LOANS AND ADVANCES DR.J.ARUL SURESH ASSISTANT PROFESSOR DEPARTMENT OF COMMERCE LOYOLA COLLEGE CHENNAI

Principles of Sound Lending 1. Safety 2. Liquidity 3. Profitability 4. Diversification 5. Object of loan 6. Security 7. Margin Money 8. National Interest 9. Character of the borrower

Forms of Lending (Advances) Banks lend for working capital requirements in the form of: 1. Loans 2. Cash credit 3. Overdraft 4. Purchase and discounting of bills of exchange.

Distinction between Loan and Cash Credit (a) Amount: In case of loan a fixed amount is sanctioned, whereas in case of cash credit a limit is fixed. (b) Period: Loan can be granted for a short, medium and long-term but cash credit is granted only for a short period up to one year only. (c) Withdrawal: The entire amount of loan is credited to the customer’s account. In case of cash credit the customer can withdraw the amount upto the limit when he needs. (d) Interest: In case of loan, interest is payable on the entire loan, whereas in case of cash credit, interest is payable only on the amount actually withdrawn and for the period the amount is withdrawn. (e) Repayment: Ordinarily a loan is repayable in one lump sum. However, it may be paid in installments also. On the other hand in case of cash credit, the borrower may repay any surplus amount from time to time.

Types of Loans and Advances Loans and advances are of different types. These can mainly be classified on the following bases: On the Basis of Object or Purpose For which purpose a loan is being taken? It may be for the following purposes: (a) Commercial Loans: This loan is taken to meet short term requirement of capital e.g., working capital. (b) Consumer Loan: This loan is taken to finance household goods like fridge, T.V.,scooter etc. (c) Agricultural Loan: Such a loan is taken by the farmers to meet their short term requirements like buying seeds, fertilisers, insecticides etc.

On the Basis of Time (a) Short Term Loan: Such a loan is taken for a period of less than one year. For example, to meet working capital requirements. (b) Medium Term Loan: Such a loan is taken for a period ranging from 1 year to 3 years. For example, to purchase equipments for professionals or furniture etc. (c) Long Term Loan: Such a loan is taken to meet long-term requirements from 3 years to 20 years or more. For example, loans to purchase land, building, plant and machinery etc. However, banks provide long-term loans to a very limited extent only.

On the Basis of Security (a) Secured Loan: Such a loan is granted on the security of tangible assets, Sec. 5 (a) of the Banking Regulation Act, 1949, defines a ‘secured loan or advance’ as a loan or advance, made on the security of assets, the market value of which is not at any time less than the amount of such loan or advance. (b) Unsecured Loans: Such a loan is granted without any security. According to Sec. 5 (a) of the above Act an unsecured loan or advance means a loan or advance not so secured.

On the Basis of Form (i) Loan, (ii) Cash credit, and (iii) Overdraft.

Characteristics of Good Security A good security should have the following characteristics: 1. Free from encumbrances 2. Easy marketability 3. Easy storability 4. Durability 5. Free from price fluctuations 6. Easy ascertainment of value 7. Earning of income 8. Free from heavy cost of handling 9. Free from disabilities

Precautions to be Taken by the Bankers Character of the Borrower Experience in the Business Title of the Borrower Purpose of the Loan Proper Valuation of Goods Nature of Goods Proper Storage Care in a Rented Godown Take Possession of Goods Godown Keys Adequate Insurance Periodical Inspection Strict Supervision Over the Release of Goods Short-period Advances Bank’s Name Board Directives of Reserve Bank

Advances Against Documents of Title to Goods Documents, which in the ordinary course of trade, are regarded as proof of the possession or control of the goods are called “documents of title to goods.” Thus, the documents of title actually represent goods. They can be transferred by mere delivery or by endorsement. The delivery of these documents actually amounts to a symbolic delivery of goods represented by them. Banks find it easy to deal with these documents than physically dealing with goods. Hence, these documents are very popular among banks. The following are the important documents of title to goods: 1. Bill of lading 2. Dock warrant 3. Warehouse keeper’s certificate 4. Delivery order 5. Railway receipt and lorry receipt

Precautions The banker has to take the following precautions while accepting the documents of title to goods as security.  Integrity and Honesty of the Borrower  Certificate Regarding Packing  Depositing of all Copies of Bill of Lading  Documents Without Onerous Conditions  Blank Endorsement  Insurance  Trust Receipt  CleanDocuments- documents containing objectionable remarks about packing  Control-customer fails to get delivery of goods, the banker should takeover the goods in its control, store them and later on dispose of them

Advances Against Stock Exchange Securities Shares and debentures which are regularly purchased and sold in the stock exchange may be accepted as security by the bank. A stock exchange is an organized market where securities are purchased and sold. The securities traded on the floor of a stock exchange include the following: (a) Bonds issued by the Central and State Governments. (b) Securities issued by semi-Government authorities like port trusts, electricity boards,improvement trusts, etc.; and (c) Shares and debentures issued by the companies.

Precautions to be Taken in Advancing Against Securities Choice of Securities Valuation of Securities Adequate Margins Debentures and Preference Shares-should prefer preference shares and debentures to equity shares because the fluctuations in the prices of debentures and preference shares are small Partly-paid Securities Transfer of Securities-the bank must get the transfer deed signed by the borrower. Notice to Company