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

Which statement best captures the essential nature of a non-fund based facility sanctioned by a bank to a company?

A non-fund based facility is one where the bank lends its credit standing and gives a commitment to a third party, such as a guarantee or letter of credit, without any immediate cash outflow. Funds move only if the customer defaults and the bank must honour the commitment.

  1. AThe bank immediately transfers cash to the company's current account for working capital
  2. BThe bank lends its name or creditworthiness and gives a commitment to a third party, without an immediate outflow of fundsCorrect
  3. CThe bank subscribes to the equity shares of the company
  4. DThe bank purchases the company's fixed assets and leases them back

Explanation

In non-fund based financing the bank does not part with money at the outset. It gives an assurance such as a guarantee or letter of credit in favour of a beneficiary. Cash flows out of the bank only if the company defaults and the commitment is invoked. Immediate cash transfer describes fund based credit.

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