Concept
The funded business of a bank refers to any transaction or business where the actual fund of the bank is used. IN other words, it facility provided by a bank where the real money is used.These are credit facilities provided by banks making the disbursement of real cash to the concerned beneficiary.It includes bank overdraft, overnight lending facility, cash finance, running finance, financing against different saving certificates or other marketable securities, project financing etc. Hence, funded banking business facilities involve facilities in which actual cash is disbursed to the customer at a certain charge.
Non-funded business or transaction refers to transactions in which the bank does not give actual cash to the concerned party. It is a less risky business involving documentary credits or guarantees. Banks do not charge interest on such facilities. Instead, they charge certain fees for such services. Thus, a non-funded business is also called a fee-based business. Non-funded businesses of banks include services of trade finance and cards issued to customers charging some fee. Income from the non-funded business is much lower as compared to that of income earned from the funded business of a bank.
Different Funded Services of Bank
Funded services include lending made by banks in which the real cash is disbursed to the client. Banks charge interest on such funded services in which the fund of the bank is directly involved. The different types of funded services provided by banks are as follows;
- Working Capital Loan:
This involves financing of the working capital need of different clients; Generally, this facility is provided for trusted and reputed parties of the bank. It is for less than one year.
- Overdraft Facility:
It is a withdrawal facility in which an excessive amount than the limit can be withdrawn from the current account. The bank cannot control or monitor the end-use of such overdraft. This is an unsecured loan on which interest is paid used an amount compounded on daily basis. Overdrafts are not so good for banks due to high administration costs, repayment patterns etc.
- Long Term Loans:
These are loans issued by banks to finance business expansion, buy real estate, purchase machinery etc. Generally, these loans are issued for a duration of more than 5 years. It is used as a term loan in which monthly installment is payable consisting of interest and principal of the loan.
- Cash Credit (CC) Facility:
CC is a secured loan provided against the value of inventory and receivable. The value of average inventory and receivable is accessed and 60 to 70 percent of the valuation is given as a loan to the borrower. The remaining value of 30 to 40 percent is the margin. The higher the risk associated with the asset, the higher will be the margin. The interest rate on CC is decided periodically on the basis of the benchmark rate.
- Working Capital Demand Loan (WDCL):
This is a short-term loan facility provided by banks to meet the working capital requirement of companies. Under WCDL, the customer must agree on the interest rate quoted by banks based on their cost of funds. WCDL limit is determined by negotiation between the bank and the borrower. This is the most common type of loan taken by medium and large companies.
Different Non-funded Services of Bank
Banks earn income either by lending deposits or by providing fee-based banking services. The type of banking service which have very low riks requiring no lending of the fund and on which certain fee is chargeable is called non-funded banking services. These are the fee-based services that form an important part of the profit and loss account of the bank. Some major non-funded services provided by banks are mentioned below:
- Card Services:
Banks offer different card services for which they directly do not have to provide real cash to the customers. For such cards, banks charge issuance, renewal, transactional, and re-activation charges. This include card services like debit card, credit card, prepaid card, travel card, special card etc. In the case of a credit card, the bank avail a kind of loan which can be used via card only and charges interest.
- ATM:
ATM (Automated Teller Machine) is an automated machine used for cash withdrawal. A chip-based card is used in such ATMs to access the customer account which is transacted for withdrawal as per aviled limit and charge. ATM can be used for balance inquiry, accessing mini account statements, transfer money etc. as per service integrated to such machines.
- Safe Deposit Locker:
Safe deposit locker is a special and highly safe box kept in the vault area of the bank which is provided to bank customers. It is used for the safekeeping of valuables like gold, foreign currencies, property papers, important personal documents etc. These containers or boxes are so built that they are not damaged by fire, flood, theft, and other disasters or harms. The bank charge certain issuance and renewal charges on such lockers.
- Demand Draft and Pay Order:
A demand draft is a payment order issued by one bank to pay a certain sum to a customer by another bank. Such drafts are issued considering the credibility and customer relation with the bank. It is a service provided by a bank without being subject to the balance maintained in the customer’s account. That’s why banks charge a certain fee on its issuance which forms an essential part of the income of the bank.
- Capital Market Facilities:
Banks provide different capital market-related services. In the context of Nepal, banks provide facilities such as DEMAT account opening, CASBA<MeroSHare registration etc. to customers charging certain approved charges. Similarly, most of these banks have already started merchant banking as a subsidiary company. Banks also charge an advisory fee on the issuance of securities by different companies. Fo this, no fund is used directly, and charges obtained from such services form an important part of the income of the bank.
- Account-Related Fees:
Banks charge different fees deductible from an account for different purposes. Banks charge fees for cheque requests and additional cards issued for the account. Similarly, penalties like cheque disposal (When requested and not taken for a specified time), excess withdrawal transactions, account statement requests exceeding a specified number for a specified period etc. Similarly, charges while using an account for different transactions through electronic and digital platforms are also deducted from a concerned account by banks.
- Bank Guarantee (BG) :
A Bank guarantee assures the seller about the payment to be made by the guarantee issuing bank even if the buyer fails to pay. The issuing bank does all the due diligence, financial and business analysis before issuing the guarantee. The issuance of BG is a key part of non-funded business of any bank contributing remarkably in overall revenue generation of the concerned bank.
- Letter of Credit (LC):
It is a documentary guarantee service provided by banks. Under this, the bank (on behalf of the buyer) promises to pay the seller if the buyer does not make payment during the stipulated time. This is used in international trade. Bank charge a certain fee to issue such a letter of credit. Such charge is an essential part of the income of banks .
Difference Between Letter of Credit and Bank Guarantee
| Letter of Credit (LC) | Bank Guarantee (BG) |
| 1. It is a commitment of the buyer’s bank to the seller that it will accept the invoice presented by the seller and make payment, subject to a certain condition. | 1. It is given by the bank to the beneficiary on behalf of the applicant to effect payment if the applicant defaults on payment |
| 2. In a letter of credit, the primary liability lies with the bank only which collect payment from the client afterward | 2. In a bank guarantee, the bank assumes liability when the client fails to make payment |
| 3. The payment is made by the bank as it becomes due such that it does not wait for the applicant’s default and beneficiary to invoke undertaking | 3. It becomes effective when the applicant default in making payment to the beneficiary |
| 4. It is most appropriate to import and export business | 4. It is suitable for government contracts |
| 5. The letter of credit is riskier for the bank but less risky for merchant t | 5. It is riskier for merchants and less risky for the bank |
| 6. It ensures that the amount will be paid as long as the service is performed in a defined manner 0 | 6. It mitigates loss if the parties to the guarantee do not satisfy the stipulated condition |
Difference Between Funded and Non-funded Business of Bank
Both funded and non-funded businesses are an essential part of the total banking system. Funded businesses yield income in form of interest whereas non-funded businesses derive income in terms of charges and fees. Apart from this, there exist certain differences between funded and non-funded businesses. These differences are mentioned below:
- Funded businesses involve the bank’s fund directly whereas non-funded businesses do not involve funds of the bank directly
- There is cash outflow in funded business. But in the case of non-funded business, there is no cash outflow
- Credit risk prevails in the case of funded business, not in the non-funded business
- The creditworthiness of customers are to be enquired and evaluated which is not required while performing non-funded business
- Interest in the form of income derived from funded business whereas commission, charges, and fees are a form of income derived from non-funded business
- Funded facilities provided by the bank include overdraft, cash credit, overnight lending facility, running finance etc. But non-funded businesses include a letter of credit, bank guarantee, performance bond etc.
