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September 24, 2013

Various forms of Loans and Advances


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Friends, all of you know that the commercial banks gives us loans and advances. But do you know what are the forms of loans ? If your answer is NO, then this post is for you. The commercial banks in India provide the following forms of loans and Advances to the public.

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 The interest is charged on total loan irrespective of the amount withdrawn. Loan once repaid, cannot be withdrawn unless a fresh loan is granted.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
  1. Term Loans : Long term loans repayable after 5 years, medium term loan repayable within a period of 3 to 5 years.
  2.  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.

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  1. grt wrk all around..

  2. difference between loan and advances..

    1. Both are almost same friend. But there is a little difference. A loan is money someone gives you which you will assumedly pay back in the future. An advance in money given to you now but to be taken out of money you would make in the future. If I'm your boss and I will pay you RS. 1000 next week as salary. If I agree to give you RS. 200 now, but only RS. 800 next week then I advanced you the RS. 200 for a week. If I just give you RS. 200 and say pay me back next month (and I continue to give you the entire RS. 1000 next week) I just lent you the money (loan). Hope it helps :)

  3. heavy language is used...difficult to understand for non-commerce background...plz give examples too...

  4. Heavy language is used... Normal people cannot understand this... please give some examples


  6. pls allow selection option of text on this webpage............pls


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