Bank Credit

Bank Credit

Bank credit is the primary institutional source of working capital finance in India. The different forms in which the bank normally provide loans and advances are as follows:
a. Loans
b. Cash credits
c. Overdrafts
d. Purchasing and discounting of bills

a. Loans

When a bank makes an advance in lump-sum against some security it is called a loan. Commercial banks generally provide short term loans up to one year for meeting working capital requirements. The term loans may be either medium-term or long term loans. In case of a loan, a specified amount is sanctioned by the bank to the customer. The entire loan amount is paid to the borrower either in cash or credit to his account. The borrower is required to pay interest on the entire amount of the loan from the date of the sanction. A loan may be repayable in lump sum or installments. Interest on loans is calculated at quarterly rests and where repayments are stipulate in installments, the interest is calculated at quarterly rests on the reduced balances.

b. Cash credits

A cash credit is an arrangement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities or guarantees. The interest is charged on the daily balance and not on the entire amount of the account. Hence it is the most favourite mode of borrowing by industrial and commercial concerns.

c. Overdrafts

Overdraft means an agreement with a bank by which a current account holder is allowed to withdraw more than the balance to his credit up to a certain limit. The interest is charged on daily overdrawn balances.
The main difference between cash credit and overdraft is that overdraft is allowed for a short period and is a temporary accommodation whereas the cash credit is allowed for a longer period. Overdraft either can be clean overdraft, partly secured or fully secured.

d. Purchasing and discounting of bills

In this case, a bank lends without any collateral security. The seller draws a bill of exchange on the buyer of goods on credit. Such a bill may be either a clean bill or a documentary bill which is accompanied by documents of title to goods such as railway receipts. The bank purchases the bills payable on demand and credits the customer’s account with the amount of bill less discount. At the maturity of the bills, bank presents the bill to its acceptor for payment. In case the bill discounted is dishonoured by non-payment, the bank recovers the full amount of the bill from the customer along with expenses in that connection.