Loans and advances (employment of funds)

One of the primary functions of the commercial banks is lending. Lending of funds
constitutes the main business of bank. The major portion of bank funds is employed by
way of advances. The bulk of its income is derived from loans and advances. Bank makes
loans and advances to traders, businessmen, industrialists and agriculturists to meet their
financial requirements.

Principles of sound lending: _

As observed, the employment of funds is not an easy task . L While, lending his
funds a banker is require to follow a cautious policy and conduct his business on the basis
of the well known principles of sound lending in order to minimize the risk . the main
principles of sound lending are ;

1)Safety: Safety is the first important of principle of sound lending . the very existence of
a bank depends upon the safety of its funds . Safety depends upon the security offered by
the borrowers and the repaying capacity and willingness of the borrower . banker should
see that the funds lent out by him would come back in normal course without being
forced to resort to legal action .

2)Liquidity : Liquidity refers to the ability of an asset to convert into cash without any
drastic reduction in its face value with in short time . the bulk of bank deposits or
repayable on demand or at short notice . to meet the demand of the depositors time , the
bank should keep its funds in liquid state . The banker should see that his advances are
given mainly for short term . again he should see that the 00000 securities, which he
accepts are easily realizable without much loss in the event of default of borrowers .

3)Profitability: Like all other commercial institutions banks are run for profit. Banks earn
profit to pay interest to depositor, to declare dividend to share holder meet establishment
charges and other expenses .
A banker should employ its funds in such a way that they will bring him adequate
and steady returns .

4)Purpose of loan : Purpose of the loan has assumed a special significance in the present
day concept of banking . Before 00000 loans a banker should enquiry about the purpose
for which it is needed .Loans granted for productive purpose increases the earning
capacity of the borrower and ensure prompt repayment . Loans for undesirable activities
should be discouraged .

5)Security : Customers may offer different kinds of securities viz., land and building ,
machinery , stocks, shares , debentures , goods , documents of title to goods etc to get
advances . The security of the customers are insurance and banker can fall back upon
them in times of necessity . Therefore , he should ensure that the security are adequate,
marketable and free from encumbrances . Securities, which could be marketed easily,
quickly without loss, should preferred .
6)Diversification of risk: An element of risk is always present in every advance, to be on
the safer side , there should be spread of advances. This means banker should not lend a
major portion of its loanable funds to any single borrower or to an industry or to one
particular region . Therefore , a banker should follow a wise policy of “ Do not lay all the
eggs in the same basket “The bank must advances to a large number of customer spread
over a wide area and belonging to different industries .

7)Public policy or national interest : Banking industry as a significant role in the

economic development of a country . Therefore a banker should identify his lending
business with national policies . He should granted advances to those sectors . Which
require development in the countries planning programs . Bank credit should be made
available to the neglected sectors of the economic activity and to the under privileged
sections of the society .

CONCLUSION : To conclude that a sound credit is one , where timely repayment is

assured . This largely depends on the earning and repaying capacity of the borrower . So
great emphasis is on the productivity of the loan .

Forms of bank advances: Bank advances take the form of loan , overdrafts , cash credit
and discounting of bills .

Classification of bank advances: From the point of view of securities , bank advances
may be classified as 1) Secured advances and 2) Unsecured advances

1) Secured advances:
Usually , a banker secures his advances by (a) stock exchange security (b) goods ,
(c)document of title to goods and (d) other security such as real estate, plant and
machinery ,gold bullion , gold ornaments , life policies , fixed deposit receipt assignment
of 000 supply bills etc .

General principles of secured advances

While granting advances against collecting securities a banker should bear in maid the
following points.
1.ready reliability :the collateral security accepted by the banker must be readily
realizable in case the borrower fails to repay the advances on the due date. Generally,
government and semi government securities and goods, which are necessaries of life, are
preferable, as they are readily marketable

2. Stability or prices: The security accepted must be fairly stable in price government
and semi government securities and goods, which are necessaries of life, are stable in
prices and they can be considered as good collateral securities .

3) Yield: It is preferable for the banker to accept that security which yields a study
income stock exchange securities yield a regular income and they are preferable . This
income may act as supporting factor as it reduces the interest burden of the borrower and
repayment will be bit easier.
4)Absence of disability : The banker must see that the security offered does not suffer
from any disability For instance , fully paid shares of a joint stock company are not
subject to any disability .

5) Validity of title: The banker must confirm that the customer a valid title to the security
offered. It as to be remembered that, if the customer’s title to the securities funds
defective, banker cannot enforce the security in the event default.

6) Absence of prior charges: The security taken should be free from encumbrance. There
should not be any prior charge against the security offered. The banker prefers normally
the first charge against the security.

7) Valuation: The security obtained against the advance should be properly valued and
the value should have stability. The amount of loan that may be given by a banker is
dependent on the value of the security offered . therefore, the banker should see that
securities offered could be valued easily .For instance of value of stock exchange
securities can be easily ascertained by referring to stock exchange quotations published in
newspaper . Again the banker should obtain the expert opinion about the intrinsic value
of securities like gold ornaments, buildings ,machinery etc.

8) Adequate margin: The banker must see that adequate margin is maintained against the
securities to cover the fall in prices of securities. Adequate margin should be left to cover
(a) the advance made (b) to cover the interest and other charges.

9) Cost of supervision: It is in the interest of the banker to prefer a security which

requires less supervision. For ex: Stock exchange securities are preferable to goods,
which are stored in the go down of the borrower, require constant supervision .

10) Right method of creating charge :Charge means the mode in which a creditor can
established his rights against the defaulting debtor . Banker as a creditor must ensure that
the method of charging is perfect. It is always in his interest to prefer pledge to other
methods , such as hypothecation ,mortgage assignment etc .

11)Documentation : The banker should also get proper documentation of title deeds in his
favour . say , agreement of pledge, mortgage deed to letter of hypothecation are properly
prepared and get them signed by borrower .

12)Other aspects :The security obtained should be readily transferable , so that he can sell
the property without any difficulty . Again, the goods obtained, as security should be
durable in nature of non-perishable character.

Unsecured advances:
Unsecured advances are the advances for which the banker as no collateral or tangible
securities. They may take the form of (a) advances on the mere personal security of the
borrowers. (b) Advances against guarantees and (c) Discounting of bills of exchange.
A clean advance is not supported by equalent value of assets, it is sanctioned solely on
the personal credit worthiness of the borrower. The banker has to be very conservative
and cautious in allowing clean loans. A prudent banker should strike a balance between
enterprise and prudence. The creditworthiness of a customer is the sole security to a
banker.
Precautions:
01. Character refers to the customer’s reputation for honesty, fairplay and regularity
sound business habits.
02. Capacity means the competence and the abilities of the borrowers. He must have the
required ability to utilize the loan for a productive purpose.
Qualities of leadership, executive control, intellectual alertness, knowledge of business
and experience in business. Able customers expected to repay the loan well in time.
03. Capital. A review of the capital invested by the customer is working funds and the
operation of bank accounts could help in assessing his financial strength. He should be
competent to produce adequate assets to redeem his loan. The banker should request the
borrower to produce financial statements so as to up rise his credit and business standing.
04. Circumstances refer to the general trends in the trade. The banker must have a clear
idea about the economic trends of the business. The banker should keep the keen watch
over the loan account of the borrower. Any changes in the status of the borrower or in his
business condition should be constantly reviewed.

Methods of creating charge on security

Creating a charge of a security indicates the procedure by which a banker establishes his
right as a lender on the particular security offered by the borrower. “There are several
methods by which banker can create charge on the securities. They are:

Lien: A banker has a general lien. Lien refers to his right to retain any property of his
customer for the general balance due from the customer. Lien is automatic; no agreement
is necessary for the creation of a lien in favor of the banker. Lien doesn’t involve the
transfer of ownership of the property from the customer to the banker. Lien is always
possessory in character; it does not confer on the creditor the right of sale. But a banker’s
lien is a general lien exception to this general principle. It confers on the banker right of
sale in case the customer fails to repay the debts.

Pledge: Section 172 of the Indian contract Act 1872 defines pledge as a bailment of
goods as security for payment of a debt or performance of a promise. Pledge is a contract
involves the pledger and pledge. A pledge is a method of creating a charge on a movable
property. In a pledge the delivery of the property by the pledger (borrower) to the pledgee
(banker) is essential. The delivery can be actual or constructive. In pledged the ownership
of the property remains with the pledger. The pledgee can sell the property pledged after
giving a reasonable notice

in case the pledger fails repay the debts on the due date. Generally a pledge is supported
by a memorandum of deposit, which contains the particular of the property pledged, the
purpose of the deposit, the amount of advances etc.
Hypothecation: Hypothecation is a method of creating an equitable charge of a movable
property in favor of a creditor. It as a contract involves two contractual parties, the
hypothecator (borrower) and the hypothecatee (the banker). Generally, the borrower has
done hypothecation by executing a document called letter of hypothecation in favor of
the lender. Hypothecation is an equitable charge on a movable property. In the case of
hypothecation neither the possession of the property nor the ownership of the property is
transferred from the borrower to the lender. In fact, both the possession and the
ownership of the property remain with the borrower. Generally, the letter of
hypothecation gives the hypothecatee the right to ask for the transfer of possession of the
property from the borrower on demand.

Mortgage: A mortgage is the transfer of the interest in a specific immovable property by

one person to another person for the purpose of securing an advance of money. It is a
method of creating charge on a specific immovable property. In a mortgage, the
possession of the mortgaged property need not be transferred to the mortgagee. Usually it
remains with the mortgagor. The interest in the mortgaged property is transferred from
the mortgagor to the mortgagee subject to reverting on the repayment of the advance.
There are several types of mortgages allowed under the Indian law. They are:
a) Simple mortgage.
b) English mortgage.
c) Mortgage by conditional sale.
d) Usufructuary mortgage.
e) Equitable mortgage.
f) Anomalous mortgage.

a) Simple mortgage: Simple mortgage is mortgage in which the mortgagor,

without transferring the possession of the mortgaged property, binds
himself personally liable to pay the debt. The mortgagee shall have the
right to sell the mortgaged property with the order by the court. The
bankers prefer this type of mortgage.

b) Legal or English mortgage: Is mortgage in which the mortgagor transfers

the legal right in the property to the mortgagee on the condition that on the
repayment of the mortgage money, the mortgagee will retransfer the legal
right in the mortgaged property to the mortgagor. In case the mortgagor
fails to repay the mortgagee money on the due date, the mortgagee has the
right to sell the mortgaged property even without the intervention of the
court.

c) Mortgagee by conditional sale: Is a mortgage in which the mortgagor

ostensibly sells the mortgaged property on the condition that the ostensible
sale will become an absolute sale if the mortgage money is not paid by the
mortgagor on the agreed date. The bankers do not prefer this type
mortgage, as there no personal covenant of the borrower for the repayment
of the mortgaged money.
 d) Usufructuary mortgage: is mortgage in which the mortgagor transfers
the possession of the mortgaged property to the mortgagee and authorized
him to have the possession of the property until the payment of the
mortgage money, and in the mean time, to receive the rents and profits,
accruing from the mortgaged property in satisfaction of the mortgaged
money
e) Equitable mortgage: In which title deeds of the property deposited with
the creditor without executing and registering a mortgage deed. A
memorandum of deposit, which binds the borrower to create a legal
mortgage whenever the mortgagee to do so calls him upon, generally
supports it. In the case of an equitable mortgage, the mortgagee cannot sell
the mortgaged property without an order of the court. This type of
mortgage is popular with the banker and borrowers in India.
f) Anomalous mortgage: is a mortgage, which does not belong to any one
of the above class’s mortgages. It is a combination of different class of
mortgage. The bankers do not generally accept this type of mortgage.

SPECIALISED SEVICES BY BANKS:

Traveler’s cheques:-This is a service meant for tourism traffic, which

minimizes the risk of carrying heavy cash, while traveling. A person who intends to visit
several places can purchase traveler’s cheques issued by the banker. The traveler is
required to deposit a certain sum of money with a banker and ask for the issue of
traveler’s cheques. This is printed in different denominations At the time of purchasing
the traveler’s cheques, the purchaser is required to put his signature on all the traveler’s
cheques issued to him in the presence of a responsible official of the issuing bank.
The purchaser or the holder of the travelers cheques can encash them at the various
places which he visits with the drawee branches are correspondent banks of the issuing
bank or with other agencies with whom the issuing bank has made necessary
arrangements. The holder is required to sign the traveler’s cheque once again in the
presence of the responsible official of the drawee branch or correspondent branch at the
time of enchasing the cheques. The drawee branch are correspondent bank will pay the
amount for the travelers cheque only when both the signature tally. The holder of the
traveler’s cheque need not carry any letter of identification or indication to be presented
to the drawee branch or correspondent bank for encashing the travelers cheques. If the
traveler’s cheque is lost , duplicate can be obtained by giving the necessary indemnity to
the bank.

Gift cheques:- This is a general utility service rendere3d by banks. Bank issue gift
cheques against payment in cash. Gift cheques are issued in fixed denominations. They
are issued to both customers and non customers. The gift cheques are intended to be
given by the purchaser to others as gifts on occasions like birthday, wedding, etc. the gift
cheques issued by the bank encashable at any of the braches of the issuing bank. They
can be encashed at any time. Gift cheques are not negotiable. They are payable only to
the payees. If a gift cheque is lost, a duplicate gift cheque can be obtained by giving an
indemnity bond.

Credit card:-
Credit card is innovative product in the line of financial service. It acts as an instant
money and provide several benefits. A credit card is a card or mechanism which enables
card holders to purchase goods, travel and dine in a hotel without making immediate
payment, the holders can use the cards to get credit from banks up to 45 days. The credit
card relieves the customer from botheration of carrying cash and ensures safety. A limit
is set to the amount of money; a card holder can spend a month using the card. At the end
of every month, the holder has to pay
Along with interest is charged for the outstanding amount, an average consumer prefers
this type of card for his personal purchase, as he is able to defer payment over several
months. There are three parties to a credit card.
1. Issuer:-The banks or the other issuing organization.
2. Cardholders:-Individual, corporate bodies and non individual corporate bodies such
as firm.
3. Member establishments:-shops and service organizations enlisted by credit card
issuer who accepts credit cards.

Benefits to credit card holders:-

a) Credit cards are simple and easy to carry.
b) A card is a convenient method of payment for goods and services.
c) Owing to revolving nature of credit, the customer can take advantage of it .
d) Cash can be obtained at any branch of the issuer since ATM facility is extended to
cardholders.
e) Overdraft facility is given to cardholders who are entitled to spend more than actual
limit.
Teller system-
Teller system is an arrangement under which the teller (i.e. the employee of a bank at the
teller counter) is authorized to make payment for cheques up to a limited amount without
reference to the ledger balance or the specimen signature. Only in case of doubt, the teller
refers to the ledger balance or the specimen signature. (Of course, the teller is expected to
be conversant with the accounts allotted to him and the specimen signatures of the
concerned customers.)
The teller system works only at certain selected branches of the bank. The object of the
teller system is to expedite payment of cheques for small amount. Teller system is quite
popular in several advanced countries of the world. Even in India, of late, teller system
has become quite popular.

Any time money (ATM) scheme or service:-

Recently, many commercial banks have introduced any time money scheme or service. In
India, banks like ICICI Bank, vijaya Bank, corporation Bank, etc.have introduced any
time money scheme or service. At present, ATM facility is available in almost all
important cities and towns. A T M has revolutionized the withdrawal facility of the
customer Any time money scheme is a scheme or service under which a customer,
through ATM card, can withdraw money from his bank account, deposit money into bank
accounts, check the balance in his bank account, transfer money from his bank account
and order for cheque book or statements at his convenience, that is at any time, day or
night, seven days a week.
Setting up a mutual fund:-
In resent years, commercial banks in advanced countries have set up mutual funds for
mobilization of funds from the small and household sectors for investment in stock
market. Mutual funds are also setup by Indian commercial banks in recent years, and they
(i.e. mutual funds) have gained importance among the Indian investors. Though the
earliest mutual fund in India was setup by unit trust of India as far back as in 1964,
commercial banks in India began setting up mutual funds only since 1987. the state bank
of India, the Canara bank, The bank of India, The Indian bank, The Punjab national bank,
The state bank of Hyderabad, the Vysya bank ltd., etc. have set up mutual funds.
A mutual fund is an institutional device through which investors pool their funds for
investment in diversified investment proposals with a view to enjoying the benefits of
minimization of risks and optimum returns on investments. In short, a mutual fund is an
institutional device for collecting funds from a large number of investors for investment
on diversified securities.
To the investors:-
1. Easy liquidity of investments.
2. Tax benefits.
3. High return on investments.
4. Safety of investments.
Debit cards:-Debit card an electronic product has become more popular nowadays, just
like credit cards, the debit card holder can present the card to the merchants, sign sales
slip and forget about it. The purchase amount automatically debited to account of the card
holder electronically and would appear in the monthly statement of accounts. The
customer has to open an account with the bank and need to maintain credit balance in his
account, which is not generally required in case of credit card. This system requires a
terminal known as the “Point of sale terminal” at every point of purchase.

1.1> Introduction to co-operative Banks: -

Unlike commercial of the economy, the co-operative banks, on the other hand
provide credit and other allied facilities to the rural and agricultural sectors the drawn of
this century saw the evaluation of the co- operative movement in India. Co-operative
societies came into being when the Co-operative banks which are engaged in serving the
industrial and commercial sectors Societies Act, 1904, was enacted. The movement was
started with the aim of providing farmers funds with low rates of interest so that
exploitation by the village moneylenders is foiled. The Act provided for the formation of
co-operative credit societies and a number of small primary credit societies were
established in various parts of the country. These societies, however, could not mobilise
enough resources as compared to loans demanded by its members. This led to the
enactment of a new act in 1912. The Co-operative Societies Act of 1912 provided for
starting Center Co-operative Banks with headquarters located in Urban Centers. In 1914
necessary steps were taken by the government to strengthen the co-operative movement.
The government appointed the Maclagan Committee to look into and make
recommendations for the improvement of a State Co-operative Bank for each state. The
federation of Central Co-operative Banks functioning at the district level forms the State
Co-operative Bank. The present organization of the co-operative in India is based on the
recommendation made by the Maclagan Committee. In 1919, the Montague Censored
Act made co-operation a provincial subject. Since then, All State governments have
passed separate Co-operative Societies Acts.

Although co-operative banks in India have shown progress since their establishment,
there still exist a number of defects in the organisation. This has led qualitative
improvement to suffer. However, the Reserve Bank of India took the initiative to
revitalize, reorganized
and promotes the growth of co-operative bank in India. Under the Banking Regulation
Act of 1949, Co-operative banks have been brought under the control of the Reserve
Bank of India.

1.2> Structure of co-operative banking in India: -

Co-operative banking in India is federal in its structure. It is to be noted that the

word 'federal' means where an institute subordinates its power authority. The State Co-
operative Bank (SCB) which is also known as the Apex Bank among the co-operatives
functions at the state level. At the district level, there is the District Central Co-operative
Bank (DCCB) for each district. At the base of the pyramid there are the Primary Credit
Societies or the Primary Agricultural Credit Societies (PACS) which cover small towns
and villages. Each higher level co- operative bank is a federation of those below having
membership and loan operations restricted to their affiliated units.

3. OBJECTIVE OF THE PROJECT: -

"While selecting the project title 'Loans & Advances' the main
objective is to know there is any changes is possible in current or present
banks lending procedure of loans and advances". Some other objectives
are as follows: -

1> To study different types of loans given by the bank

2> To study the procedure of loans and advances of the bank.
3> The norms and conditions for sanctioning the loans are studied.
4> To show total advances of the bank.
5> Some focus on the recovery procedure of the loans and advances of
the bank.
6> The procedures for giving the loans and advances have been studied
4. THEORITICAL FRAME WORK: -
4.1> Introduction of Loans and Advances: -
Any amount borrowed or lent is called loan. If money is borrowed
it is debt of business ands if loan is given, it is receivable for the business.
Loan is a method of lending under which bank gives credit to a
borrower for a fixed period and for a specific purpose. Loan are promises for future
payment, they have to be repaid in periods beyond a year and
are, therefore long term liabilities.

In other wards "when a banker makes an advances in a lump sum which can not be
paid wholly or partly and which the customer has permission to withdraw subsequently, it
is called a loan."

Profit is the pivot on which the entire business activity roates. Banking is
essentially a business dealing with money and credit. Like every other business activity.
Banks are profit oriented. A bank invests its funds in many ways to earn income. The
bulk of its income is derived from loans and advances.

Banks make loans and advances to traders, businessman and industrialist against
the security of some assets or on the basis of the personal security of the borrower. In
either case, the banks run the risk of default in repayment. Therefore, banks have to
follow a cautions policy and sound lending principles in the matter of lending. Banks in
India have to consider the national interest along with their own interest while
determining the lending policy.

Many a time a borrower needs funds for fixed assets or non- respective type of
activities and thus seeks money from the bank that is withdrawn in one lump sum. The
loan amount is normally repaid in installments. Loan may be short-term, medium-term or
long-term.

◊ Principles of sound lending:-

Traditionally, banks have been following three principles of lending viz., safety,
liquidity and profitability. Banks in India have shouldered additional responsibility of
fulfilling social obligations. Hence, the bank observes both the traditional and certain
other principles

1>Sefety: -

A bank leads what it receives from the public as deposits. The success of the bank
depends upon the confidence of the depositing public. Confidence could be infused in the
depositors by investing the money in safe and sound securities. Safety depends upon (1)
the security offered by the borrower, and (2) the repaying capacity and willingness of the
debtor to repay the loan with interest. So the banker should ensure that the security
offered are adequate and readily releasable and the borrower is a person of integrity good
character and reputation.

2>liquidity: -
Liquidity refers to the ability of assets to convert into cash without
loss within short time.

The liabilities of a bank are repayable on demand or at short notice. To meet the
demand of the depositors in time, the banks should keep its funds in liquid state. Money
locked up in long term loans such as land, building, plants, machinery, etc., can not be
received back in time and so less liquid.

3>Profitability: -
Like all other commercial institutions banks are run for profit. Even government owned
banks are no exception to this. Banks earn profit to pay interest to depositors, declared
dividends to shareholders, meet establishment charges and other expenses, provide for
reserve and for bad and doubtful debts, depreciation, maintenance and improvements of
property owned by the bank and sufficient resources to meet contingent
loss. So profit is an essential consideration.
4>Security: -

Customers may offer different kinds of securities viz., land, building,

machinery, goods and raw materials to get advances. The securities of the customers are
insurance and bankers can fall back upon than in times of necessity. Securities which
could be marketed easily, quickly and without less should be preferred.

5>Purpose of the loans: -

Before sanctioning loans a banker should enquire about the purpose for which it is
needed. Loans for undesirable activities such as speculation and hoarding should be
discouraged. Banks readily allow borrowings for productive purposes. It is also equally
important on the part of banks to insure that a loan is utilised for the proposed for which
it is granted so that repayment will be prompt.

Proposed of the loan has assumed a special significance in the present day concept
of banking it is equally important to insure that the loan is utilised for the proposed for
which it is a granted.

6>Sources of Repayment: -
Before giving financial accommodation, a banker should consider
the source from which repayment is promised.

7>Diversification of risk: -

The security conciseness of a banker and the integrity of the borrower are not
adequate factors to keep the bankers on safe side, what is more important is the
diversification of risk. So that a bank should follow wise-policy for 'do not lay all the
eggs in the same basket.' The bank must advance moderate sums to a large number of
customers spread over a wide area and belonging to different industries.

8>Receipt concept of sound lending: -

 A sound credit is one where timely repayment is assumed. This largely depends on
the earning power of the business units and the repaying capacity of the borrower. So
great emphasis is laid on the productivity of the loan. Since the banks have shouldered an
additional responsibility of keeping the tempo of development of the economy they
should consider the productivity of loan as the chief criterion for advancing loan.

4.2a>Types or Forms of advances: -

Bank offers different types of borrowing facilities to their

customers. The credit facilities may be broadly classified into four types.
1> Loans,
2> Cash Credit System,
3> Overdraft,
4> Bills Purchased and Discounted.

These can be discussing in brief as follows.

1> LOANS:-

In case of loans, the banker advances a lump sum for a certain period at an agreed rate of
interest. The entire amount is paid on an occasion either in cash or by credit in his current
account, which he can draw at any time. The interest is charged for the full amount
sanctioned whether he withdraws the money from his account or not. The loan may be
repaid in installments or at the expiry of a certain period. The loan may be made with or
without security. A loan once repaid in full or in part cannot be withdraw again by the
customer. In case a borrower wants further loan, he has to arrange for a fresh loan.

Loan may be a demand loan or a term loan. Demand loan is payable on demand. It
is for a short period and usually granted to meet working capital needs of the borrower.
Term loans may be medium term or long term loan. Medium term loans are granted for a
period ranging from one year to five years for the purchased of vehicles, tractors, tools
and equipment's. Long term loans are granted for capital expenditure such as purchase of
 land, construction of factory building, purchase of new machinery and modernization of
plants etc.,

⇒ Advantages of Loan System: -

1>Financial discipline on the Borrower :-

As the time of repayment of the loan or its instalments is fixed in advances, this
system ensures a greater degree of self-discipline on the borrower as compared to the
cash credit system.

2>Periodic Review of Local Account: -

Whenever any loan is granted or its renewal is sanctioned the banker gets an
opportunity of automatically reviewing the loan account. Unsatisfactory loan accounts
may be discontinued at the discretion of the banker.

3>Profitability:-
The system is comparatively simple. Interest accrues to the
bank on the entire amount lent to a customer.
⇒ Drawbacks/ Limitations: -
1>Inflexibility: -Every time a loan is required, it is to be negotiated
with the banker. To avoid it, borrowers may borrow in excess of
their exact requirements to provide for any contingency.

2> Banks have not control over the use of funds borrowed by the customer. However, banks
insist on hypothecation of the assets/ vehicle purchased with loan amount.

3>Though the loans are for fixed periods, but in practice they roll
over,i.e., they are renewed frequently.
4> Loan documentation is more comprehensive as compared to each
credit system.
4.2b>Types of Loans: -

Banks grant loans for different periods- shorts, medium and long, for different
propose. Broadly, the loans granted by banks are classified follows:-

1> Short term loans: -

 Short-term loans are granted to meet the working capital needs of the
borrowers. These loans are granted against the security of tangible assets mainly the
movable asset like goods and commodity shares, debentures etc. Since April 1995 RBI
has made it mandatory for the banks to grant a portion of bank credit to big customers in
the form o