Overdraft: The word overdraft means the act of overdrawing from the Bank
account. In other words, the account holder withdraws more money from the
Current Account than has been deposited in it. The loan holder can freely draw money from this account
up to the limit and can deposit money in the
account. The Overdraft
loan has an expiry date after which renewal or
enhancement is necessary for enjoying such facility. Any deposit in the
overdraft account is treated as repayment of loan. Interest is charged as
balance outstanding on
quarterly
basis. Overdraft facilities are
generally granted to businesspersons.
Cash Credit: These are also the facilities where, like
overdrafts, a limit is set in the account
not
exceeding one year. However difference is that a separate
“Cash Credit’ account
is opened by the bank where limit
is applied instead of
client’s account. Banks lend money against the security
of
tangible assets or
guarantees in the method. 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account except that the money that can be withdrawn from this account is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. Once a security for repayment has been given, the business that receives the loan can continuously draw from the
bank up to that certain specified amount. The purpose
of
cash credit
is to
meet working capital need of
businesspersons.
Bill Discounting: Under this type of lending, Bank takes the bill drawn by
borrower on his (borrower’s) customer and pays him immediately deducting some amount as discount and commission. The Bank then presents the Bill to the borrower’s customer
on
the due date of the Bill and collects the total
amount. If the bill is delayed, the borrower or his customer pays the Bank a
pre-determined interest depending upon the terms of transaction.
Term Loan: This type Banks lend money in this mode when the repayment
is sought to be made in fixed, pre-determined
installments. These are the
loans sanctioned for repayment
in period more than one year. This type of
loan is normally given to the borrowers for acquiring long-term assets.
Short Term loan: Term loan extended for short period usually up to One
year is term
as STL. This
type
of loan may or may not have specific
repayment schedule. However, STL with
repayment schedule is preferable.
Letter of Credit: This is a pre-import finance, which is made in the form of
commitment on behalf of the client to pay an agreed sum of money to the beneficiary of the L/C upon fulfillment of terms and conditions of the credit.
Thus at this stage bank does not directly assume any liability, as such the same is termed as contingent liability.
Payment against Documents:
Payment against Documents or
simply
(PAD) is a post-import finance to settle the properly drawn import bills
received by
the bank in case adequate
fund is not available in client’s account. This is a demand loan for interim period and liquidates by retiring import bills by the client. The bank shall immediately
serve a notice upon the
client mentioning arrival of documents with a request to arrange retirement
of the same immediately.
Loan against Trust Receipt (LTR): This is also a post-import finance facility awarded to retire import bill directly or under PAD as the case may be.
In this case, bank may or may not realize margin on the total landed cost, depending upon banker-customer
relationship. Here the possession of the goods remains with the borrower and the borrower executes
‘Letter of Trust
Receipt’ in acknowledgement of debt and its repayment along with interest
within agreed period of time.
Export Finance: Like import finance DBL advances in export trade at both pre and post shipment stages. In this type of advance, standing of both opener and beneficiary
of
export L/C as well as standing of the L/C issuing
bank are of important consideration. The pre-shipment
facilities are usually
required to finance
the costs to execute export
orders, such as: procuring & processing
of raw materials, packaging and
transportation, payment
of various fees and charges including insurance premium. While post-import facilities are directed to finance exporter’s various requirements, which are required to be settled immediately on the backdrop that usually, settlement
of export proceeds takes some time to complete.
Syndicated Loan: These are the loans usually involving huge amount of
credit and such to reduce
a particular bank’s stake. A number of banks and
financial institutions participate in such credit, known as loan syndication. The
bank primarily approached by arranging the credit is known as the lead or
managing banks.
Lease Finance: These types of finance are made to acquire the assets
selected
by the borrower (lessee) for hiring of the same at a certain agreed
terms and conditions with the bank
(lessor). In this case, bank retains ownership of the assets and borrower possesses and uses the same on
payment
of
rental as per contract. In this case, no down payment
is required
and usually purchase option is not permitted.
Bank Guarantee: Bank Guarantee is one sort of non funded facility. Bank
Guarantee
is an irrevocable obligation of a bank to pay a pre-agreed amount
of
money to a third party on behalf of a customer of a bank. A contract of
guarantee is thus secondary contract, the principal contract being between the beneficiary
and
creditor and the principal debtor themselves to which
guarantor is not a part. If the promise or the liability in the principal contract
is not fulfilled or discharged, only then the liability of guarantor or surety arises.