UTILITY OF LOANS AND ADVANCES


UTILITY OF LOANS AND ADVANCES

Loans and advances granted by commercial banks are highly beneficial to individuals, firms, companies and industrial concerns. The growth and diversification of business activities are effected to a large extent through bank financing. Loans and advances granted by banks help in meeting short-term and long term financial needs of business enterprises. We can discuss the role played by banks in the business world by way of loans and advances as follows :-
(a)     Loans and advances can be arranged from banks in keeping with the flexibility in business operations. Traders, may borrow money for day to day financial needs availing of the facility of cash credit, bank overdraft and discounting of bills. The amount raised as loan may be repaid within a short period to suit the convenience of the borrower. Thus business may be run efficiently with borrowed funds from banks for financing its working capital requirements.
(b)     Loans and advances are utilized for making payment of current liabilities, wage and salaries of employees, and also the tax liability of business.
(c)      Loans and advances from banks are found to be ‘economical’ for traders and businessmen, because banks charge a reasonable rate of interest on such loans/advances. For loans from money lenders, the rate of interest charged is very high. The interest charged by commercial banks is regulated by the Reserve Bank of India.
(d)     Banks generally do not interfere with the use, management and control of the borrowed money. But it takes care to ensure that the money lent is used only for business purposes.
(e)      Bank loans and advances are found to be convenient as far as its repayment is concerned. This facilitates planning for future and timely repayment of loans. Otherwise business activities would have come to a halt.
(f)      Loans and advances by banks generally carry element of secrecy with it. Banks are duty-bound to maintain secrecy of their transactions with the customers. This enhances people’s faith in the banking system.










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