Explain the difference between Fund based and Non-Fund based credit facilities.

Difference between fund based and non-fund based credit facilities In Fund based credit facility, there is cash outflow right from the initial stage. The examples of funded facility are term loan, cash credit and bill purchased or bill discounting. When a term loan is disbursed, cash credit facility is sanctioned or a bill is purchased or discounted cash flow takes place. The income earned by the banks when they extend funded facilities to the borrowers, is accounted under income head interest (in case of term loans and cash credits) and discount (in case of bill discounting facility). In Non-fund based facility, initially there is no cash outflow, later on there may or may not be cash outflow. The examples of non-fund based facility are Bank Guarantees (BGs) including deferred payment guarantees and Letter of Credit (LCs). When BG or LC is issued, there is no cash out flow. However, later on if the guarantee is invoked by the beneficiary, the bank will have to make the payment under the guarantee at times even if there is no balance in the account of customer. Similarly, when bills negotiated under LC are due for payment the bank may have to honour the same at times by creating forced loan in the account of the buyer on whose behalf Letter of Credit is issued. The income earned by banks while issuing bank guarantees or LCs is accounted under the income head "commission". Non-Fund based credit facilities to non- borrowers of the bank.