Sei sulla pagina 1di 18

A STUDY ON TYPE OF BANK FINANCING

INTRODUCTION
The first banks were probably the religious temples of the ancient world, and were probably established in the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. There are extant records of loans from the 18th century BC in Babylon that were made by temple priests/monks to merchants

DEFINATION
Banking refers to that process in which a bank which is a commercial or government institution offers financial services that include lending money, collection of deposits, issue of currencies and debit cards, and transaction processing etc. The majority of banks works as profitseeking enterprises, however, a few government banks work as non-profit organizations. Central banks function as government agencies and they regulate the interest rates and circulation of money in the total economy.

HISTORY OF BANK. Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders . In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. . During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The

Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised. Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Main Functions of Banks


1. 2. 3. 4. 5. 6. To open and maintain various types of accounts like savings account and current account. To provide cheque clearance facilities. To accept various types of deposits. To provide various loans for buying home, car and for other purposes. To issue demand drafts and pay orders. To provide money transfer facilities at various places in India and abroad.

Other Services provide by Banks


1. 2. 3. 4. 5. 6. 7. Foreign Exchange transactions. Issuing debit and credit cards. Internet Banking and Mobile Banking. To sell and distribute various investment products. Demat account and stock trading. Safe Deposit Lockers. Selling Gold Coin.

Major Banks in India


There are total 34 Nationalized Banks, 1 Public Sector Bank, 25 Private (Domestic) Banks, 29 Private (Foreign Banks), 31 State Co-Operative Banks, 87 Regional Rural Banks in addition

to large number District Co-operative Banks, Central Co-operative Banks and other Co-operative Banks.

Reserve Bank of India


Every country has a central bank to issue currency notes and coins, to keep the reserves for securing monetary stability in the country and to operate currency and credit system of the country in addition to looking after the interests of common man. Reserve Bank of India (RBI), established in 1935 under Reserve Bank of India Act, 1934 is the Central Bank in India. Main office of RBI is situated at Mumbai. Originally RBI was established as a private company but since 1949 it is fully owned by Government of India. Dr. Y. V. Reddy is the present governor and head of RBI.

Types of banks in India


The History of banking in India dates back to the early half of the 18th century. 3 Presidency Banks that were established in the country namely the Bank of Hindustan, Bank of Madras and Bank of Bombay can also be referred to as some of the oldest banking institutions in the country. The State Bank of India that was earlier known as the Bank of Bengal is also one of the oldest in the genre. To know about the types of banks in India, it is necessary that we first comprehend the banking system so as to be able to distinguish about its various types. All types of Banks in India are regulated and the activities monitored by a standard bank called the Reserve Bank of India that stands at the apex of the banking structure. It is also called the Central Bank, as major banking decisions are taken at this level. The other types of banks in India are placed below this bank in the hierarchy.

The major types of banks in India are as follows;

Public sector banks in India - All government owned banks fall in this variety. Besides the Reserve Bank of India, the State Bank of India and its associate banks and about 20 nationalized banks, all comprises of the public sector banks. Many of the regional rural banks that are funded by the government banks can also be clubbed in this genre. Private sector banks in India - A new wave in the banking industry came about with the private sector banks in India. With policies on liberalization being generously taken up, these private banks were established in the country that also contributed heavily towards the growth of

the economy and also offering numerous services to its customers. Some of the most popular banks in this genre are: Axis Bank, Bank of Rajasthan, Catholic Syrian Bank, Federal Bank, HDFC Bank, ICICI Bank, ING Vysya Bank, Kotak Mahindra Bank and SBI Commercial and International Bank. The Foreign Banks in India like HSBC, Citibank, and Standard Chartered bank etc can also be clubbed here. . Cooperative banks in India - With the aim to specifically cater to the rural population, the cooperative banks in India were set up through the country. Issues like agricultural credit and the likes are taken care of by these banks.

Types of bank Financing Term loans.


With a term loan, the bank loans you a lump sum of money and specifies a length of time for you to repay the loan plus interest. The loan may be secured by collateral, such as the property to be purchased with the loan proceeds, or may be unsecured. Since term loans are among the easiest to obtain, they are the most common method of business financing. Generally, term loans are intended to supplement a companys permanent capital. They may be used to cover routine operating expenses or to make specific capital improvements or equipment purchases. Banks generally require monthly or quarterly payments on term loans. Typically, loans with a longer term and less frequent payments carry a higher interest rate. Interest rates may be floating rates (which vary with the banks prime rate) or may be fixed for the term of the loan. With a fixed rate loan, you can expect to pay a penalty if you repay the loan prior to its due date.

Lines of credit.
Lines of credit, much like credit cards, establish a maximum amount of credit that you may borrow as needed, repay when you have excess cash, and then reborrow when the need arises again. When you reach your credit limit, you must make payments to reduce your debt before borrowing any more. While they are useful in a number of different situations, lines of credit typically provide a steady cash flow for businesses with seasonal revenue or expense fluctuations. For example, a business that requires an inventory buildup for the Christmas season is a candidate for a seasonal line of credit. Funds borrowed to build up the inventory before the holidays can be repaid in January after the inventory has been converted into cash. Like term loans, lines of credit may be secured or unsecured. Typically, the level of borrowing is limited to some percentage of your inventory, accounts receivable or other assets. The primary advantage of a line of credit is that you dont have to reapply for financing every time you need cash. Although lines of credit offer a lower interest rate than credit cards, interest is typically higher than on term loans.

Letters of credit.
Like a line of credit, a letter of credit provides advance assurance that a certain amount of credit will be available to you in the future. However, with a letter of credit, the bank

guarantees that it will pay to a third party the amounts that you owe that party. You are then responsible for repaying that amount plus interest. Banks provide many different types of letters of credit, and they generally can be tailored to meet your specific needs.

Commercial mortgages.
Commercial mortgages are term loans secured by real estate. Businesses usually take out commercial mortgages to buy real property or construct or improve buildings. A mortgage typically is written as a percentage of the propertys appraised value (generally 60-80 percent). Commercial mortgages are often written for a longer term than other term loans. In addition, a commercial mortgage has longer lead times and higher up-front costs than other forms of business financing due to the need for appraisals, title searches, title insurance, environmental site assessments, and so forth. Commercial mortgages are not used solely to finance a new property purchase. You may also take out a second mortgage on existing property in which you have more than 20 percent equity. A second mortgage may be a good option if you have problems obtaining Stephanie A. Dill other forms of credit or if you wish to consolidate debt. However, the interest rate on second mortgages will often be higher than on first mortgages.

Syndication.
Syndication is a single loan usually of millions of dollars made by two or more lenders and administered by a common agent. Syndication allows companies to borrow sums that exceed amounts individual banks could lend to a single borrower. Typically, syndication is used to finance large corporate purchases and major mergers and acquisitions. Due to the large dollar amounts, syndication is usually available only to the largest companies. The complexity of the application process for this type of financing is offset by the advantage of being able to finance large sums in a single transaction. Moreover, since the risk is spread out among different banks, the interest rate and other associated costs may be lower.

Different types of bank finance


Working capital finance - short term Product Description

Supported by all features of a business current account A flexible source of short term working capital finance No fixed repayment schedule Confidential debt-financing facility Helps businesses overcome cashflow problems caused by overdue

Overdraft

Invoice Discounting

invoices, giving immediate access to up to 80% of invoiced debt.

Repaid as debts are received

Overdraft financing
Overdraft financing is provided when businesses make payments from their business current account exceeding the available cash balance. An overdraft facility enables businesses to obtain short-term funding - although in theory the amount loaned is repayable on demand by the bank. There are several important factors to consider when assessing the appropriateness of an overdraft as a source of funding for SME's: - The amount borrowed should not exceed the agreed limit ("facility").The amount of the facility made available is a matter for negotiation with the bank; - Interest is charged on the amount overdrawn - at a rate that is above the Bank Base Rate. The bank may also charge an overdraft facility fee; - Overdrafts are generally meant to cover short-term financing requirements - they are not generally meant to provide a permanent source of finance - Depending on the size of the overdraft facility, the bank may require the SME to provide some security - for example by securing the overdraft against tangible fixed assets, or against personal guarantees provided by the directors

Invoice Discounting
Invoice discounting and discounting of receivable financing are often used by entrepreneurs with regards to accounts receivable. Accounts receivable, otherwise known as trade debtors or AR or A/R, is a type of working capital that refers to amounts from which management has yet to receive from their customers for goods sold. Receivables are a result of business owners extending credit to their customers. The amount of accounts receivable is an asset on a companys financial report but may not always match up to the amount of sales and cash inflows recorded on the companys financial report. When small business owners find that they are cash-strapped and are unable to

obtain small business loans from the banks, they sometimes turn to receivable financing such as receivables factoring and invoice discounting. Business consultants come into the picture when clients need assistance with developing a strategy for accounts receivables management and wish to consider invoice discounting as an option of receivable financing.

Bank Loans
If you asked most new business people how they expect to get finance, the vast majority would say a business loan from the bank. The routine of new business owners going to the bank with their business plan in hand and trying to persuade the bank that the idea is a profitable one has changed very little over the past 30 years. How Do Bank Loans Work? Bank loans work in much the same way as secured personal loans, the bank lends you money, with repayment over a set number of years at a particular interest rate. The loans are usually secured against your house or other personal and business assets (e.g. Expensive machinery); so if you cannot pay them back your property will be at risk. Bank loans can range from a couple of thousand to many hundred thousands of pounds depending on the security and business prospects you can offer. You will be unlikely to get a loan of several hundred thousand pounds if you are opening a village corner shop. The payment periods of bank loans vary considerably depending on the amount borrowed and the individual lenders terms and conditions. The typical loan periods are between 1 and 10 years, with some going up to 20 years, though each lender is likely to have a number of different loan packages to suit various business needs. The riskier your business, the less you are likely to able to borrow, and the higher the interest rate you will be asked to pay. This helps the bank to ensure that they are covered even if the risk does not pay off. Remember that even if you are a limited company, your loan will probably still need to be secured on your home or other assets. If you do not have enough security for the loan you need, you may be able to get extra security with the Small Firms Loan Guarantee.

Advantages of Bank Loans


Reliability Loans are very reliable and secure, you are assured the money for the duration of the loan (unless you break terms and conditions), and the odds of a bank or major lender requiring immediate pay back is tiny. You will also be fully aware of what you owe and your repayments (unless you choose a loan with a variable interest rate).

Cost Compared to many other forms of finance, a bank loan is very reasonable in cost. Although loans are not cheap, they do not have the interest rates or charges of credit cards and overdrafts, and do not require you to give up a portion of your business as you would with investors. Equipment Life If you are using a loan to buy equipment, you may be able to tie the loan to the usable life of the product; saving you from having to pay out in one go for expensive machinery.

Disadvantages of Bank Loans


Inflexible Once payment terms have been set you need to stick to them, and if you borrow more than you need you could end up paying lots of extra interest needlessly. Security If your loan is secured against your home or other assets, they will be at risk if you cannot afford to keep up repayments. Having the loan secured does provide lower interest rates, but it does mean you need to be more careful about repayments; and also be very wary of borrowing more than you can afford to repay. Charges Most loans will have an arrangement fee when you first get the money, while many will charge you if you repay the loan before the end of the agreed period.

Types of Bank Loans Offered by Banks in India


Due to the unequal distribution of wealth, India has arrived at a situation where the affluent class gets richer and richer and the underprivileged becomes poorer. To bridge this financial gap and to satisfy their day to day requirements, Bank plays a vital role by offering various loans to the finance seekers. Hence every borrower should have prior knowledge on the various Bank Loans in India, which are eligible for meeting their financial objectives. The various Loans offered by Banks in India are mentioned as under:

Personal Loans
Personal Bank Loans are the credits which a bank offers to its customer to meet his instant personal requirements ranging from home renovation to purchasing of new laptop, a getaway with family or for reimbursing the credit card liabilities, for buying a new car or for child's education, etc. Personal loan simplifies the cash flow of the customer besides handling its immediate needs. Personal Loans Eligibility Minimum and Maximum Age Maximum Annual Income Minimum years in service/ business Loan Amount For salaried Individuals 21 years and 58 years respectively For Self-Employed Individuals 25 years and 65 years respectively

Rs. 1,20,000

Rs. 1,50,000

1 year Rs 50,000 to Rs. 50,000 to

3 years Rs 15,00,000 Rs. 15,00,000 1 years to 7 years

Loan Tenure

1 years to 7 years

Interest Rates Mode of Repayment

12-24%. Post-dated cheques or Standing orders to debit from personal A/c

12-24%. Post-dated cheques or Standing orders to debit from personal A/c

Home Loans
To buy a dream home is the dream of every person. Home Loan has helped in changing every Indian's dream into reality. However, the every increasing property rates and escalating rates of interest sometimes act as an obstacle. Therefore, before opting for a home loan it is advisable to check every prospect of the product. Home Loans Eligibility For salaried Individuals 21 years and 65 years respectively Rs. 1,00,000 1 year Rs 2,00,000 to Rs 2,00,000 to Loan Tenure Interest Rates 5 years to 20 years 9-16% For Self-Employed Individuals 21 years and 70 years respectively Rs. 1,50,000 3 years Rs 2,00,00,000 Rs 2,00,00,000 5 years to 20 years 9-16%

Minimum and Maximum Age Maximum Annual Income Minimum years in service/ business Loan Amount

Tax Benefits on Home Loans: Any person who opts for home loan is entitled for tax benefits under Income Tax Act, 1961 on principal and the interest amount in the form of deductions from the chargeable earnings.

Bank Loans against Property


Property Loan or Loan against property is a kind of loan which is allowed by the bank on the condition of keeping the customer's current assets as a security with them. These loans are very useful when other resources of financing get exhausted. It is significant to recognize that a loan against property is not similar to mortgage. While loan against property is obtained from the bank by allocating customer's current assets as a security against the credit, a mortgage is an instrument for purchasing an asset. On the basis of the current market situations, the paid up cost of the asset and other aspects, the cost of the credit against asset can range anywhere from 40% to 60% of the asset costs. Loans against Property Eligibility For salaried Individuals 21 years and 60 years respectively Rs. 1,20,000 1 year Rs 2,00,000 to Rs 2,00,000 to Loan Tenure Loan to cost ratio 1 years to 15 years 60% of residential cost For Self-Employed Individuals 21 years and 65 years respectively Rs. 1,50,000 3 years Rs 1,50,00,000 Rs 1,50,00,000 1 years to 15 years 50% of commercial cost

Minimum and Maximum Age Maximum Annual Income Minimum years in service/ business Loan Amount

60% of residential cost Tax Rebate

50% of commercial cost NIL NIL

Business Loans
Before starting a business, the entrepreneur should be mentally and financially prepared to encounter the fiscal setbacks during the process. To bail the companies out from the fiscal crunch, several banks in India offers business Loans both for meeting urgent official growth and expenses. Other details of Business Loans offered by Banks in India are: Business Loans

Car Loans
Every individual want to own a car. Hence, the need for car loans emerges at some point or the other. While selecting a car loan it is always wise to scrutinize the various options accessible in the market besides analyzing its fiscal suitability. Car Loans Eligibility Minimum and Maximum Age For salaried Individuals For Self-Employed Individuals 21 years and 65 years respectively Rs. 60,000 Rs. 20,00,000

21 years and 60 years respectively

Maximum Annual Income Rs. 1,00,000 Loan Amount Rs. 1,00,000 (new) and Rs. 50,000 (old) to Rs. 1,00,000 (new) and Rs. 50,000 (old) to Loan Tenure 1 years to 7 years

Rs. 20,00,000 1 years to 7 years

Loan to cost ratio

85-90% of car cost

85-90% of car cost

Education Loans
Education Loans offered by various banks in India provide much required assistance to fund your child's education when all other resources of finance get exhausted. Education Loans are offered by almost every Indian bank thus providing ample opportunity to students to undergo higher education both in India and abroad. Education Loans Eligibility Minimum and Maximum Age Expenses covered For Students 16 years and 26 years respectively course and examination fee, refundable deposits, procurement of books, travel expenses

Loan Amount for studies in Upto Rs 10,00,000 India Loan Amount for studies abroad Repayment Period Upto Rs 20,00,000 5-7 years

Different Types Of Debt Financing


1. Working Capital Loan:

It is the most popular short-term financing option. It is meant to meet the working needs like the purchase of raw material, payment of wages and other administrative expenses, financing inventories, managing internal cash-flows, supporting supply chains, funding production and marketing operations. Most banks provide these against collaterals. Companies who borrow from banks are subjected to the discipline of maintenance of proper accounts and regular repayments of loans. They are subjected to periodical monitoring through a reporting structure of financial and other statements and also through analysis of cash flows routed through the banks. 2. Overdraft: The other short-term debt option is the overdraft facility, by way of which a company opens a current account with a bank and can overdraw money up to an agreed limit. In this case, you pay interest only for the time you use the money. 3. Factoring: The bank buys the customers account receivables in domestic and international trade, assuming the responsibility of collecting them from the party who owes money. 4. Commercial Papers (CPs): It is a debt instrument issued by companies at a discount on the face value. Banks, individuals and mutual funds usually buy commercial papers. 5. Term loans: Term loans are mostly taker to buy assets and grow business. These loans are term based, which may vary from three to ten years. The amount, the tenure and interest rates may vary depending upon the risk profile of the company. Term loans are either asset-backed or cash-flow backed. In the case of asset-backed term loans, lender institutions seek assets of the company as collaterals while issuing loans. In the case of cash-flow backed loans, banks carefully scrutinize the balance sheets of a company to study its cash-flow capability. 6. Syndicated loans: Syndicated loans are large capital loans raised by big corporations from a group of banks. These are aimed at acquiring domestic or international companies. In this case, one bank acts as a lead bank. 7. Project Finance: Large and long-term infrastructure projects require huge amounts amount of funding both in the form of debt and equity. In project financing, lenders (banks) rely on the assets created for the project as security and the cash-flow generated by the project as source of funds

for repaying their dues. These projects include building of roads, dams; ports etc are sensitive to regulatory and political policies and tariffs. 8. Debentures: This is a long-term debt instrument issued by a company with the acknowledgement that it would repay the money at a certain rate of interest to the buyer. These are not shares, thus the buyer can stake no claim in the share of the company. 9. Inter-corporate deposits: This is a short-term help provided by one corporate with surplus funds to another in need of funds. The major disadvantage to lenders is that the money is locked in for the certain period of time. 10. Personal loans: Entrepreneurs also take personal loans from banks and financial institutions to fund their projects.

Traditional Sources of Small Business Financing


The first step in finding small business financing is knowing what kind of financing you need. IS the small business financing you're looking for debt financing (money you borrow to run your business) or equity financing (money acquired from investors and/or savings)? When it comes to debt financing, most Canadian small businesses turn to our traditional financial institutions, such as banks and credit unions, to find small business financing. Some take out short-term business loans, which need to be repaid (with interest) within a set period such as 180 days. These are sometimes called demand loans, because they can be called in by the lender (the bank) at any time. Longer term business loans are also frequently used as small business financing. Term loans are usually used to finance particular assets, such as building renovations or capital equipment. Other businesses depend on lines of credit for their small business financing. Through agreement with the financial institution, your business has a set amount of credit that you can draw upon. While a line of credit gives you the flexibility to pay day-to-day expenses or meet cash flow crises, whatever amount of money you use has to be paid back, and you pay interest on the outstanding balance.

Many financial institutions now offer credit cards especially designed for small businesses - and credit cards are a popular way for small businesses to finance startup and operating expenses. In fact, according to a 1998 study of small- and medium-sized enterprises by Thompson Lightstone and Company, 41 percent used personal credit cards as their main source of small business financing! However, credit cards are some of the most expensive small business financing available, in terms of their interest rates. They're best used as a convenience for day to day expenses, if you pay off the balance in its entirety each month. Traditional sources of small business financing are not available to all small businesses. Start up businesses may have an especially difficult time meeting bank requirements for debt financing. Let's look at the different types of equity financing that a business might pursue. Continue on to the next page to read about sources of equity financing.

CONCLUSION
Bank maintain various types of accounts like savings account and current account,provide cheque clearance facilities,accept types of deposits, provide loans for buying home, car and for other purposes,To issue demand drafts and pay orders and provide money

transfer facilities at various places in India and abroad and provide loans to the farmers in the rural areas. Hence the Bank plays an important role in developing the business sectore and rural area of country. The financial help provided by the bank to the common people helps in developing the standard of living of people.