Question

Explain briefly three methods adopted by Commercial Banks to advance credit to borrowers.

Briefly explain two methods of advancing loans by commercial banks.

Mention the types of loans granted by the commercial banks.

Answer 1

Loans advanced by a commercial bank:

• Ordinary loans: Commercial banks advance ordinary loans for purchasing consumer durables, building houses, etc.
• Cash credit: Commercial banks allow the borrower to withdraw up to a certain amount on a given security, which constitutes stocks of goods and bills receivable from others. Interest will be paid by the borrower only on the actual amount withdrawn from the bank.
• Overdraft facilities: Under overdraft facilities, an account holder can withdraw money in excess of the amount deposited with the bank. The borrower is required to pay an interest on the excess amount withdrawn from the bank.