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

Which statement about a bank's deferred payment guarantee (DPG) given on behalf of a borrower is correct?

A deferred payment guarantee is a non-fund based facility. The bank outlays no money when issuing it and becomes liable only if the buyer defaults on an instalment due to the seller. Paying the seller upfront would be a fund-based loan, which is a different facility.

  1. AThe bank pays the seller up front in cash and the borrower repays on the due date
  2. BIt is a non-fund based facility; the bank funds nothing at issue and pays only if the borrower defaults on an instalmentCorrect
  3. CIt converts the bank into the owner of the asset until the last instalment is paid
  4. DIt can be invoked by the borrower to defer payments beyond the agreed schedule

Explanation

A DPG is a contingent liability for the bank, so no funds move at issuance. The bank pays only if the buyer fails to pay an instalment, after which it recovers from the borrower. Cash payment up front describes a fund-based loan, not a guarantee.

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