BTL 714 - NFB Term Loans - DPG & BCA

 

The Banking Tutor’s Lessons

BTL 714                                                                          15-10-2024

NFB Term Loans - DPG & BCA

 

Banks, normally, extend credit facilities both by way of Fund Based (FB) and Non Fund Based (NFB).

 

In case of FB Limits Banks part with Funds immediately and in case of NFB Limits, in case of any eventuality (invocation or devolvement) only Banks may part with Funds.

 

Credit limits extended by Banks may be grouped under two major categories – Working Capital Limits (towards current assets) and Term Loans (to acquire fixed assets).

 

With regard to Non-Fund Based Credit Limits to acquire Fixed Assets, mainly machinery, there are two different Products – Deferred Payment Guarantees (DPG) and Bills Co-acceptance (BCA).

 

DPG and  BCA are normally involved in purchase of heavy plant and machinery only. As it is not possible for industries to make bulk investments for purchase of plant and machinery, DPG & BCA  almost similar methods of purchasing them in instalments.

 

These two products  help the industrial sector in acquiring machinery with up-to date technology. The second  advantage of the scheme is that since it helps sales of machinery, the manufacturers can market their product easily.

 

This system is also advantageous to the Bank as no outflow of funds is involved. These two products are of much helpful to Banks in adverse Credit-Deposit Ratio (CD Ratio) situations.

Deferred Payment Guarantees (DPG)

 

Issuance of deferred payment guarantees favouring suppliers  arise where machineries are supplied on credit and the payment is to be made by way of instalments. The manufacturers  will agree to supply the same only if such  instalments are guaranteed by the bank.

 

In the event of non-payment of instalment dues by the buyer, i.e., principal debtor, banker issuing the deferred payment guarantee will have to make the payment.

 

Bills  Co-acceptance (BCA) 

 

Bills  Co-acceptance (BCA)  means “an undertaking from the third party (Bank) to make payment to the drawer of the bill (seller) on due date even if the buyer  fails to make the payment on that date”.

 

Thus, in the Co-acceptance of the bills, the bank which stands as co-accepter undertakes to make timely payment to the seller even if the buyer fails to make payment on due date.

 

In terms of  RBI regulations, the co-acceptance limits should be sanctioned only to the borrowers of the bank who enjoy other credit facilities with the bank.

 

The facility of BCA is applicable even to acquire current assets. However, as Banks prefer this facility only in case of Fixed Assets, we will confine our discussion only to BCA applicable for Fixed Assets such as machinery.

 

Main Difference between DPG & BCA :

 

In case of both DPG & BCA, Suppliers are sure of receipt of payments. However, Suppliers who are cash rich may prefer DPG as they may not in need of funds immediately.

In case of BCA, since Co-accepted Bill is available, Suppliers who are in need of funds, can get them discounted with their Bank. As such, Cash Rich Suppliers may prefer DPG and Suppliers who need immediate funds may prefer BCA.

 

As both DPG & BCA are to get fixed assets, we have to assess the need of these NFB limits on the lines similar to Term Loan Appraisal.

 

As per RBI guidelines, Banks should ensure that the total credit facilities including the proposed DPG or BCA  do not exceed the prescribed exposure ceilings.

 

Normally Banks hesitate to  extend DPG facility for new units.

 

Sekhar Pariti

+91 9440641014