Banking · Credit Facilities and Trade Finance
In the classification of credit facilities, why is a Letter of Credit (LC) categorized as a non-fund-based limit as opposed to a Cash Credit (CC) limit?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The facility is primarily used for the acquisition of long-term fixed assets and is repayable in equated monthly installments.
- 2The bank's obligation to pay is contingent upon the beneficiary presenting complying documents, rather than involving an immediate disbursement of cash.✓
- 3The bank undergoes an immediate cash outflow to the borrower's account at the time of opening the credit instrument.
- 4The bank charges a fixed interest rate on the entire limit from the date of sanction regardless of usage.
Correct answer
The bank's obligation to pay is contingent upon the beneficiary presenting complying documents, rather than involving an immediate disbursement of cash.
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