DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : Sreenivasa Rao B.
Designation : Lecturer in CCP
Branch : Commercial and Computer Practice
Institute : S.U.V.R&S.R GPW, Ethamukkala
Semester : VI Semester
Subject Name : Banking II
Subject Code : CCP 604 (B)
Major Topic : Loans and Advances – Short term & Long term
Duration : 50 + 50 minutes[100 minutes]
Sub Topic : Different Styles of Credit extended by
the Banker - 2
Teaching Aids : PPTs
CCP604(B).5 TO 6 1
 Objectives :

On completion of this period, you would be

able to

 Explain different styles of credit extended by the

commercial banks.

CCP604(B).5 TO 6 2
Recap
 In previous class we have discussed about
purpose for which banks are granting loans and
advances.

 Classifications of loans and advances i.e.

secured advances and unsecured advances.

 The three C’s of unsecured advances.

 Different styles of credit extended by the banker–

 1) Loans, 2) Cash credit system.
CCP604(B).5 TO 6 3
3. Over Draft:
 When a current account holder is permitted by
the banker to draw more than the amount to his
credit, such an advance is called an
OVERDRAFT.

 The banker may take some collateral security or

may grant such advance on the personal security
of the borrower.

 The customer is permitted to withdraw the

amount as and when he needs it and to repay it
by means of deposit in his account as and when
it is feasible for him
CCP604(B).5 TO 6 4
3. Over Draft:
 Interest is charged on the exact amount
overdrawn by the customer and for the period
of its actual utilization.

 Overdraft is not granted as regularly as cash

credit. It is granted only occasionally and for
shorter periods.
Examples :
Where a customer has a credit balance of Rs.
7000 /- in his current account and there is an
overdraft facility sanctioned by the banker of
the order of Rs. 8000/-, it possible for the
customer to draw an amount of Rs. 15000/-.

CCP604(B).5 TO 6 5
4. Bills Discounted and Purchased:
 Banks grant advances to their customers by
discounting bill of exchange or promissory
note.

 The amount after deducting the interest or

commission from the amount of the
instrument is credited in the account of the
customer.

 In this form of lending the interest is

received by the banker in advance.

 The banker takes in to account the financial

position and the integrity of the drawers/
makers before under taking bill discounting.
CCP604(B).5 TO 6 6
4. Bills Discounted and Purchased…

Banks some times purchase the bills such as

Bills of Lading or Railway Receipt. In such cases
banks grant loan in the form of overdraft or cash
credit against the security of the bills.

 The term “Bills Purchased” means that the bank

becomes the owner of such bills.

 But, in almost all cases the bank holds the bill

only as security for the advance.

CCP604(B).5 TO 6 7
5. Hire Purchase Advances:
 Under this system, banks provide finance to
business concerns engaged in hire purchase
business.

 Hire purchase business is very popular in case of

durable goods like TV sets, Refrigerators, Motor
vehicles, etc.,

 This type of advance is popular, particularly in

transport operations.

 Banks also provide financial facility to lease

finance companies in order to enable them to
give assets on lease basis.

CCP604(B).5 TO 6 8
6. Call Money or Short - period Loans:
 Call money or short period loans are the types of
loans provided to business men for extremely short
period of time.

 For instance, these loans may be given for a period

of a day, or two days are at the most 15 days.

 For this reason only these loans are called “ Call

Money or Short – period Loans” .

CCP604(B).5 TO 6 9
6. Call Money or Short - period Loans

 The banks can recall the loans without giving any

prior notice to borrower.
 The call loans are mostly extended by one bank to
another to meet their short term requirements of
cash.
 The loans carry very low interest rate.
 Call loans are considered better assets than the cash.

CCP604(B).5 TO 6 10
7. Clean Advances
 Clean Advances are essentially unsecured
advances.

 When a Banker gives loan, not against any security

but based on the anticipated income of the
borrower, it is called as clean loan.

 Banks consider three C’s before advancing clean

loans.

 Confidence in the borrower is the basis of clean

loan.

CCP604(B).5 TO 6 11
1. Participation loans or Consortium
Finance

 When two or more banks agree to advance a

barrower, in a certain agreed proportion, against a
common security, such loans are called
‘Participation Loans’ or ‘Consortium Finance’.

 Such loans are extended to meet large sized

credit requirements of trade and industrial houses.

CCP604(B).5 TO 6 12
1. Participation loans or Consortium
Finance [continued….]
 In this advance, each bank bears a part of the risks
involved in a large advance.

Usually in the case of a consortium advance, one of

the banks acts as a consortium leader and takes
leading part in the processing of the loan proposed,
its documentation, recovery etc.,

CCP604(B).5 TO 6 13
9. Housing Loans

 An important form of advance provided by a

modern banker is ‘Housing Finance’

 Housing Loans constitute a major segment of

deployment of funds by a banker.

 A huge portion of the earnings of a bank comes /

emanates from the housing finance activities
undertaken by a bank.

CCP604(B).5 TO 6 14
10. Loans to Small Borrowers:
 Loans advanced to small borrowers such as the
common man and self employed persons , say,
doctors, engineers, etc., .

 Banks under the umbrella of ‘social sector lending’

advance such loans.

 The purpose of granting such loans is to help the

weaker sectors of the economy to improve their
standards.

 Loans are granted on the strength of borrowers

credit worthiness and capacity.
CCP604(B).5 TO 6 15
11. Packing Credit:

 A short term credit granted by a bank to an

exporter to assist him to buy, process, pack and
ship the goods is called ‘packing credit.’
 Packing credit is advanced for a period not
exceeding 90 days.
 Packing credit is granted against an ‘Export Trust
Receipt’ [ETR].

CCP604(B).5 TO 6 16
12. Import Finance:

 Import financing include finance for import

settlement, finance for taking delivery of imported
goods and import usance bills, etc.,

CCP604(B).5 TO 6 17
13. Consumer Credit:
 Bank credit granted to consumers for their personal
needs , including the purchase of cars, refrigerators,
televisions sets, repairing of houses , settlement of
hospital bills, etc., is called ‘Consumer Credit’.
 Such loans are advanced to respectable customers.
 The amount is given in a lump sum.
 These loans are repayable in installments within a
couple of years.

CCP604(B).5 TO 6 18
Summary
 Loans and advances are the most important
revenue of investment of bankers resources and
are the principal source of profit.
 Other source of income such as bank commission
and bank charges are comparatively small .
 Banks provided accommodation to industrial and
commercial establishment by discounting their bills
of exchange and by granting loans, overdrafts and
cash credits etc.,

CCP604(B).5 TO 6 19
Quiz

1. _____________ is an arrangement by which a

bank allows is customer to borrow money up to a
specified limit.
a) CASH CREDIT
b) CASH DEBIT
c) CASH RECEIPT

CCP604(B).5 TO 6 20
Quiz

1. What are 3 Cs of safe credit?

a) Character + Capacity + Capital.

b) Character + Capacity – Capital .
c) Capital + Capacity – Character
d) Character – Capital – Capacity .

CCP604(B).5 TO 6 21
Frequently Asked Questions

1. What are the secured and unsecured advances of

the bank?
2. What are the different forms of banker’s advances?
3. What is meant by over draft?

CCP604(B).5 TO 6 22