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TYPESOFADVANCES:
Introduction:
Inordertomeetvarioustypesofrequirementsofclient,commercialbanksmake
differenttypesofadvances.Normallyfourdifferenttypesofadvancesaremade.
Theseareasfollows:
1.OVERDRAFT:
Meanings:
Itisafacilityprovidedbyabanktohisclientthathecanwithdrawalimited
amountinexcessofhisoriginalbalances,ForexampleifyouhaveRs.5000in
youraccountandyouhavebeengrantedoverdraftfacilityofRs.10,000youcan
nowdrawchecquestoRs.15,000.
Features:
1.CurrentAccount:Thisfacilityisonlyavailableincurrentaccount.
2.Application:Applicationhastobemadetobankrequestingtogrant
overdraft.
3.CreditAnalysis:Bankexaminestherecordofthedealingofthepartybefore
grantingoverdraft.
4.ShortTerm:Overdraftisshorttermfinancebutthetermcanbe
renegotiatedwiththebanker.
5.Interest:Interestischargedbybankontheamountoverdrawn.
6.Securities:Bankinordertosecureadvanceusuallykeepscertainsecurities.
Thesecuritiesmaybefixeddepositreceipt,lifeinsurancepoliciesetc.
7.Grantee:Incertaincaseswhenpartyisofsoundreputationthebankcanbe
grantedontheguaranteeofathirdparty.
2.CASHCREDIT:
Meanings:
Cashcreditmeansthatbankafterdecidingtheamountofloantransfersthe
amountinanaccount.Thecustomerisgivingachequebookofthataccountand
hecanwithdrawanyportionoftheamountaccordingtohisneeds.Inpractice
cashcreditissimilartooverdraft,onlydifferenceisthatcurrentaccountisnot
neededinthiscase.Thecashcreditisgrantedagainstpledgeorbypothecation
ofassetsoftheclient.
1.Features:
SeparateAccount:Usuallythecashfinanceisprovidedinseparateaccount.The
banktransfersthefundsinthecreditaccountandchequebookisissuedtothe
client.
2.Securities:Thebankcandemandsecuritiesagainsttheloan.
3.Pledge:Usuallythecashcreditisadvancedagainstledgeorhypothecationof
goods.
4.TermofFinance:Cashcreditcanbegrantedforshortormediumterms.
5.Interest:Interestischargedontheamountwithdrawnbytheclient.Itis
chargedondailybasissoclientcansavetheinterestexpensebydepositing
moneyintheaccountatanytime.
DEMANDLOANS:
Meanings:
Demandloansaretheloansgrantedbybanksforanagreedperiodoftime.The
wholeamountofloanistransferredtotheaccountofcustomer.Hecan
withdrawiteitherinlumpsumorinstallments.
Features:
1.Securities:Theloanadvancedissecuredbywayofmortgageofpledge.
2.Interest:Interestischargedonthewholeamounteitherquarterly,semi
annuallyorannually.
3.Repayment:Theloanisrepayablewithinafixedtimeperiod.Howeverthe
bankreservestherighttocallbacktheloanafteroneyear.
Objectives:
Thedemandloansarearrangedbyclienttomeettheirworkingcapital
requirements.Demandloanscanfurtherbeclassifiedintof9ollowing.
a)TermLoan:Termloansareadvancedforaparticulartimeperiodandthey
arerepayableattheexpiryofperiod.Howevertheycanberenegotiated
also.
b)PersonalLoans:Personalloansareadvancedforsuchpurposesaspurchases
oforconstructionofhouseetc.
4.DISCOUNTINGOFBILLS:
Meanings:
Bydiscountingbillsofexchange,bankmakesatpaymenttotheholderor
instrumentbeforethedateofmaturity.Bankdeductsanamountcalleddiscount
formakingearlypayments.
FEATURES:
Income:
Thisdiscountconstitutestheincomeofthebank.Finance:
Theholderoftheinstrumentcangetfinance(cash)fromthebank.Hedoesnot
havetowaituntilthematurityofbill.
SummingUp:
Thesearedifferenttypesofadvanceswhicharemadebycommercialbanks.