1.2.8 Limits Fungibility
This topic describes information about Limit Fungibility.
In banking, limits fungibility refers to the ability to share credit limits across different facilities, allowing borrowers to utilize available credit where it's most needed without requiring separate approvals for each product or utilization. This approach enhances risk management by treating individual risk limits as interchangeable units, provided they fall under the same class and type of risk exposure.
Business Use Case Example:
Consider a corporate client, ABC Corp, with three credit facilities:
- Facility A: A revolving credit line (working capital) of $1 million designated for working capital.
- Facility B: A term loan of $500,000 for equipment financing.
- Facility C: A term loan of $400,000 for business expansion.
With limits fungibility, if ABC Corp has fully utilized Facility A but has an unused portion in Facility B or C, they can allocate funds from Facility B or C to meet their working capital needs without applying for an increase in Facility A. This flexibility ensures optimal resource allocation and improved liquidity for the customer.
Maintenances: User need to maintain specific configurations
at both the customer and facility levels for fungibility.
Maintenance 1: Fungibility Rule Maintenance
Creating Fungibility Rules for a Customer: Define fungibility
rules for a customer and liability combination with the following parameters:
- From and To Line Attribute: The From and To Line Attribute displays the characteristics of both the originating (From) and receiving (To) lines within a liability and customer combination, for defining fungibility rules.
- Allowed flag – Toggle the switch to enable the selected criteria.
- Populated Lines – The available lines for fungibility gets listed based on the criteria selection.
Table 1-111 Attributes explained with example:
| From Line Attribute/To Line Attribute | Description | Allowed/Disallowed (Example Value) |
|---|---|---|
| Between facility types | Enables fungibility across different facility types such as revolving, non-revolving, and non-revolving secured (NRS). | Allowed |
| Between funded and non-funded lines | Allows fungibility between funded (e.g., loans) and non-funded (e.g., guarantees) facilities. | Allowed |
| Between committed and non-committed lines | Permits fungibility between committed (firm commitment) and non-committed (uncommitted) facilities. | Allowed |
| Between secured and unsecured lines | Permits fungibility between facilities backed by collateral (secured) and those that are not (unsecured). | Disallowed |
| Between different facility categories | Allows fungibility across various facility categories. | Allowed |
Maintenance 2: Facility-Level Configuration
At the facility level, configure the following:
Table 1-112 Facility-Level Configuration:
| Parameter | Description | Example Value |
|---|---|---|
| Fungibility Flag (Is fungible line) | Indicates whether the facility is eligible for fungibility. | Enabled |
| Fungible cap percentage | Defines the maximum percentage of the facility's effective line amount that can be shared. | 50% |
Transaction Processing for Fungible Lines: Once
the maintainces are done, when a utilization transaction exceeds the available balance
of a fungible line, the system processes it as follows:
- Check Fungibility Configuration: Verify the fungibility rules defined for the customer and liability combination.
- Identify Eligible Facilities: Filter facilities enabled for fungibility based on the configured parameters.
- Determine Priority: Establish the internal priority order for utilizing fungible amounts from eligible facilities, preferring a single line for full transaction amount.
- Allocate Funds: Transfer the required amount from the prioritized facility to the facility with the utilization request, ensuring the fungibility cap is not exceeded.
- Update Records: Adjust the fungible amounts (in and out) for the involved facilities accordingly.
Table 1-113 Example:
| Steps | Action | Details |
|---|---|---|
| 1 | Utilization request exceeds Facility A's available balance. | Requested amount: $300,000; Available balance: $100,000. |
| 2 | System checks fungibility rules and identifies Facility B over Facility C as eligible. | Facility B has a 50% fungibility cap on its $500,000 line, allowing up to $250,000. |
| 3 | Facility B is prioritized based on internal criteria. | Facility B is selected to provide the fungible amount. |
| 4 | $200,000 is transferred from Facility B to Facility A to cover the shortfall. | Facility B's fungible amount (out) increases by $200,000; Facility A's fungible amount (in) increases by $200,000. |
| 5 | Records are updated to reflect the fungible transfer. | Facility A's utilization is now $300,000; Facility B's available balance is reduced accordingly. |
Sample example for the Functionality: The
following scenario demonstrates end-to-end process of limits fungibility and how it
allows for efficient credit utilization.
Customer
Profile:
- Customer: XYZ Ltd.
- Liability: Corporate Loan Account
Facilities:
Table 1-114 Facilities
| Facility | Type | Limit Amount | Is Fungible Line | Fungibility Cap(%) |
|---|---|---|---|---|
| Working Capital - Facility A | Revolving | $1,000,000 | Yes | 50% |
| Term Loan - Facility B | Non-Revolving | $500,000 | Yes | 50% |
| Term Loan - Facility C | Non-Revolving | $400.000 | Yes | 50% |
Fungibility Rules:
Table 1-115 Fungibility Rules
| Parameter | Setting |
|---|---|
| Between facility types (Revolving – Non Revolving) | Allowed |
| Between funded and non-funded lines | Allowed |
| Between committed and non-committed lines | Allowed |
| Between secured and unsecured lines | Allowed |
| Between different facility categories | Allowed |
Utilization Transaction Scenario:
- Utilization Request: XYZ Ltd. requests a drawdown of $1,200,000 from Working Capital Facility.
- Available Balance Check: Working Capital facility has an available balance of $1,000,000.
- Shortfall Identification: There's a shortfall of $200,000.
- Fungibility Assessment: The system checks fungibility rules and identifies Term Loan Facility B as eligible to cover the shortfall.
- Fungibility Cap Verification: Term Loan Facility's fungibility cap allows up to $250,000 (50% of $500,000).
- Fund Transfer: $200,000 is transferred from Term Loan Facility B to Working Capital Facility A.
- Transaction Completion: The drawdown of $1,200,000 is processed successfully.
Table 1-116 Post-Transaction Status
| Facility | Utilization | Available Balance | Fungible amount received | Fungible amount lent |
|---|---|---|---|---|
| Working Capital Facility A | $1,200,000 | $0 | $200,000 | $0 |
| Term Loan Facility B | $500,000 | $300,000 | $0 | $200,000 |
Deutilization Transaction Scenario:
- RepaymentRequest: XYZ Ltd. requests a repayment of $1,000,000 to Working Capital Facility.
- FundTransfer: $200,000 is transferred back to Term Loan Facility B. The remaining balance of $800,000 is repaid back to Working Capital Facility A.
- TransactionCompletion: The entire fungible amount of $200,000 borrowed is repaid successfully.
-
Table 1-117 Post-Transaction Status
Facility Deutilization Available Balance Fungible amount received Fungible amount lent Working Capital Facility A $1,000,000 $800,000 $0 $0 Term Loan Facility B $500,000 $500,000 $0 $0
Parent topic: Transactions