Devaiya Nikhil

LDRP – ITR MBA

Subject: - Loan and Advances

INTRODUCTION
The term ‘loan’ refers to the amount borrowed by one person from another. The
amount is in the nature of loan and refers to the sum paid to the borrower. Thus,
from the view point of borrower, it is ‘borrowing’ and from the view point of
bank, it is ‘lending’. Loan may be regarded as ‘credit’ granted where the money
is disbursed and its recovery is made on a later date. It is a debit for a borrower.
While granting loans, credit is given for a definite purpose and for a
predetermined period. Interest is charged on the loan at agreed rate and intervals
of payment. ‘Advance’ on the other hand, is a ‘credit facility’ granted by bank.
Banks grant advances largely for short-term purpose, such as purchase of goods
traded in and meeting other short-term trading liabilities. There is a sense of debt
in loan, where as an advance is a facility being availed of by the borrower.
However, like loans, advances are also too repaid. Thus a credit facility repayable
in instalments over a period is termed as loan while a credit facility repayable
within one year may be known as advances. Loans and advances granted by
commercial banks are highly beneficial to individuals, firms, companies and
industrial concerns. The growth and diversification of business activities are
affected to a large extent through bank financing. Loans and advances granted by
banks help in meeting short-term and long term financial needs of business
enterprises

Loans
Loan is the amount borrowed from bank. The nature of borrowing is that the
money is disbursed and recovery is made in instalments. While lending money
by way of loan, credit is given for a definite purpose and for a pre-determined
period. Depending upon the purpose and period of loan, each bank has its own
procedure for granting loan. However, the bank is a liberty to grant the loan
requested or refuse it depending upon its own cash position and lending policy.

There are two types of available from banks:

(1) Demand loan, and
(2) Term loan.
(1) A Demand Loan: - it is a loan which is repayable on demand by the bank. In
other words, it is repayable at short-notice. The entire amount of demand loan is
disbursed at one time and the borrower has to pay interest on it. The borrower can
repay the loan either in lump sum (one time) or as agreed with the bank.
Demanded loans are raised normally for working capital purpose, like purchase
of raw materials, making payment of short-term liabilities.
(2) Term loans: -medium and long-term loans are called term loans. Term loans
are granted for more than a year and repayment6 of such loans is spread over a
longer period. The repayment is generally made in suitable instalment of a fixed
amount. Term loan is required for a purpose of starting a new business activity,
renovation, and modernization, expansion/extension of existing units, purchase
of plant and machinery, purchase a land for setting up a factory, construction of
a factory building or purchase of immovable assets. These loans are generally
secured against the mortgage of land, plant and machinery, building and etc….

Advances
‘Advance’ on the other hand, is a ‘credit facility’ granted by the bank. Banks
grant advances largely for short-term purposes, such as purchase of goods traded
in and meeting other short-term trading liabilities. There is a sense of debt in loan,
whereas an advance is a facility being availed of by the borrower. However, like
loans, advances are also to be repaid. Thus, a credit facility- repayable in
instalments over a period is termed as loan while a credit facility repayable within
one year may be known as advances. However, in the present lesson these two
terms are used interchangeably.
Types of advances
1. OVERDRAFT:
Meanings: It is a facility provided by a bank to his client that he can
withdraw a limited amount in excess of his original balances, for example
if you have Rs.5000 in your account and you have been granted Current
Account: over draft facility of Rs. 10,000 you can now draw cheques to
Rs. 15,000. Features:

1. This facility is only available in current account.

2. Application: Application has to be made to bank requesting to grant
overdraft.
3. Credit Analysis: Bank examines the record of the dealing of the party
before granting overdraft.
4. Short Term: Overdraft is short term finance but the term can be
renegotiated with the banker.
 5. Interest: Interest is charged by bank on the amount overdrawn. 6.
Securities: Bank in order to secure advance usually keeps certain securities.
The securities may be fixed deposit receipt, life insurance policies etc.
7. Grantee: In certain cases when party is of sound reputation the bank
can be granted on the guarantee of a third party.

2. CASH CREDIT: Meanings: Cash credit means that bank after deciding
the amount of loan transfers the amount in an account. The customer is
giving a cheque book of that account and he can withdraw any portion of
the amount according to his needs. In practice cash credit is similar to
overdraft, only difference is that current account is not needed in this case.
The cash credit is granted against pledge or by postreaction of assets of the
client.

3. BILLS DISCOUNTED AND PURCHASED

Bank takes the bill drawn by borrower on his customer and pay him
immediately deducting some amount as discount/commission.

PROCEDURE FOR GRANTING LOANS AND ADVANCES:

i. Filling up of loan application form
ii. Submission of form along with document
iii. Sanctioning of loan
iv. Executing the agreement
v. Arrangement of security for loan
RECOMMENDATION
 Moe customer convenience
 Services for businessmen
 Services for self-employed & serviceman’s
 Rural banking
 Social banking

CHARACTERISTICS OF LOAN
Loans have the following distinguishing characteristics:

1. Time to maturity. Time to maturity describes the length of the loan

contract. Loans are classified according to their maturity into short-term
debt, intermediate-term debt, and long-term debt. Revolving credit and
perpetual debt have no fixed date for retirement. Banks provide revolving
credit through extension of a line of credit. Brokerage firms supply margin
credit for qualified customers on certain securities. In these cases, the
 borrower constantly turns over the line of credit by paying it down and
reborrowing the funds when needed. A perpetual loan requires only regular
interest payments. The borrower, who usually issued such debt through a
registered offering, determines the timing of the debt retirement.
2. Repayment Schedule. Payments may be required at the end of the contract
or at set intervals, usually on a monthly or semi-annual basis. The payment
is generally comprised of two parts: a portion of the outstanding principal
and the interest costs. With the passage of time, the principal amount of the
loan is amortized, or repaid little by little until it is completely retired. As
the principal balance diminishes, the interest on the remaining balance also
declines. Interest-only loans do not pay down the principal. The borrower
pays interest on the principal loan amount and is expected to retire the
principal at the end of the contract through a balloon payment or through
refinancing.
3. Interest. Interest is the cost of borrowing money. The interest rate charged
by lending institutions must be sufficient to cover operating costs,
administrative costs, and an acceptable rate of return. Interest rates may be
fixed for the term of the loan or adjusted to reflect changing market
conditions. A credit contract may adjust rates daily, annually, or at intervals
of 3, 5, and 10 years. Floating rates are tied to some market index and are
adjusted regularly.
4. Security. Assets pledged as security against loan loss are known as
collateral. Credit backed by collateral is secured. In many cases, the asset
purchased by the loan often serves as the only collateral. In other cases, the
borrower puts other assets, including cash, aside as collateral. Real estate
or land collateralize mortgages. Unsecured debt relies on the earning
power of the borrower.

ADVANTAGES OF LOANS:

1. They can be easily procured.

2. They can be used for short-term as well as medium-term financing.

3. Interest paid on a bank loan is a tax-deductible expenditure.

DISADVANTAGES OF LOANS

1. due to inflexibility in account opening it is difficult to convince customer.

2. no authentic evidence of customers is found.
3. no special facilities of loans to businessman are given in semi-rural area.
4. The bank is not tapping untapping areas.
5. Lack of communication & delivery channels.
6. Lack of social banking.
7. Loans are not provided without security.
8. Loans are not provided at ease lot of paper work & documentation is
involved.
The time bounded period is the major limitation in research project.