05 July 2022
While calculating the threshold limit of borrowings by a company, the temporary loans are excluded. My query is whether Trade credit, Stand by letter of credit, Overdraft and bank guarantees forms part of the term Temporary loans?
25 July 2022
In explanation to s.180(1)(c), "Temporary Loans" are defined to loans repayable on demand or within six months from the date of the loan such as short-term, cash credit arrangements, the discounting of bills and the issue of other short-term loans of a seasonal character.
The explanation gives only the illustrations with the defining feature of Temporary Loan being a loan repayable on demand or within six months from the date of the loan such as short term. So, if trade credit satisfies this condition, it can fall within the ambit of Temporary Loan and not within the meaning of money already borrowed. Position with regard to Stand By Letter of Credit and Bank Guarantees may be debatable as they are Non-Fund based limits. I do not see them as loans within the meaning of s.180(1)(c) (Although they may be loans for other purposes); rather they are simply in the nature of guarantees and liability of a company will arise upon demand by the bank once bank pays under the bank guarantee.
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