Discuss different types of credit facilities that a commercial bank can provide to its clients

 Different types of credit facilities by commercial bank are as follows:

1. Overdraft Facilities: The depositor in a current account is allowed to draw over and above his account up to a previously agreed limit. Bank charges interest only on overdrawn amount.

2. Cash Credit: Borrowers will be allowed to withdraw small sums of money

according to his requirements, but not exceed credit and he is required to pay interest only.

3. Discounting Bills of Exchange: The holder of a bill can get it discounted by

the bank, when he is in need of money. After deducting its commission, the bank pays the present price of the bill to the holder.

4. Money at Call: Bank grant loans for a very short period, not exceeding 7 days

to the dealers or brokers in stock exchange markets against collateral securities.

5. Term Loans: Provide loans to trading, industry and agriculture sector with a period between 1 to 10 years in installment basis. It also provides working capital funds to the borrowers.

 6. Consortium Finance: Two or more banks may jointly provide large loans to the borrower against a common security.

7. Consumer Credit: Grant credit to households in a limited amount to buy some durable consumer goods or to meet some personal needs.

8. Miscellaneous: The other forms of loan are packing credits given to exporters,

export bills purchased/discounted, import finance against import bills, finance to the self employed, credit to the public sector, credit to the cooperative sector. 

Types of credit commercial prefer to finance & its reason

Commercial bank is a financial business institution. Profit is the main target of such institution. again commercial abnks are bound to repay the deposit money to the customer. so commercial banks prefer short term credit than long term crdit for  earning profit. the main reason for  preference to finance short term credit are given below----

 

1. liquidity act—commercial bank are bound to repay the deposit to its customer at demand. For this reason commercial bank give short term credit so that they can easily convert it to cash.liquidity does not exist in long term loan.

2. Risky activities- approval of long term loan is risky and so, banks prefer short term lending.

3. Earning of profit- the more you will use the invested money the more you will earn profit but in case of long term lending investment cannot reuse. As a result profit margin become low. So, banks prefer short term loan.

At last we can say that considering  on profit margin, risk factor and

liquidity condition commercial bank prefer short term loan than long term loan.

Why do the private commercial banks prefer short term lending Or, Advantages of Short-Term Financing

 1. Easier to provide: Banks can provide short–term credit more easily within the minimum functionality than long-term credit.

2. Higher interest: Banks may impose the higher interest rate due to small amount of credit with the minimum or security less financing.

3. Rapid turn-over of capital: The capital investment is turning over rapidly and it make chance to further investment

4. Minimum cost of capital: Whether, the short-term credit makes the rapid turn- over of capital investment, thus it may reduce the cost of capital.

5. Minimum risks: Due to minimum time frame, the repayment of loan may cover in earlier. Thus, the risk is lesser than the long term credit.

6. Easy control over the customers: Banks can overlook more easily to the short- term borrowing customers than the long-term borrower.

7. Flexibility to lend: It is more flexible in the sense that the banks lends as the borrowers are needed and repay then in due time.

8. Minimum complexity: The maintenance and supports of further credit procedures is simple than long-term finance.

9. Fund availability: In many cases, commercial banks prefer to maximize the fund availability particularly small enterprises.