There are several Advances by commercial banks in different forms such as cash credit, loan, demand loan, overdraft. Here, explain forms of advances.
Forms of Advances by Commercial Banks
1- Cash Credit
One of the Advances by Commercial Banks is Cash credits, That are the most favorable mode of financing by large commercial and industrial concerns by which the customer is allowed to borrow money up to a certain limit known as the cash credit limit. This is a permanent arrangement and the customer need not draw the sanctioned amount at once but draw the amount as and when required.
Cash credit provides an elastic form of borrowing since the limit fluctuates according to the needs of the business. Usually, the borrower is required to provide security in the form of a pledge or hypothecation of tangible securities. Sometimes, this facility is also provided against personal security.
Thus cash credit is an active and running account to which deposits and withdrawals may be affected frequently. Interest is charged only for the amount withdrawn and not for the whole amount approved. If the customer does not use the cash limit to the foil extent, a commitment charge is made by the bank. This charge is imposed on the un-utilized portion of cash credit only.
2- Demand Loan
In a demand loan account, the entire amount is paid to the debtor at one time, either in cash or by transfer to his savings bank or current account. No subsequent debt is ordinarily allowed except by way of interest, incidental charges, insurance premiums, expenses incurred for the protection of the security etc.
Repayment is provided for by installment without allowing the demand characteristics of the loan to be affected in any way. There is usually a stipulation that in the event of any installment, remaining unpaid, the entire amount of the loan will become due.
Interest is charged on the debit balance, usually with monthly rests unless there is an arrangement to the contrary. No cheque book is issued. The security may be personal or in the form of shares, Govt. paper, fixed deposit receipt, life insurance policies, goods, etc.
3- the loan
the loan is one of the Advances by Commercial Banks. It is the money lent on condition by a bank that it is repaid, either in installments or all at once, on agreed dates and usually that the borrower pays the lender an agreed rate of interest. It is a formal agreement between a bank and borrower.
When a loan is granted for a fixed period exceeding three years and is repayable according to the schedule of repayment, it is known as a term loan. The period of term loan may extend up to 10 years and in some cases up to 20 years.
A loan is generally granted for fixed capital requirements, e.g. investment in plant and equipment, land and building etc. These may be required for setting up new projects or expansion or modernization of the plant and equipment. Advances granted for purchasing land/building/ flat (Apartment house) are term loans.
Overdraft is defined as a loan made to a customer with a cheque account at a bank or building the society, in which the account is allowed to go into debt, usually up to a specified limit. The matter likes a credit facility that allows borrowers to draw upon it up to a specified limit as and when they need to. Borrowers pay only for what they use.
Overdraft is One of the Advances by Commercial Banks between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account up to an agreed limit. This is only a temporary accommodation usually granted against security.
The borrower is permitted to draw and repay any number of times, provided the total amount overdrawn does not exceed the agreed limit. The interest is charged only for the amount drawn and not for the whole amount sanctioned.
A cash credit differs from an overdraft in one respect. A cash credit is used for long-term by businesses in doing regular business whereas overdraft is made occasionally and for short duration.