PROCEDURE OF GRANTING CASH CREDIT, OVERDRAFT AND DISCOUNTING BILLS


PROCEDURE OF GRANTING CASH CREDIT, OVERDRAFT AND DISCOUNTING BILLS

We have studied in this lesson that banks provide financial assistance to its customers in the form of loans, advances, cash credit, overdraft and through the discounting of bills. The procedure of applying for and sanction of loans and advances differs from bank to bank. However, the steps which are generally to be taken in all cases are as follow:– (I) Filling up of loan application form
Each bank has separate loan application forms for different categories of borrowers. When you want to borrow money from a bank, you will have to fill up a loan application form available with the bank free of cost.
The loan application form contains different columns to be filled in by the applicant. It includes all information required about the borrower, purpose of loan, nature of facility (cash-credit, overdraft etc) required, period of repayment, nature of security offered, and the financial status of the borrower. A running business limit may be required to furnish additional information in respect of :
          —      assets and liabilities
          —      profit  and loss for the last 2 to 3 years.
          —      The names and addresses of three persons
(which may include borrowers, suppliers, customers and bankers) for reference purposes.
(ii)     Submission of form along with relevant documents
The loan application form duly filled in should be submitted to the bank along with the relevant documents.
          (iii)    Sanctioning of loan
The bank scrutinizes the documents submitted and determines the credit worthiness of the applicant. If it is found to be feasible, the loan is sanctioned. If  the loan is for Rs 5000 or less, normally the Branch Manager himself can take the decision and sanction the loan. In case the amount of loan is more than Rs 5000, the application is considered at regional, zonal or head office level, depending on the amount of loan.
          (iv)    Executing the Agreement
When the loan is sanctioned by the bank and the borrower is informed about it,  he will have to execute an agreement with the bank regarding terms and condition for the amount of loan raised.
          (v)     Arrangement of Security for Loan
The borrower will now arrange for security against the loan. These securities may be immovable properties, shares, debentures, fixed deposit receipts, and other documents, like, Kisan Vikas Patra, National Savings Certificate, as per agreement.
When the borrower completes all the formalities, he is allowed to get the amount of loan/advance/ over draft as sanctioned by the bank. In case of ‘discounting of bills’, the bank credits the amount of bill to the customer’s account before the realization of the bill and thus, makes available the fund. In case, the bill is dishonored on due date, the amount due on the bill together with interest and other charges are payable by the party whose bill is discounted.


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