilities, such as Letters of Credit (LC) and Bank Guarantees (BG), are financial instruments provided by banks to guarantee a client’s obligations to third parties, ensuring payment or performance without direct fund disbursement.
Benefits & Features
Enhanced Credibility
Assures suppliers and contractors of payment security.
Improved Trade Terms
Facilitates better negotiation terms with suppliers.
No Immediate Cash Outflow
Does not impact immediate liquidity.
Eligibility Criteria
Creditworthiness
A good credit history and financial stability.
Collateral
Depending on the bank's policy, collateral or margin money may be required.
Purpose Justification
Clear rationale for the requirement of the LC or BG, aligned with business activities.
FAqs
What is a Letter of Credit?
A financial document issued by a bank guaranteeing a buyer's payment to a seller, ensuring timely and full payment.
What is a Bank Guarantee?
A promise from a bank that the liabilities of a debtor will be met if they fail to fulfill contractual obligations.
Are there charges associated with these facilities?
Yes, banks charge fees for issuing LCs and BGs, varying based on amount and risk assessment.
