Various forms of Loans and Advances
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1. Loans : It
is the most common and important form of loans offered by the bank.
Under this system the banker grants certain lumpsum amount as a loan to a
cu8stomer, which will be credited to his deposit account, the customer
can withdraw the loan amount at any time. The loan is payable either in
installments or in lumpsum after the period of loan. The interest is
charged on total loan irrespective of the amount withdrawn. Loan once
repaid, cannot be withdrawn unless a fresh loan is granted. The rate of
interest on loans will be usually lower than the rate charged on cash
credits and overdrafts due to the fact that it involves maintenance and
interest is charged on total loan sanctioned for the total period of
loan.
Banks grant two types of loans. Those are
- Term Loans : Long term loans repayable after 5 years, medium term loan repayable within a period of 3 to 5 years.
- Demand Loans : Which are repayable on demand.
The loan system encourages greater degree of financial discipline on the
borrower, gives an opportunity for periodical review and it is simple
to operate and more profitable. However, this form of loan is inflexible
and involves more formalities and frequent renewals.
2. Cash Credits :Under this system of loans a customer is
permitted to borrow money upto a particular limit granted to him. The
amount so granted will be credited to a separate Account. The customer
can withdraw the amount at any time he needs, and at the same time
deposit money whenever he feels surplus money. The interest is charged
only on the actual amount drawn but not on the total amount sanctioned.
However, there is a minimum interest to be charged which may be 1/3rd or
1/4 of total amount sanctioned.
Cash Credit is usually granted on the security of commodities hypothecated or pledged with the bank. Generally customers favor hypothecation to pledge because the later is considered to lower his prestige.
Cash credits are very popular, more flexible and very convenient for the banker to maintain a credit account. However, there is possibility of misutilisation of loan by the borrower and it is not possible for the banker to verify end use.
3. Overdrafts : Under this system, the customer is allowed to overdraw his current account up to certain amount granted with or without any security. Under this method also the interest is charged only on actual amount withdrawn irrespective of the amount granted. However there is a minimum interest clause in case overdraft is not made use of. Overdraft is not granted as a regular basis. It is purely temporary one. This type of advance is very important in business community.
4. Bills Discounted and Purchased :Under this form of lending, banks discount the bills of customer and provide cash for the period equal to the term of the bill be credited to the customer's account with the amount of the bill after deducting some charges. The charges are called discount charges which is an income to the bank. It is an unsecured form of loan hence such loan is granted only to financially strong and known business men. If on the due date the bill is dishonoured, the drawer is liable to pay the amount.
Sometimes, a banker may purchase a bill instead of discounting it. The advantage of purchasing a bill is that the banker becomes a holder for value of such a bill, since, he becomes the owner of the bill, he can exercise his right as a pledge over the good, covered by that bill, in case it is dishonoured.
5. Hire Purchase Advances : Such form of loans are granted to businessmen who are engaged in Hire Purchase sale. This system is very popular in western countries. It is gaining popularity in our country also. They don't give finance to ultimate buyer, but they provide finance to Hire Purchase dealers or the security of good sold on Hire Purchase. This type of advance is popular particularly in transport operations.
