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Question
Answer the following question:
What are the different types of loans provided by commercial banks?
Solution
The following are the different types of loans and advances made by the commercial banks.
1. Loans: Loans can be of the following types:
a. Call loans: These are the loans granted by the commercial banks for a very short period of time, say about 5-7 days. The interest charged is the lowest in these kinds of loans. These are usually taken by stock brokers.
b. Short term loans: These are the loans provided for a period of not more than 2 years of time. Interest rate is higher than on the call loans but lower than the ones on medium term loans.
c. Medium term loans: These are the loans provided for a period of 2-5 years. The interest rate on these is higher than the ones on short term loans but not higher than those on the long term loans.
d. Long term loans: These are the loans provided for a period of more than 5 years. The interest rates on these are the highest of all the other loans.
2. Cash credit: In the system of cash credit, the banks first estimate the value of the assets held by the borrower. Based on this estimation, a credit limit is then decided by the bank for the borrower. The credit limit decided by the bank is the upper limit for the borrowings by the borrower. However, the actual utilization of credit by the borrower depends on his/her withdrawing power. The borrower is liable to pay interest only on the withdrawn portion of the credit.
3. Overdraft: Overdraft is a facility provided by commercial banks to the current account holders. Under this facility, commercial banks allow their customers to withdraw the amount from banks in excess of their account balance. The bank specifies the maximum limit of overdraft. A rate of interest is charged on the amount overdrawn.
4. Discounting of bills: The commercial banks provide financial assistance to the business community by discounting bills of exchange. A bill of exchange is a document that acknowledges the amount of money that is owed by the debtors as against the goods and services received by them. The banks purchase these bills produced by the customers after deducting interest on the face-value of the bill.
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