CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based
Which of the following is a non-fund based facility that a bank extends to a corporate borrower?
A bank guarantee is a non-fund based facility because the bank only undertakes a contingent liability to pay if the borrower defaults, without releasing money upfront. Cash credit, term loans and overdrafts involve actual fund disbursal, so they are fund based facilities.
- ACash credit against hypothecation of stock
- BTerm loan for purchase of machinery
- CBank guarantee issued on behalf of the borrower to a customerCorrect
- DOverdraft against fixed deposit
Explanation
Non-fund based facilities do not involve an immediate outflow of bank funds; the bank only gives a commitment to pay if the customer defaults. A bank guarantee is such a facility. Cash credit, term loan and overdraft all involve actual disbursement of funds and are therefore fund based.
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