Broadly explain Credit Facilities Available in Banks

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 It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account.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.