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Question
Justify the following statement:
There is a difference between Loans and Advances given by the Bank.
Solution
The difference between Loans and Advances:
(1) A loan is an arrangement under which a certain amount is advanced to the borrower for a certain fixed period. An advance is a credit facility provided by the bank to its customers. Loans are granted for a longer period of time, but advances are usually given for a shorter period of time.
(2) The purpose of granting loan is to meet long term financial needs of the business organisations such as working capital need, fund for growth and development, funds for modernisation, etc. The purpose of granting advances is to meet the day-today financial requirements of a business.
(3) In the case of loan interest is charged by the bank on the entire amount sanctioned and credited to the account of the borrower. However, in case of advances bank charges interest only on the amount actually withdrawn from the bank and not on the amount sanctioned.
(4) The rate of interest charged on the loan depends on the period of time for which loan is given. Usually it is a little higher than the rate of interest charged on the advances.
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