39.2.2.1.1 Differences between Credit Lines and Commitment Contracts

Table 39-1 Differences between Credit Lines and Commitment Contracts

Credit Line	Commitment Contract
Credit Line utilized is subject to interest accrual.	Does not include the concept of interest.
Subject to credit risk.	Bank makes provisions to get out, if they sense credit risk, as per conditions of the contract. There is no provision to hold capital or loan for a Commitment Contract except if the bank has no provision to back out as per terms of contract.
A credit facility taken up in normal course of business.	Customer going in for a tender requires assurance on availability of Credit at a certain rate to quote a price with certain profitability. Therefore, the customer takes a Commitment Contract before they quote for the tender.
Consists of limits associated with it and limits may include one or multiple interest tiers applicable.	Commitment Contract must be mapped to a Credit Line to ensure that a customer or party level credit exposure caps are adhered. Commitment Contract can be provided to retail or SME without credit lines. It is similar to a pre-approved loan, which is valid for certain terms and date agreed. However, a fee or periodic fee must be paid to keep up the commitment.
Can be utilized by the customer under agreed conditions, without intervention of the banker.	Can be utilized by the customer after going through an abridged credit appraisal process such as providing updated income statements, KYC documents, POA etc., before any credit is extended.
Credit Line provided to a customer is summed up to understand customer or party level exposures.	Commitment Contracts roll into one of the Credit Lines, which is used to estimate total exposure to a customer.
Credit Line is factual.	Commitment Contract is only a commitment.