Module: General Practice
Q110: In the context of banking credit facilities, which of the following clearly distinguishes a "Fund-Based" limit from a "Non-Fund Based" limit?
✅ Correct Answer: A
Fund-Based Limits: These involve an actual, immediate transfer of funds (cash outflow) from the bank to the borrower.
Examples include Term Loans, Cash Credit (CC), Overdrafts (OD), and Bill Discounting.
These appear on the Asset side of the bank's balance sheet.
Non-Fund Based (NFB) Limits: These do not involve an immediate outflow of funds.
Instead, the bank undertakes a Contingent Liability—a promise to pay a third party if the borrower fails to fulfill a contractual obligation.
Examples include Letters of Credit (LC) and Bank Guarantees (BG). If the borrower defaults, the NFB limit converts into a fund-based liability.
These items appear in the "Contingent Liabilities" section (Notes to Accounts), not the main balance sheet assets, until crystallized.
Examples include Term Loans, Cash Credit (CC), Overdrafts (OD), and Bill Discounting.
These appear on the Asset side of the bank's balance sheet.
Non-Fund Based (NFB) Limits: These do not involve an immediate outflow of funds.
Instead, the bank undertakes a Contingent Liability—a promise to pay a third party if the borrower fails to fulfill a contractual obligation.
Examples include Letters of Credit (LC) and Bank Guarantees (BG). If the borrower defaults, the NFB limit converts into a fund-based liability.
These items appear in the "Contingent Liabilities" section (Notes to Accounts), not the main balance sheet assets, until crystallized.