📜 Non-Fund Based Facilities
Bank guarantees (performance, financial, deferred payment), letters of credit (UCPDC 600), underwriting, credit guarantees, and derivative products.
Non-Fund Based Facilities
Non-fund based facilities don't require immediate cash outflow. The bank assumes a risk based on certain contingencies.
Bank Guarantee
- Defined in the Indian Contract Act, 1872
- Has three roles: surety, principal debtor, and creditor
- Bank covers borrower's liability to third parties
Types of Bank Guarantees:
- Performance guarantees — assurance of satisfactory contract completion
- Financial guarantees
- Deferred payment guarantees
Specific Guarantees:
- Bid Bond Guarantee
- Earnest Money Deposit Guarantee
- Advance Payment Guarantee
- Retention Amount Guarantee
For large contracts, banks offer performance guarantees to ensure the supplier meets their obligations.
A banker's obligation to pay a specific sum contingent upon the default of the customer is known as a Bank Guarantee.
Letter of Credit
- Bank promises to pay upon document presentation or specified due dates
- Defined as a written promise by a bank to pay the seller on behalf of the buyer, under specified terms
- Governed by Uniform Customs and Practices (UCPDC 600) by International Chamber of Commerce
- Mainly used for trade finance; its use has been decreasing recently
- Provides assurance to an exporter about payment from the importer
Underwriting and Credit Guarantee
- Banks may underwrite or offer credit guarantees
- Obligation to provide funds arises if the borrower fails to raise or repay money
- Less common with the rise of merchant banking
Derivative Products
- Banks offer these to help clients hedge against currency and interest rate risks
- Carry financial exposure but don't involve immediate fund outflows
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| Non-Fund Based | No immediate cash outflow; bank assumes contingent risk |
| Bank Guarantee | Indian Contract Act 1872; 3 parties — surety, principal debtor, creditor |
| Performance Guarantee | Assurance of satisfactory contract completion |
| Financial Guarantee | Covers financial obligations |
| Deferred Payment Guarantee | Covers deferred payment obligations |
| Letter of Credit | UCPDC 600 (ICC); bank pays seller on behalf of buyer; trade finance |
| Underwriting | Obligation if borrower fails to raise funds; declining with merchant banking |
| Derivatives | Hedge currency/interest rate risks; no immediate fund outflow |
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Non-Fund Based Facilities
Non-fund based facilities don't require immediate cash outflow. The bank assumes a risk based on certain contingencies.
Bank Guarantee
- Defined in the Indian Contract Act, 1872
- Has three roles: surety, principal debtor, and creditor
- Bank covers borrower's liability to third parties
Types of Bank Guarantees:
- Performance guarantees — assurance of satisfactory contract completion
- Financial guarantees
- Deferred payment guarantees
Specific Guarantees:
- Bid Bond Guarantee
- Earnest Money Deposit Guarantee
- Advance Payment Guarantee
- Retention Amount Guarantee
For large contracts, banks offer performance guarantees to ensure the supplier meets their obligations.
A banker's obligation to pay a specific sum contingent upon the default of the customer is known as a Bank Guarantee.
Letter of Credit
- Bank promises to pay upon document presentation or specified due dates
- Defined as a written promise by a bank to pay the seller on behalf of the buyer, under specified terms
- Governed by Uniform Customs and Practices (UCPDC 600) by International Chamber of Commerce
- Mainly used for trade finance; its use has been decreasing recently
- Provides assurance to an exporter about payment from the importer
Underwriting and Credit Guarantee
- Banks may underwrite or offer credit guarantees
- Obligation to provide funds arises if the borrower fails to raise or repay money
- Less common with the rise of merchant banking
Derivative Products
- Banks offer these to help clients hedge against currency and interest rate risks
- Carry financial exposure but don't involve immediate fund outflows
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| Non-Fund Based | No immediate cash outflow; bank assumes contingent risk |
| Bank Guarantee | Indian Contract Act 1872; 3 parties — surety, principal debtor, creditor |
| Performance Guarantee | Assurance of satisfactory contract completion |
| Financial Guarantee | Covers financial obligations |
| Deferred Payment Guarantee | Covers deferred payment obligations |
| Letter of Credit | UCPDC 600 (ICC); bank pays seller on behalf of buyer; trade finance |
| Underwriting | Obligation if borrower fails to raise funds; declining with merchant banking |
| Derivatives | Hedge currency/interest rate risks; no immediate fund outflow |
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