Quasi Credit Facilities: Advantage of Non-Fund Facilities, Various types of NFB facilities

Quasi credit facilities, also known as non-fund-based (NFB) facilities, are banking products that do not involve the bank disbursing any funds to the borrower. Instead, the bank provides various types of non-fund-based facilities to the borrower. These facilities have certain advantages over traditional fund-based facilities.

Advantages of Non-Fund Facilities:

Cost-effective: NFB facilities do not involve any disbursal of funds, so they are cost-effective for banks to offer.

Lower risk: NFB facilities involve lower risk for banks, as there is no disbursement of funds involved.

Flexibility: NFB facilities can be more flexible than traditional fund-based facilities, as they can be customized to meet the borrower’s specific needs.

Various types of NFB facilities:

Letter of credit (LC): A letter of credit is a guarantee issued by a bank that ensures payment will be made to the seller of goods or services, provided that certain conditions are met. This is commonly used in international trade.

Bank guarantees: Bank guarantees are similar to LCs, but they are issued to guarantee payment of debts or obligations, rather than payment for goods or services.

Standby letter of credit (SBLC): A standby letter of credit is a guarantee issued by a bank to ensure payment if a debtor fails to fulfill a contractual obligation.

Deferred payment guarantee (DPG): A deferred payment guarantee is a type of bank guarantee that ensures payment will be made at a later date, typically in installments.

Performance bond: A performance bond is a type of bank guarantee that ensures payment will be made if a party fails to perform its obligations under a contract.

Bill discounting: Bill discounting involves the bank purchasing a bill of exchange from the borrower at a discounted rate, with the borrower agreeing to pay the bank the full amount of the bill at a later date.

Bank overdraft: An overdraft facility allows the borrower to overdraw their account up to a certain limit, with interest charged on the amount overdrawn. This is a type of revolving credit facility.

Overall, non-fund based facilities provide a range of options for borrowers to access credit without actually borrowing money. These facilities are typically used in situations where traditional lending is not feasible or cost-effective.