bank advances

Topic:Bank Advances.

By

Akash Ijaz

Introduction Of Bank

Bank word is dreived from an intalian word banco and french word banque means bench.Later derived from german word back mean joint stock of money.

Definition.

Bank is an institute which collect money from thoes who have its spares or who are saving it out of their income and lending to thoes who require it.

Bank advances.

Overdraft (running finance). Cash credit Loan Discounting of bills.

Overdraft(running finance)

Features. Facility that is provide to the account holder they

can withdraw their money in the excess of there account.

Bank examine the records of the person. Charges on daily basis. Securities are requires in some cases.

Cash credit.

Features. Is a short term advance. usually for commerical industrial concern Bank allows to borrow in the from of installment or

in lump sum. Pledgeable securities. Interset only the amount utlize by the borrow.

Difference.Basis. Cash credit. Overdraft.Meaning. Is a short term loan provided to

the comapnies to fullfil their working capital requirements.

Facility provided to the companies to withdraw in the exess of their balance.

Securities. Pledge or hypothecation of goods.(current assets)

In some cases if party is not off sound reputation. (Fixed assets)

Intrest. Only on the amount utlizes by `borrower.

Interest on daily basis.

Demand. At any time. Right to call money,lent at short notices.

Requirments. On needs to open spreate cash credit account to avail this offer.

Other avail on existing current account

End use. This is only for business opreations.

Can be use for any purpose(personal or business)

Lenght. Only for 1 year. Very short period usually a month or a week.

Rate of Intrest. Is higher than overdraft. Realitvely lower than cash creditt.

An amount of money that is borrowed, often from a bank, and has to be paid back, usually together with an extxa amount of money that you have to pay as a charge for borrowing.

Loan.

Securities: The acceptable securities are goverment

securities, paper securities and tangiable securities in return of these seucurities we received loans.

Features.

Time Period : The amount of loan is payable on demand.The time period

depends upon the need of banks.

Cont'd

Rate of profit:

The profit is charged on the whole amount of loan.

Cont'd.

Purpose of Loan:

The purpose of loan is to meet the working capital requirements of the business for short peorid.

Cont'd.

Demand loan. Term loan. Secured loans. Unsecured loans.

Types of Loans.

Demand Loan. A demand loan is a loan which is repayable on demand by

bank.In other word it is repayable at short notice.The entrie amount of demand loan is disburse at one time and borrower has to pay interest on it.The borrower can repay the amount in lump sum(one time) or as agreed with bank. Demand loans are raised normally for working capital purpose like purchase of raw material and making payment of short term liabilities.

Term Loan. Medium and long term loan are called term loan.Term loan is granted for

more than a year and payment of such loan is spread over for longer period.Ter loan is required for starting the new business activity renovation,modernization,expansion existing unit,purchase of their land for setting up a factory.etc.These loan are generally secured against the mortage of land,buliding,machinery.

Secured loans:

These are the loans which are granted against security of tangiable assets like stock and immoveable.

Unsecured loans: Unsecured loans are thoes loan which is not secured by security

of tangaible assets.Such loans are granted to frim/institution against the personal security of the owner,manager or director.

Discounting of bill

When the holder of bill deposit or sell bill to bank and obtain financial help from bank or other financial institution is know as discounting of bill. A bank give loan against the bill and discount represent as interest on loan until the amount is repay.

Parties of discounting bill

It also have three parties drawer drawee payee

creation

Creation of a B/E Suppose a seller sells goods or merchandise to a buyer. In most cases, the buyer would like to pay only after some time, that is, the buyer would wish to purchase on credit. To solve this problem, the seller draws a B/E of a given maturity on the buyer. The seller has now assumed the role of a creditor; and is called the drawer of the bill. The buyer, who is the debtor, is called the drawee. . The seller then sends the bill to the buyer who acknowledges his responsibility for the payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer himself or any third party willing to take on the credit risk of the buyer.

Holder have two option

Discounting of a B/E The seller, who is the holder of an accepted B/E has two options:

Hold on to the B/E till maturity and then take the payment from the buyer.

Discount the B/E with a discounting agency

Types of bill

Demand bill Usance bill Documentary bill Clean bill

Demand bill

Demand bill

This is payable immediately “at sight. A bill on which no time of payment or “due date” is specified is also termed as a demand bill

Usance bill

This is also called time bill. The term usance refers to the time period recognized by custom or usage for

payment of bills.

Documentary bill

These are the B/Es that are accompanied by documents that confirm that a trade has taken place between the buyer and the seller of goods

Clean bill.

not necessary of any documents that show that a trade has taken place. Thus interest rate charged on such bills is higher than rate charged on documentary bills.

Maturity of bill

The maturity a B/E is defined as the date on which payment will fall due. Normal maturity periods are 30,60,90 or 120 days but bills maturing within 90 days seem to be the most popular

Features

Income discounting of bill is a type of income for bank. Time period the time period of bill draw may be within seven days or more Negotiable It is negotiable instrument. written it is written document.

features Finance through the discounting of bill you have finance at the time before the maturity. trade Provide benefit to importers and exporters. mostly provide benefit to the trading purpose. DeductionsExcept the interest discounting of bill hove no other deduction like tax.