Granting Finance and Non-Fund Based Limits Essay

For the purpose of granting finance, posits are lending by way of fund found limits as well as non fund based limits. The following are treated as fund based limitsa) Lock and key type against of make merry of goodsb) Open factory type pledge or open key advance against hypothecation of goodsc) Advance against hypothecation of goodsd) Advance against book debtse) Advance against bills.The following are considered as non fund based limits granted by the banks to the publicLetter of credit and bank guaranteesBanks normally undertake a proper appraisal of the financial stand and requirement of the customer for non fund based facilities as in the case of fund based ones. This is because though the bank in the case of non funded facility, commits itself to pay all in the event of non-payment by or non performance of the customer, the possibility of the given non-funded credit facility resolving into real or funded credit facility on the customers default or non performance cannot b e ruled out.Letter of creditA letter of credit is a written labour given by a bank on behalf of its customer who is a buyer, to the supplied, promising to pay a certain sum of money provided the supplier complies with the call and conditions embodied in the letter of credit. A letter of credit is required where the supplier of goods and services deals with unknown parties or otherwise feels the need to safeguard his interest. In such circumstances he stipulates in his sales contract with the buyer that the goods will be supplied and payment made single under a banks letter of credit. Under a banks letter of credit a conditional commitment to make the payment is made by the bank which gives an assurance to the supplier that he will receive the necessary payment provided he does what the buyer requires him to do, within the time period specified in that regard.Whereas in the case of fund based limits, the banks deal with goods, in the case of letter of credits, they deal with docum ents and not in goods and the transactions are executed only on the basis of the documents. The letter of credit is an autonomous transaction quite distinct from the sale and purchase on which it may be based. The bank issue the letter of credit has to make up its mind within a reasonable time on receipt of the documents whether to accept or reject them. ordinarily the letter of credits issued the banks are governed by the Uniform customs and practice for documentary credits of the International Chamber of Commerce situated at Paris. telephone extensionhttp//classof1.com/homework-help/finance-homework-help/