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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

How are non-fund based facilities generally shown in the financial statements of the bank that issues them?

Non-fund based facilities appear as contingent liabilities of the issuing bank because the payment obligation depends on a future uncertain event, such as the customer's default. They become funded exposure, shown as an advance, only once the guarantee or letter of credit is invoked and the bank pays.

  1. AAs a loan asset on the balance sheet
  2. BAs contingent liabilities, until the commitment is invoked and converted into funded exposureCorrect
  3. CAs share capital
  4. DAs deferred revenue expenditure

Explanation

Because the obligation depends on a future event such as default by the customer, the bank reports it as a contingent liability. Only if the guarantee is invoked and the bank pays does it become a funded advance. A loan asset arises only on actual disbursement.

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