Question

Explain three ways by which commercial banks advance loans to the public.

Mention the types of loans granted by the commercial banks. 

The main functions of a commercial bank are to accept deposits and advance loans. Explain two types of loans given by commercial banks.

What is overdraft facility?

Briefly explain two methods of advancing loans by the commercial banks.

Answer 1

The banks advance following types of loans:

1. Cash Credit: Cash credit is a type of loan by bank. It is a short term working capital loan against collateral by the borrower. Under this, the borrower is allowed to withdraw upto a certain amount on a given security which comprises mainly stocks of goods and bills receivable from others. But interest is charged on the amount actually withdrawn.
2. Short-term Loans: Out right loan under it, loans of a fixed amount are sanctioned. The sanctioned amount is credited in the debtor's account. Bank charges interest on the whole amount from the day it was sanctioned. It involves repaying the principle amount with interest by a given due date usually within a year. 
3. Overdraft Facility: An overdraft is an advance given by allowing a customer keeping current account to overdraw his current account upto an agreed limit. It is a facility to a depositor for overdrawing the amount than the balance amount in his account. 
4. Discounting of the Bill of Exchange: This is another popular type of lending by modern banks. Through this method, a holder of a bill of exchange can get it discounted from the bank. In a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (ice, holder of the bill) and agrees to pay the amount mentioned on maturity. If the holder, i.e., creditor of a bill.