LENDING OF MONEY
The commercial bank lends money in four
different ways:
(a) Direct Loans.
(b) Cash Credit.
(c) Overdraft. and
(d) Discounting of bills.
Loans
Loan is the amount borrowed from
bank. The nature of borrowing is that the money is disbursed and recovery is
made in installments. While lending money by way of loan, credit is given for a
definite purpose and for a pre-determined period. Depending upon the purpose
and period of loan, each bank has its own procedure for granting loan. However
the bank is a liberty to grant the loan requested or refuse it depending upon
its own cash position and lending policy.
There
are two types of available from banks:
(1) Demand loan, and
(2) Term loan.
(1) A Demand Loan: - it is a loan which is
repayable on demand by the bank. In other words, it is repayable at
short-notice. The entire amount of demand loan is disbursed at one time and the
borrower has to pay interest on it. The borrower can repay the loan either in
lump sum (one time) or as agreed with the bank. Demanded loans are raised
normally for working capital purpose, like purchase of raw materials, making
payment of short-term liabilities.
(2) Term loans: -medium and long term loans are
called term loans. Term loans are granted for more than a year and repayment6
of such loans is spread over a longer period. The repayment is generally made
in suitable installment of a fixed amount. Term loan is required for a purpose
of starting a new business activity, renovation, and modernization,
expansion/extension of existing units, purchase of plant and machinery,
purchase a land for setting up a factory, construction of a factory building or
purchase of immovable assets. These loans are generally secured against the
mortgage of land, plant and machinery, building and etc….
Cash
Credit
Cash
Credit is a flexible system of lending under which the borrower has the option
to withdraw the funds as and when required and to the extent of his needs.
Under this arrangement the banker specifies a limit of loan for the customer
(known as cash credit limit) up to which the customer is allowed to draw. The
cash credit limit is based on the borrower’s need and as agreed with the bank.
Against the limit of cash credit, the borrower is permitted to withdraw as and
when he needs money subject to the limit sanctioned.
It
is normally sanctioned for a period of one year and secured by the security of
some tangible assets or personal guarantee. If the account is running satisfactorily,
the limit of cash credit may be renewed by the bank at the end of the year. The
interest is calculated and charged to the customer’s account. Cash credit, is
one of the types of bank lending against the security by way of pledge or
/hypothetication of goods. ‘Pledge’ means bailment of goods as security for the
payment of debt.
Its
primary proposes is to put the goods pledged in the procession of lender. It
ensures recovery of loans in case of failure of borrower to repay the borrowed
account. In ‘hypothetication’, goods remain in the possession of the borrower,
who binds himself under the agreement to give possession of goods to the banker
whenever the banker requires him to do so. So hypothetication is a device to
create a charge over the asset under circumstances in which transfer of
possession is either inconvenient or impracticable.
Overdraft
Over
draft facility is more or less similar to ‘cash credit’ facility is the result
of an agreement with the bank by which a current account holder is allowed to
draw over and above the credit balance in his/her account. It is a short-period
facility. This facility is made available to current account holder who
operates their account through cheques. The customer is permitted to with the
amount of overdraft allowed as and when he/she needs it and to repay it through
deposit in the account as and when it is convenient to him/her. Overdraft is
generally granted by a bank of the basis of a written request by the customer.
Sometimes the bank also insists on either a promissory note from the borrower
or personal security of borrower to ensure safety of amount withdrawn by the
customer. The interest rate on overdraft is higher than is charged on loan.
The
following are some of the benefits of cash credit and over draft:-
(1) Cash credit and some overdraft allow
flexibility of borrowing, which depends upon the needs of the borrower.
(2) There is no necessity of providing security
and documentation again and again for borrowing funds.
(3) This mode of borrowing is simple and
elastic and meets the short term financial needs of the business.
Discounting
of Bills
Apart
from sanctioning loans and advances, discounting of bills of exchange by bank
is another way of making funds available to the customers. Bills of exchange
are negotiable instruments which enables debtors to discharge their obligations
to the creditors. Such bills of exchange arise out of commercial transactions
both in inland trade and foreign trade. When the seller of goods has to release
his dues from the buyer at a distant place immediately or after the lapse of
agreed period of time, the bill of exchange facilitates this task with the help
of banking institution. Banks invest a good percentage of their funds in
discounting bills of exchange. These bills may be payable on demand or after a
stated period.
In
discounting a bill, the bank pays the amount to the customer in advance, i.e.
before the due date. For this purpose, bank charges discount on the bill at a
specified rate. The bill so discounted is retained by the bank till its due
date and is presented to drawee on the date of maturity. In case the bill is
dishonored on due date the amount due on bill together with interest and other
charges is debited by the bank to the customer’s account.
Nature
and security of loans
To
ensure the safety of funds lent, the first and most important factor considered
by a bank is the capacity of borrowers to repay the amount of loan; the bank
therefore, relies primarily on the character, capacity and financial soundness
of the borrower. But the bank can hardly afford to take any risk in this regard
and hence it also has the security of tangible asset owned by the borrower. In
case the borrower fails to repay the loan, the bank can recover the amount by attacking
the assets. It can sell the assets offered as a security and realize the
amount.
Thus
from the view point of security of loans, we can divide the loans into two
categories: (a) secured, and (b) unsecured.
Unsecured
loans are those loans which are not covered by the security of tangible assets.
Such loans are granted to firms/institutions against the personal security of
the owner, manager or director. On the other hand, Secured loans are those
which are granted against the security of tangible assets, like stock in trade
and immovable property. Thus, while granting loan against the security of some
assets, a charge is created over the assets of the borrower in favor of bank.
This enables the bank to recover the dues from the customer out of sale proceeds
of the assets in case the borrower fails to repay the loan. There are various
types of securities which may be offered against loans granted, but all of
those are not acceptable to the banks.
The
types of securities generally accepted by the bank are the following:
• Tangible assets such as plant and
machinery, motor-van, etc.
• Documents of title to goods, like
Railway Receipt (R/R), Bills of exchange, etc.
• Financial securities (Shares and
Debentures) • Life-Insurance Policy.
• Real Estates (Land, Building, etc).
• Fixed Deposit Receipt (FDR).
• Gold Ornaments, jewellery etc.
Comments
Post a Comment