DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name :Sreenivasa Rao B.
Designation :Lecturer in CCP
Branch :Commercial and Computer Practice
Institute :S.U.V.R&s.R gpw,Ethamukkala
Semester :VI
Subject name :Banking II
Subject code :CCP 604 (B)
Major topic :Loans and Advances–Short Term & Long Term
Duration :50 Minutes
Sub topic :Merits and Demerits of Loans and Advances
Teaching aids :PPTs
CCP604(B).7 1
Objectives :

On completion of this period you would be

able to

 Explain Loan system

 Explain theMerits and demerits of loans and
advances.

CCP604(B).7 2
Recap
So for you know

 The principles of sound lending policy

 The different styles credit extended by banker

CCP604(B).7 3
Loan System

 Credit is given by commercial banks for a definite

purpose and for a predetermined period.
 Normally, these loans are repayable in installments.
 Funds are required for single non–repetitive
transactions and are withdrawn only once.

CCP604(B).7 4
Loan system ……continued…..

 If the borrower needs funds again, or wants

renewal of an existing loan, a fresh request is
made to the bank.
 Thus, a borrower is required to negotiate every
time he is taking a new loan or renewing an
existing loan.
 Banker is at liberty to grant or refuse such a
request depending upon his own cash resources
and the credit policy of the central bank.
CCP604(B).7 5
 Banks grant loans for different periods.

1. Short terms.
2. Medium term and
3. Long term loans.

CCP604(B).7 6
Broadly, the loans granted by banks are
classified as follows:

Bank loan

Short
Medium and long Bridge Composite Consumption
term
term loans loans loans loans
loans

CCP604(B).7 7
Merits of Loans and Advances
 The loans system has the following merits.

 Observance of the financial discipline by the

borrower:
In case of loan system, the time and amount of
repayment of installments is fixed in advance.
The system therefore encourages a greater
degree of financial discipline on the borrower.

CCP604(B).7 8
MERITS …..Continued

3. Periodic Review of loan account:

 The banker gets an opportunity to review the

loan account as and when a loan is granted or
renewed.
 The banker may discontinue or refuse
unsatisfactory loan account.

CCP604(B).7 9
MERITS …..Continued

3. Simple and Profitable:

 The banker charges interest on the total amount

sanctioned.
 No loss of interest to the banker.
 Operation of the system is comparatively simple
as compared to a cash credit system.

CCP604(B).7 10
MERITS …..Continued

4.Convenience:
 Banks have to maintain only one account
for all transactions of the customer.
 Repetitive documentation can be avoided.
 The system is quite convenient to operate.

CCP604(B).7 11
De-merits of loans and advances:

1. Inflexibility:

The system is inflexible in the sense that every

time a loan is required, it is to be negotiated with
the banker.

To avoid it, borrowers may borrow in excess of

their exact requirements.

CCP604(B).7 12
De-Merits ……: continued

1. More Formalities:

Sanctioning of the loan requires more

documentation as compared to a cash credit
system.

CCP604(B).7 13
De-Merits ……..continued..

3. No Verification of end-use of funds:

 The banker concentrates greater attention on the

security offered rather than the end use of funds.

 Owing to lack of verification, the funds are

diverted to other purposes.

CCP604(B).7 14
De-Merits ……..continued..

1. Frequent Renewals:

 Though the loan is sanctioned only for a fixed

period but in practice they are continuously
renewed period after period.

CCP604(B).7 15
Summary

 Explanation of loan system .

 Classifications of loans.
 Merits of loans and advances, namely, financial
discipline, periodic review, profitability, etc.,
 Demerits of loans and advances include more
formalities, no verification of end use of funds
etc.

CCP604(B).7 16
 Quiz

1. In secured advances ____________ is the

provision for safety.

a) Margin

b) Higher rate of interest

c) Good documentation.

d) Character.

CCP604(B).7 17
Quiz

State whether the following statement is

‘true or false’:
I) Granting of advances is the primary function of
the banks: true

CCP604(B).7 18
Frequently Asked Questions

1. What are the different types of loans?

2. List out the merits and demerits of loans and

advances.

CCP604(B).7 19