Credit facilities can be fund based or non-fund based.

Fund Based
The fund based limits are those where outlay of the Banks funds is involved. Such limits are also known as borrowing limits. Fund Based limits are generally granted by way of Overdrafts, Cash Credit, Demand Loans, Working Capital Term Loans, Bills Purchased / Discounted and Term Loans. (1) Overdraft and Cash Credit: In Overdraft/Cash Credit, the borrower is allowed to carry out debit and credit transactions up to a limit. These are more operative accounts and have cheque book facility. The term Overdraft is generally used for continuing limits granted against the security of term deposits and other financial securities, occasional over drawings/ debits in current accounts and also for continuing limits granted for personal purposes. Cash Credit is generally used for continuing limits granted for working capital requirements of commercial establishments. Cash credit/overdraft limits are repayable on demand. (2) Demand Loans / Loans: As the name suggests, are repayable on demand. They are also at times referred to as Loans. Though technically repayable on demand, a repayment of the loan in installments spread over a period up to 3 years or so is generally stipulated. Composite loans given for working capital and for fixed assets as also the loans for fixed assets where repayment period is stipulated up to 3 years are generally granted by way of Demand Loans. (3) Bills Purchased / Discounted: are normally meant for financing working capital requirements in the post-sale part of the operating cycle of a unit. The facilities are for purchasing/discounting bills drawn by the customer for goods sold. (4) Export Credit: is mainly a short term working capital facility extended to an exporter for execution of an export order from the date of receipt of such order till the date of realisation of the export proceeds. Mainly the finance is given in the form of pre/post shipment facilities. Pre shipment facilities are extended against export orders and post shipment facilities are extended by way of bill discounting and bill purchase. The working capital funding requirements for clients are partly met out of the short term funding provided by banks, the balance being funded out of long-term sources of the client. The fund based working capital funding limits for each client are determined based on the following standard procedures: Computation of Maximum Permissible Banking Finance (MPBF) under the Second Method of Lending, Assessed Bank Finance under the Cash Flow Budgeting Method or Nayak Committee Method. The primary security for working capital limits is normally hypothecation of the current assets of the company. Funding requirements in excess of the assessed limits are met out of 132

the long-term sources of the client. Term loans extended by Bank towards extending long-term funds to working capital requirements of a client are classified as (5) Working Capital Term Loans Term Loans: Term Loans are generally granted for acquisition of Fixed Assets. They are repayable by specified number of instalments spread over a period of 3 to 5 years or some times more. Normally, a term loan, which is repayable up to a period 3 to 5 years, is called Medium Term Loan. Where the repayment is longer than 5 years, it is called Long Term Loan. Term loans are mainly granted for acquisition of capital assets. The loans are not repayable on demand, but only in installments ranging over a period of time. The repayment of the loan is generally out of the future earnings of the borrowers business. The primary security is normally the charge on the fixed assets of the company.

Non-Fund Based Limits

Non-fund based limits are those where the Bank has to meet the commitment / promise made by a borrower and endorsed by the Bank, only if the borrower fails to honour it. The two main types of non-fund based facilities are Letter of credit and Bank Guarantees the details of which are given as follows: (1) Letter of Credit: Letter of credit (LC) is an arrangement where a bank, acting on the request of the customer (importer/opener of letter of credit), gives an undertaking to a third party (exporter/beneficiary of the letter of credit) that on his submitting the shipping documents (drafts, invoices, insurance policy bill of lading), the bank will meet the traders commitment. In international trade, given the fact that the local trader might not be known to the foreign supplier, such assurance from a bank facilitates the business. (2) Bank Guarantees: Issuing guarantees on behalf of customers is a major non-fund based business of banks. A guarantee is a contract to perform the promise or discharge the liability of a third person in case of his/her default. It constitutes a contingent liability that arises in the event of default by the customer. (3) Credit Products from Offshore Branches at Singapore/Hongkong/Dubai During the last one year AXIS Bank has opened three offshore branches at Singapore, Hong kong and Dubai. With these overseas banking units it is now possible for AXIS Bank to offer seamless services to its Indian corporate clientele. Some of the opportunities are elicited as below. (a) Acquisition Funding: A number of Indian corporates are interested in raising money in international capital markets to fund acquisitions. The overseas branches makes it possible to finance firms interested in acquisition of overseas companies or starting off new joint ventures or subsidiaries.

(b) External Commercial Borrowing (ECBs): External commercial borrowings refer to

commercial loans, in the form of bank loans, securitized instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years. Indian corporates willing to raise international capital can adopt this route. ECBs can be used to fund capital expenditures.

(c) Credit Linked Notes (CLNs): A security with an embedded credit default swap allowing the issuer to transfer a specific credit risk to credit investors. CLNs being structured securities, the principal and interest payments are contingent on the performance of the reference entities. AXIS Bank with a better understanding of Indian corporates is in a good position to undertake them as reference assets. Coupled with FCCBs these offer a win-win proposition for banks as well as investors. FCCBs can be used to fund capacity expansion, repaying debt, acquisition funding. (d) Credit Derivatives: Credit Derivatives are privately held bilateral contracts where the credit risk is transferred without the transfer of ownership for a pre-agreed amount or fee. Various types of credit derivatives are plain CDS, First-to-default CLN, Basket CLN, CDOs etc. The overseas branches cater to their demand. (e) Trade Finance: The offshore branches also offer products in Buyers credit and Seller credit. Indian importers with requirement for import finance can be catered to without any hassles. The International syndication of loans, trade finance advisory and offering agency services for loan syndication is also been explored through these branches.