📝 IBPS AFO Interview — Fund-Based vs Non-Fund Credit
IBPS AFO interview questions on fund-based vs non-fund-based credit facilities, bank guarantees, letters of credit, retail loans, and working capital classification.
Types of Credit Facilities
Credit facilities are broadly classified into two categories based on whether there is a direct outflow of the bank's funds.
| Category | Description | Examples |
|---|---|---|
| Fund-Based Facilities | Direct outflow of bank's funds | Cash credits/overdrafts, term loans/demand loans, bill finance |
| Non-Fund Based Facilities | No direct lending of bank's funds; bank assumes a risk based on certain contingencies | Bank guarantees, letters of credit, acceptance facilities |
Interest on fund-based facilities can be charged on a temporary basis; each credit discharges the earliest debit entry.
Loan Portfolio Segregation
Banks typically segregate their lending portfolio into:
Retail Loans:
- For individual customers (includes small business for some banks)
- Examples: Vehicle loans, home loans, education loans, credit cards, consumer durables, small business loans
Commercial Loans:
- Larger amounts with personal attention due to their uniqueness
- Term Loans: Fixed repayment schedule
- Working Capital Loans: Payable on demand; classified as current assets
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| Fund-Based Facilities | Direct outflow of bank's funds — cash credit, overdraft, term loans, demand loans, bill finance |
| Non-Fund Based Facilities | No direct lending; contingent risk — bank guarantees, letters of credit, acceptance facilities |
| Retail Loans | Individual customers — vehicle, home, education, credit cards, consumer durables |
| Commercial Loans | Larger amounts — term loans (fixed schedule) and working capital loans (on demand) |
For IBPS AFO exam pattern and syllabus coverage visit exam pattern and syllabus. Practise credit classification questions in mock tests. For RBI guidelines on credit facilities see rbi.org.in.
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Types of Credit Facilities
Credit facilities are broadly classified into two categories based on whether there is a direct outflow of the bank's funds.
| Category | Description | Examples |
|---|---|---|
| Fund-Based Facilities | Direct outflow of bank's funds | Cash credits/overdrafts, term loans/demand loans, bill finance |
| Non-Fund Based Facilities | No direct lending of bank's funds; bank assumes a risk based on certain contingencies | Bank guarantees, letters of credit, acceptance facilities |
Interest on fund-based facilities can be charged on a temporary basis; each credit discharges the earliest debit entry.
Loan Portfolio Segregation
Banks typically segregate their lending portfolio into:
Retail Loans:
- For individual customers (includes small business for some banks)
- Examples: Vehicle loans, home loans, education loans, credit cards, consumer durables, small business loans
Commercial Loans:
- Larger amounts with personal attention due to their uniqueness
- Term Loans: Fixed repayment schedule
- Working Capital Loans: Payable on demand; classified as current assets
Summary Cheat Sheet
| Concept / Topic | Key Details / Explanation |
|---|---|
| Fund-Based Facilities | Direct outflow of bank's funds — cash credit, overdraft, term loans, demand loans, bill finance |
| Non-Fund Based Facilities | No direct lending; contingent risk — bank guarantees, letters of credit, acceptance facilities |
| Retail Loans | Individual customers — vehicle, home, education, credit cards, consumer durables |
| Commercial Loans | Larger amounts — term loans (fixed schedule) and working capital loans (on demand) |
For IBPS AFO exam pattern and syllabus coverage visit exam pattern and syllabus. Practise credit classification questions in mock tests. For RBI guidelines on credit facilities see rbi.org.in.
See also Principles of Sound Lending and Non-Performing Assets for how credit facilities are classified when they go bad.
Frequently Asked Questions
Q: What is the difference between fund-based and non-fund-based credit facilities? Fund-based facilities involve a direct outflow of the bank's funds — examples include cash credits, overdrafts, term loans, demand loans, and bill finance. Non-fund-based facilities involve no direct lending; the bank assumes a contingent risk — examples are bank guarantees, letters of credit, and acceptance facilities. The key distinction is that non-fund-based facilities only become fund-based if the contingency (default by the customer) materialises.
Q: What is a working capital loan and how is it classified in banking? Working capital loans (also called cash credits or overdrafts) are payable on demand and classified as current assets in a bank's balance sheet. They fund day-to-day operational needs such as raw material purchase, wages, and inventory. Unlike term loans with a fixed repayment schedule, working capital limits are revolving — funds are drawn and repaid continuously within the sanctioned limit.
Q: What is the difference between a term loan and a demand loan? A term loan has a fixed repayment schedule spread over a defined period, typically used for capital expenditure (purchase of equipment, land, construction). A demand loan is repayable on demand by the bank at any time — it provides flexibility but carries higher recall risk for the borrower. Both are fund-based credit facilities classified under commercial loans.
Q: What are the access criteria for centralised payment systems used for fund transfers? Banks must meet three criteria for RTGS/NEFT membership: minimum CRAR of 9% as per the latest audited balance sheet, net NPAs below 5%, and minimum net worth of ₹25 crore. These criteria ensure only financially sound banks participate in high-value fund transfer systems, protecting systemic integrity.
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