Question

Answer in brief.

What are the schemes for disbursement of credit by bank?

Answer 1

(a) Commercial banks play an important role in providing short term finance to business concerns. They have become the primary source of financing working capital of the business.
(b) In India, the primary source of financing working capital is bank credit and trade credit.
(c) Commercial bank assists corporate enterprises:
• By granting term loans to companies
• By underwriting the issue of securities of the company.
• By subscribing to shares and debentures of the company.

Disbursement of credit by bank
Overdraft
Cash credit
Cash loans
Discounting of Bills of Exchange
The above disbursement of credit by commercial banks are as follows:

(a) Overdraft: An overdraft implies only to the existing current account holder. Therefore, it is a credit facility granted by a bank to current account holders. Under an overdraft facility, the bank allows its customers to overdraw an amount, up to a particular limit, i.e. to withdraw more than the amount of credit balance in his current account.
Generally, a low rate of interest is charged by a bank, and collateral securities usually accepted for an overdraft facility.

(b) Cash credit:
It is an important form of providing finance to business organisations. Cash Credit is given against the pledge of goods or by providing alternative securities. A cash Credit account is operated on similar lines as the overdraft facility. On the security margin, the amount of cash credit is sanctioned by the bank and the borrower can withdraw the amount from his current account up to this limit as and when the company needs.
Interest is charged on the actual amount outstanding and not the amount of credit limit sanctioned by the bank.

(c) Cash loans: Commercial Banks credit the account of the borrower with the amount of loan. The borrower has to pay interest on the entire amount sanctioned by the bank as a loan. If the amount of loan is paid in installments, the interest to be paid will be on the actual balance outstanding.

(d) Discounting of Bills of Exchange: Bills of Exchange is an acknowledgment received by the seller (drawer) from the buyer (drawee) promising to pay him a certain amount on a specific date. The drawer of the bill can receive money from drawee on the due date. The drawer can receive money before the due date by discounting of bills. This is nothing but selling the bills to the bank.
The drawer gets money immediately from the bank against the bill. The bank gives money to the drawer less than the face value of the bill. The amount received less is called a discount. They are accepted by banks and cash is advanced against them. Thus, the Bill of Exchange is Trade Bills.