Types of Loans | Advances | Primary Functions of Commercial Banking
In Previous articles, We had learned about banking In India and Commercial Banks and Types of Deposits. In this article we are going to continue to discuss Commercial banking and primary functions of Commercial banks.
|The commercial banks provide both demand and term loans mainly to businessmen and investors against personal security or goods of movable or immovable in nature.|
Primary Functions of Commercial Banks -Loans And Advances
In this Article we are going to discuss kind of loans and advances offered by commercial banks.
Types of Advances
Advances given by bankers can be classified broadly into the following categories:
Advances which are given on the personal security of the debtor, and for which no tangible or collateral security is taken. (this type of advance is given either when the amount of the advance is very small, or when the borrower is known to the Banker and the Banker has complete confidence in him .
Advances which are covered by tangible or collateral security. Advances which are given against the personal security of the debtor but for which the Banker also holds in addition the guarantee of one or more sureties. This type of advance is often given by Banker to persons who are not known to them but whose surety is known to the Banker.
Bankers also often take the personal guarantee of the Directors of a company to whom they agree to advance a clean or unsecured loan.
This facility is given to holders of current accounts only. This is an arrangement with the bankers thereby the customer is allowed to draw money over and above the balance in his/her account. This facility of overdrawing his account is generally prearranged with the bank up to a certain limit. It is a short-term temporary fund facility from bank and the bank will charge interest over the amount overdrawn. This facility is generally available to business firms and companies.
Cash credit is a form of working capital credit given to the business firms. Under this arrangement, the customer opens an account and the sanctioned amount is credited with that account. The customer can operate that account within the sanctioned limit as and when required. It is made against security of goods, personal security etc.
On the basis of operation, the period of credit facility may be extended further. One advantage under this method is that bank charges interest only on the amount utilized and not on total amount sanctioned or credited to the account. Reserve Bank discourages this type of facility to business firms as it imposes an uncertainty on money supply. Hence this method of lending is slowly phased out from banks and replaced by loan accounts. Cash credit system is not in use in developed countries.
Discounting of Bills
Discounting of Bills may be another form of bank credit. The bank may purchase inland and foreign bills before these are due for payment by the drawer debtors, at discounted values, i.e., values a little lower than the face values.
The Banker's discount is generally the interest on the full amount for the unexpired period of the bill. The banks reserve the right of debiting the accounts of the customers in case the bills are ultimately not paid, i.e., dishonored.
The bill passes to the Banker after endorsement. Discounting of bills by banks provide immediate finance to sellers of goods. This helps them to carry on their business.
Banks can discount only genuine commercial bills i.e., those drawn against sale of goods on Credit. Banks will not discount Accommodation Bills.
Types of Loans
It includes both demand and term loans, direct loans and advances given to all type of customers mainly to businessmen and investors against personal security or goods of movable or immovable in nature.
The loan amount is paid in cash or by credit to customer account which the customer can draw at any time. The interest is charged for the full amount whether he withdraws the money from his account or not. Short-term loans are granted to meet the working capital requirements where as long-term loans are granted to meet capital expenditure.
Educational Loan Scheme
- Medical and dental course.
- Engineering course.
- Chemical Technology.
- Management courses like MBA.
- Law studies.
- Computer Science and Applications.
Loans against Shares/Securities
Loans against Savings Certificates
Consumer Loans and Advances
Securitization of Loans
- Effective October 18, 1994 banks were free to determine their own prime lending rates (PLRs) for credit limit over Rs. 2 lakh.
- The stipulation of minimum maturity period of term deposits was reduced from 30 days to 15 days, effective April 29, 1998.
- The change in the Bank Rate was made effective from the close of business of respective dates of change except April 29, 1998.
Prime Lending Rate (PLR)
Previously interest on loan was also regulated by RBI. Currently, banks can determine the rate themselves. Each bank is, however required to fix a minimum rate known as Prime Lending Rate (PLR).
- The commercial banks provide loans and advances in various forms like Overdraft, Cash Credit, Discounting of Bills etc.
- The commercial banks provide both demand and term loans mainly to businessmen and investors against personal security or goods of movable or immovable in nature.
- The commercial banks offers loans like Housing Finance, Educational Loan, Loans against Shares/Securities, Loans against Savings Certificates, Consumer Loans and Advances, Consumer Loans and Advances, Securitization of Loans.