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What is the method for assessment of  Non-fund based Limits?

What is the method for assessment of Non-fund based Limits?

The assessment LC/LG limits are fixed by banks based on annual consumption of  raw material to be purchased against LC or LG. The raw material holding in terms of consumption is worked out as under.

Assessment of LC/LG limits for import of materials.

Ascertain from customer the Consumption of Material (CM) per annum,( to be purchased under LC or LG.)

Find out Procurement Time or lead time (PT) for importing the materials.

If the material is purchased under credit, add Credit Period (CP) to procurement time.

We get Total Time (TT) when we add credit period to procurement period. TT=PT+CP

If CM is Annual Consumption of Material to be purchased against LC or LG

We can compute the LG or LC limit required to the company by dividing the annual consumption of raw material to be purchased against LC or LG and same is divided by 12 and multiplied by total time.

Formula for LC/LG Limit=CM×TT ÷ 12

However, if minimum quantity to be procured is more than the limit arrived, such request should be considered. This equation is to be adapted for LC under DA terms as well for inland LG.

Assessment of DPG/APG: Assessment of DPG is done in the same method term loan is assessed, as it is a substitution of the term loan. The assessment of Advance Payment Guarantee (APG) is done in the same way for fund based limits. Since the borrower receives advance payment for the material to be supplied by him at future date, advance received should be reduced from working capital gap.

Whenever LC/LG limits are sanctioned for import of raw material or goods imported for the trading purpose such limit shall normally help in reducing the working capital limit. Therefore, following points to be noticed while sanctioning/opening LCs

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