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Different Kinds of Borrowing Facilities Granted by Banks ~

•Loans.
•Cash Credit.
•Overdraft.
•Bills Purchased.
•Bills Discounted.
BANK LENDING
Lending of funds is the main business of a
bank. The major portion of bank fund is
employed by way of lending.
Meaning of lending banker ~
The lending banker is the banker who lends
funds to trade, commerce and industry etc to
meet their financial requirements.
GENERAL PRINCIPLES OF BANK
LENDING or SOUND LENDING
 Safety:- safety is the most important principles of lending.
A banker has to see that the borrower should be able to
repay the principle amount along with interest.
 Liquidity:- liquidity refers to convertibility into cash. The
major portion of bank deposits is repayable on demand or
at a short notice. Therefore the banks must see to it that
advances are not locked up but comes back immediately.
 Profitability:- in order to ensure sufficient profit a bank
should employ its fund in genuine sources which gives not
only fair returns but also steady returns.
 Security:- Another guiding factor in bank advance is
security. When the banker advances without security he
will run the risk of losing the money.
 Purpose of Loan:- A banker should grant advance for
productive purposes such as financing trade, commerce
and industry. He should not grant advances for
unproductive purposes.
 Diversification of Risk:- Another important principle to be
followed by the banker is to see that loans and advances
are spread to different categories spread credit risk.
 Assured Repayment:- The banker has to see whether the
project for which money is lent will generate necessary
funds to repay the loan.
 Social Objective:- The banker should grant advances to
those industries which require development in the
countries planning program.
 The Law of Limitation Act:- A lending banker should
always bear in mind the Law of Limitation Act which
states that a debt will become a bad one after the expiry
of 03 years from the date of the loan.
FORMS OF ADVANCES
The loans and advances granted by banks can be broadly
divided into the following categories :-
Loans
Cash Credit
Overdraft
Hire Purchases Advances/Bills Purchased
Discounting of Bills Exchanged/Bills Discounted
LOANS
A loan is money, property or other material goods given to
another party in exchange for future repayment of the loan
value amount, along with interest or other finance charges. A
loan may be for a specific, one-time amount or can be
available as an open-ended line of credit up to a specified
limit or ceiling amount. Loans can come from individuals,
corporations, financial institutions and governments. They
offer a way to grow the overall money supply in an economy,
as well as open up competition and expand business
operations. The interest and fees from loans are a primary
source of revenue for many financial institutions, such as
banks, as well as some retailers through the use of credit
facilities.
CASH CREDIT
Cash credit is a facility to withdraw money from a current
bank account without having credit balance but limited to
the extent of borrowing limit which is fixed by the
commercial bank. The interest on this facility is charged on
the running balance and not the borrowing limit which is
given by bank. This is a very common facility by banks. It is
one of the important short term sources of finance for a
business. The availability is also not very difficult. Cash credit
facility is bound by a limit specified by bank. The borrowing
limit is determined based on the drawing powers of the
borrower. Drawing power is calculated using book debts,
inventories and creditors. Till this limit is not exhausted, the
borrower can withdraw and deposit funds any no. of times.
OVERDRAFT
An overdraft is an extension of credit from a lending
institution when an account reaches zero. An overdraft
allows the individual to continue withdrawing money even
when the account has no funds in it or insufficient money to
cover the amount of the withdrawal. Basically, overdraft
means that the bank allows customers to borrow a set
amount of money. With an overdraft account, your bank
covers checks that would otherwise bounce and be returned
without payment. As with any loan, you pay interest on the
outstanding balance of an overdraft loan. Often, the interest
on the loan is lower than credit cards. In many cases, there
are additional fees for using overdraft protection that reduce
the amount available to cover your checks, such as
insufficient funds fees per check or withdrawal.
BILLS PURCHASED
Bills purchased, in trade finance, allows a seller to obtain
financing and receive immediate funds in exchange for a sales
document not drawn under a letter of credit. The bank will send
the sales documents to the buyers bank on behalf of the seller.
Hire purchase is an arrangement for buying expensive consumer
goods, where the buyer makes an initial down payment and pays
the balance plus interest in instalments. The term hire purchase is
commonly used in the United Kingdom and it's more commonly
known as an instalment plan in the United States. However, there
can be a difference between the two: With some instalment plans,
the buyer gets the ownership rights as soon as the contract is
signed with the seller. With hire purchase agreements, the
ownership of the merchandise is not officially transferred to the
buyer until all the payments have been made.
BILLS DISCOUNTED
Discount of trade bills is short-term financing granted by the
Bank. The Bank purchases trade bill before its payment term
at a price less the amount of discount interest. The Bank
discounts bills submitted by the drawee which is creditor of
the principal amount and holds a settlement account at
Bank. An accepted draft or bill of exchange sold for early
payment to a bank or credit institution at less than face value
after the bank deducts fees and applicable interest charges.
The bank or credit institution then collects full value on the
draft or bill of exchange when payment comes due. It is an
arrangement under which a banker takes a bill of exchange
before its due date and pays to the customer. Then on the due
date the banker receives the face value of the bill from the
drawee.
TYPES OF LOANS
 Debt Consolidation Loans:- A consolidation loan is meant
to simplify your finances. Simply put, a consolidation loan
pays off all or several of your outstanding debts,
particularly credit card debt. It means fewer monthly
payments and lower interest rates. Consolidation loans are
typically in the form of second mortgages or personal
loans.
 Student Loans:- Student loans are offered to college
students and their families to help cover the cost of higher
education. There are two main types: federal student loans
and private student loans. Federally funded loans are
better, as they typically come with lower interest rates and
more borrower-friendly repayment terms.
 Mortgages:- Mortgages are loans distributed by banks to
allow consumers to buy homes they can’t pay for upfront. A
mortgage is tied to your home, meaning you risk
foreclosure if you fall behind on payments. Mortgages have
among the lowest interest rates of all loans.
 Auto Loans:- Like mortgages, auto loans are tied to your
property. They can help you afford a vehicle, but you risk
losing the car if you miss payments. This type of loan may
be distributed by a bank or by the car dealership directly
but you should understand that while loans from the
dealership may be more convenient, they often carry
higher interest rates and ultimately cost more overall.
 Personal Loans:- Personal loans can be used for any
personal expenses and don’t have a designated purpose.
This makes them an attractive option for people with
outstanding debts, such as credit card debt, who want to
reduce their interest rates by transferring balances. Like
other loans, personal loan terms depend on your credit
history.
 Loans for Veterans:-The Department of Veterans Affairs
(VA) has lending programs available to veterans and their
families. With a VA-backed home loan, money does not
come directly from the administration. Instead, the VA acts
as a co-signer and effectively vouches for you, helping you
earn higher loan amounts with lower interest rates.
 Small Business Loans:- Small business loans are granted to
entrepreneurs and aspiring entrepreneurs to help them
start or expand a business. The best source of small
business loans is the U.S. Small Business Administration
(SBA), which offers a variety of options depending on each
business’s needs.
 Payday Loans:- Payday loans are short-term, high-interest
loans designed to bridge the gap from one pay check to the
next, used predominantly by repeat borrowers living pay
check to pay check. The government strongly discourages
consumers from taking out payday loans because of their
high costs and interest rates.
 Borrowing from Retirement & Life Insurance:- Those with
retirement funds or life insurance plans may be eligible to
borrow from their accounts. This option has the benefit
that you are borrowing from yourself, making repayment
much easier and less stressful. However, in some cases,
failing to repay such a loan can result in severe tax
consequences.
 Borrowing from Friends and Family:- Borrowing money
from friends and relatives is an informal type of loan. This
isn’t always a good option, as it may strain a relationship. To
protect both parties, it’s a good idea to sign a basic
promissory note.
 Cash Advances:- A cash advance is a short-term loan against
your credit card. Instead of using the credit card to make a
purchase or pay for a service, you bring it to a bank or ATM and
receive cash to be used for whatever purpose you need. Cash
advances also are available by writing a check to payday lenders.
 Home Equity Loans:- If you have equity in your home – the
house is worth more than you owe on it – you can use that
equity to help pay for big projects. Home equity loans are
good for renovating the house, consolidating credit card debt,
paying off student loans and many other worthwhile projects.
Home equity loans and home equity lines of credit (HELOCs)
use the borrower’s home as a source of collateral so interest
rates are considerably lower than credit cards. The major
difference between the two is that a home equity loan has a
fixed interest rate and regular monthly payments are expected,
while a HELOC has variable rates and offers a flexible payment
schedule. Home equity loans and HELOCs are used for things
like home renovations, credit card debt consolidation, major
medical bills, education expenses and retirement income
supplements. They must be repaid in full if the home is sold.

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