Commercial Banks

Topics: Bank, Debt, Overdraft Pages: 3 (1013 words) Published: April 7, 2013
Commercial banks
Types of advances:
Advances by commercial banks are made in different forms such as demand loan, term loan, cash credit, overdraft etc. These forms of advances are explained below. 1. 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 debit 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 instalment without allowing the demand character of the loan to be affected in any way. There is usually a stipulation that in the event of any instalment, 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. 2. Term Loan:-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 term 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. 3. Overdraft:-An overdraft is a fluctuating account wherein the balance sometimes may be in credit and at other times in debit. Overdraft facilities are allowed in current accounts only. Opening of an overdraft account requires that a current account will have to be formally opened, and the usual account opening form completed. Whereas in a current account cheques are...
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