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The credit facilities given by the banks where actual bank funds are not involved are termedas 'non-
fund based facilities'. These facilities are divided in three broad categories as under:

Letters of credit


Co-acceptance of-bills/deferred payment guarantees.Units for the above facilities are also
simultaneously sanctioned by banks while sanctioningother fund based credit limits.Facilities for co-
acceptance of bills/deferred payment guarantees are generally required foracquiring plant and
machinery and may, technically be taken as a substitute for term loanwhich would require detailed
appraisal of the borrower's needs and financial position in thesame manner as in case of any other
term loan proposal. The co-acceptance limits may alsobe sanctioned under IDBI's Bill Rediscounting
Scheme which has been discussed in detail inchapter 5.
Reserve Bank of India has also issued detailed guidelines to commercial banks in respect of non-fund
based credit facilities. Some of the important points to be kept in view in thisregard are discussed
Letters of Credit

Bank should normally open letters of credit for their own customers who enjoy creditfacilities with
them Customers maintaining current account only and not enjoying anycredit limits should not be
granted L/C facilities except in cases where no other creditfacility is needed by the customer.

The request of such customer for sanctioning and opening of letter of credit should beproperly
scrutinised to establish the genuine need of the customer. The customer maybe, required to submit a
complete loan proposal Including financial statements to satisfythe bank about his, needs and also his

financial resources, to mire the bills drawn under

Where a customer enjoys

credit facilities with some other bank, the reasons for hisapproaching the bank for sanctioning L/C
limits have to be clearly stated. The bankopening L/C on behalf of such customer should invariably
make a reference to the,existing banker of the customer.

In all cases of opening of letters of credit, the bank has to ensure that the customer isable to retire the
bills drawn under L/C as per the financial arrangement alreadyfinalised.

The conditions relating to obligant being a customer of the bank enjoying credit facilitiesas discussed
in case of letters of credit are equally applicable for guarantees also. Infact, guarantee facilities also
cannot be sanctioned in isolation.
Financial guarantees will be issued by the banks only if they are satisfied that thecustomer will be in a
position to reimburse the bank in case the guarantee is invokedand the bank is required to make
the payment in terms of guarantee.

Performance guarantee will be issued by the banks only on behalf of those customerswith whom the
bank has sufficient experience and is satisfied that the customer has thenecessary experience and
means to perform the obligations under the contract and isnot likely to commit any default.