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

In bank credit appraisal, a non-fund based limit sanctioned to a company, such as a letter of credit or bank guarantee, is best described as:

A non-fund based limit is a facility in which the bank does not lend cash upfront but assumes a contingent liability for the borrower, as with letters of credit and guarantees. It turns into a funded exposure only if the borrower fails and the bank must pay.

  1. AA facility where the bank immediately lends cash to the borrower for working capital
  2. BA facility where the bank gives no cash outlay at the outset but takes on a contingent liability on behalf of the borrowerCorrect
  3. CA term loan repayable in equal instalments over several years
  4. DA facility under which the borrower deposits funds with the bank to earn interest

Explanation

Non-fund based limits involve no immediate cash outflow by the bank. The bank undertakes a contingent liability that becomes a funded exposure only if the borrower defaults and the bank has to pay. The cash-lending option describes fund based facilities such as cash credit.

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