Non-fund base limit
Non-fund based credit facilities are those where at the time of sanction which do not involve such outflow of the bank’s funds. Typical examples of non-fund based facilities are letters of credit, bank guarantees, letter of comfort, etc.
So, in the simple terms non funded facility are the funds provided are not in real cash, but the Bank commits to the third party to pay their amount if the client fails to do so. Non-Funded Facilities are,
- A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
- Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.
- A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.