Question

Explain two methods adopted by Commercial banks to advance loans to the general public.

Answer 1

Loans advanced by a commercial bank are:
i. 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 Interest will be paid by the borrower only on the actual amount withdrawn from the bank.
ii. Overdraft facilities: Demand deposit holders can avail the overdraft facilities provided by a bank. When a customer receives an overdraft facility from a bank, then he/she can draw cheques in excess of the balance standing in his/her credit to the extent of the amount of overdraft. The borrower is required to pay an interest on the excess amount withdrawn from the bank.