💵 Fund-Based Working Capital Facilities
Cash credit, overdraft, bill finance (discounting and purchase), bills co-acceptance, Clayton's Case, and key legal perspectives on fund-based facilities.
Fund-Based Working Capital Facilities
Cash Credit and Overdraft
- Both allow borrowing up to a certain limit
- Cash credit is regularly used for working capital; overdrafts are used intermittently
- Cash credit accounts usually have debit balances; overdrafts are typically in credit and function as a current account with borrowing privileges
- Borrowers don't need to borrow the full limit initially, providing flexibility
- Interest is only charged on the amount actually drawn
- Drawings are linked to the value of current assets
Legal Perspectives:
- Both cash credit and overdraft can be express or implied contracts
- In the Bank of Maharashtra vs United Construction Co. case, an implied contract for an overdraft was acknowledged
- In Clayton's Case, every debit and credit is seen as a separate loan and repayment respectively. However, banks treat all debts as a single debt to avoid complications
- Banks can't unilaterally terminate an overdraft facility without notice, as seen in the Gujarat High Court vs Indian Overseas Bank case. It's an agreement based on mutual interests
Bill Finance
- Directly finances receivables based on sales transactions
- Typically conducted via discounting bills of exchange
- Cash liquidates when the buyer pays the discounted bill, making it a self-liquidating facility
- Bill finance reduces the need for cash credit facilities, as it focuses on receivables, not stocks
Types of Bill Finance
1. Bill Discounting:
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Fund-Based Working Capital Facilities
Cash Credit and Overdraft
- Both allow borrowing up to a certain limit
- Cash credit is regularly used for working capital; overdrafts are used intermittently
- Cash credit accounts usually have debit balances; overdrafts are typically in credit and function as a current account with borrowing privileges
- Borrowers don't need to borrow the full limit initially, providing flexibility
- Interest is only charged on the amount actually drawn
- Drawings are linked to the value of current assets
Legal Perspectives:
- Both cash credit and overdraft can be express or implied contracts
- In the Bank of Maharashtra vs United Construction Co. case, an implied contract for an overdraft was acknowledged
- In Clayton's Case, every debit and credit is seen as a separate loan and repayment respectively. However, banks treat all debts as a single debt to avoid complications
- Banks can't unilaterally terminate an overdraft facility without notice, as seen in the Gujarat High Court vs Indian Overseas Bank case. It's an agreement based on mutual interests
Bill Finance
- Directly finances receivables based on sales transactions
- Typically conducted via discounting bills of exchange
- Cash liquidates when the buyer pays the discounted bill, making it a self-liquidating facility
- Bill finance reduces the need for cash credit facilities, as it focuses on receivables, not stocks
Types of Bill Finance
1. Bill Discounting:
- Usance bills drawn by borrower are discounted by the bank
- Borrower receives the bill's amount minus discount and charges
- Discount represents interest for the remaining period of the bill's tenor
- Proceeds credited to borrower's cash credit/overdraft account; if bill payment is delayed, extra interest is charged
2. Bill Purchase:
- Bank purchases demand bills drawn by borrower
- Used when payment terms are immediate
- Borrower gets the bill's amount minus bank charges
- Proceeds credited to borrower's cash credit/overdraft account; delays incur additional interest
Bills Co-acceptance
- Non-fund based; bank adds co-acceptance to bills accepted by the borrower
- Acts like a bank guarantee or letter of credit for the seller
- Gives additional assurance to sellers during credit sales; sellers might finance such bills via a bank
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| Cash Credit | Revolving; regularly used for WC; interest on amount drawn; debit balance |
| Overdraft | Current account with borrowing; used intermittently; credit balance normally |
| Clayton's Case | Each debit/credit = separate loan/repayment; banks treat as single debt |
| Bank of Maharashtra Case | Implied contract for overdraft acknowledged |
| Gujarat HC vs IOB | Banks can't unilaterally terminate OD without notice |
| Bill Discounting | Usance bills; borrower gets amount minus discount; self-liquidating |
| Bill Purchase | Demand bills; borrower gets amount minus charges; immediate payment terms |
| Bills Co-acceptance | Non-fund based; bank adds co-acceptance; acts like guarantee for seller |
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