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Lending
money is one of the two major
activities of any Bank. Banks
accept deposit from public for
safe-keeping and pay interest
to them. They then lend this
money to earn interest on this
money. In a way, the Banks act
as intermediaries between the
people who have the money to
lend and those who have the
need for money to carry out
business transactions. The difference
between the rate at which the
interest is paid on deposits
and is charged on loans, is
called the "spread".
Banks lend money in various
forms and they lend for practically
every activity. Let us first
look at the lending activity
from the point of view of security.
Loans are given against or in
exchange of the ownership (physical
or constructive) of various
type of tangible items. Some
of the securities against which
the Banks lend are :
1. Commodities
2. Debts
3. Financial Instruments
4. Real Estate
5. Automobiles
6. Consumer durable goods
7. Documents of title
Apart from the above categories,
the Banks also lend to people
on the basis of their perceived
personal worth. Such loans are
called clean and the Banks are
understandably cagey about extending
such loans. The credit card
arms of the various Banks, however,
fill up this void.
Cash
credit Account
This account is the primary
method in which Banks lend money
against the security of commodities
and debt. It runs like a current
account except that the money
that can be withdrawn from this
account is not restricted to
the amount deposited in the
account. Instead, the account
holder is permitted to withdraw
a certain sum called "limit"
or "credit facility"
in excess of the amount deposited
in the account.
Cash Credits are, in theory,
payable on demand. These are,
therefore, counter part of demand
deposits of the Bank.
Overdraft
The word overdraft means the
act of overdrawing from a Bank
account. In other words, the
account holder withdraws more
money from a Bank Account than
has been deposited in it.
How
does this account then differ
from a Cash Credit Account?
The difference is very subtle
and relates to the operation
of the account. In the case
of Cash Credit, a proper limit
is sanctioned which normally
is a certain percentage of the
value of the commodities/debts
pledged by the account holder
with the Bank. Overdraft, on
the other hand, is allowed against
a host of other securities including
financial instruments like shares,
units of mutual funds, surrender
value of LIC policy and debentures
etc. Some overdrafts are even
granted against the perceived
"worth" of an individual.
Such overdrafts are called clean
overdrafts.
Bill
Discounting
Bill discounting is a major
activity with some of the smaller
Banks. Under this type of lending,
Bank takes the bill drawn by
borrower on his(borrower's)
customer and pay him immediately
deducting some amount as discount/commission.
The Bank then presents the Bill
to the borrower's customer on
the due date of the Bill and
collect the total amount. If
the bill is delayed, the borrower
or his customer pay the Bank
a pre-determined interest depending
upon the terms of transaction.
Term
Loan
Term Loans are the counter parts
of Fixed Deposits in the Bank.
Banks lend money in this mode
when the repayment is sought
to be made in fixed, pre-determined
installments. This type of loan
is normally given to the borrowers
for acquiring long term assets
i.e. assets which will benefit
the borrower over a long period
(exceeding at least one year).
Purchases of plant and machinery,
constructing building for factory,
setting up new projects fall
in this category. Financing
for purchase of automobiles,
consumer durables, real estate
and creation of infra structure
also falls in this category.
Classification
of loans
Another way to classify the
loans is through the activity
being financed. Viewed from
this angle, bank loans are bifurcated
into :
"
Priority
sector lending
" Commercial
lending 
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