Banks lend for working capital requirements
in the form of:
1. Loans
2. Cash credit
3. Overdraft
1. Loans: This
is the oldest and very popular form of lending by the banks. In case of loans,
financial assistance is given for a specific purpose and for a fixed period.
The customer can withdraw the entire amount of loan in a single installment. As
such, interest is payable on the entire amount. In case he needs the funds
again, he has to make a fresh application for a new loan or renewal of the
existing one. Ordinarily, the loans are repayable in one installment. However,
a customer may return the loan in more than one installment also.
2. Cash Credit: Cash
credit is the most popular method of lending by the banks in India. It accounts
for more than two third of total bank credit. Under cash credit system, a
limit, called the credit limit is specified by the bank. A borrower is entitled
to borrow up to that limit. It is granted against the security of tangible
assets or guarantee. The borrower can withdraw money, any number of times up to
that limit. He can also deposit any amount of surplus funds with him from time
to time. He is charged interest on the actual amount withdrawn and for the period
such amount is drawn.
3. Overdraft: One
of the main advantages of a current account is that, its holder can avail of
the facility of overdraft. An overdraft facility is granted to a customer on a
written request. Sometimes, it may be implied where a customer overdraws his account
and the bank honors his cheques.
The bank should obtain a written request from
the customer. He should also settle the terms and conditions and the rate of
interest chargeable. It is usual to obtain a promissory note from the customer
to cover the overdraft.
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