Page 103 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes plant and machinery, constructing building for factory, setting up new projects fall in this
category.

Financing for purchase of automobiles, consumer durables, real estate and creation of
infrastructure also falls in this category.

7.1.2 Cash Credit (CC)

In this case, the entire sanctioned (approved) amount of loan is not given to the borrower at one
particular time. The bank opens an account of the borrower and allows him to withdraw the
borrowed amount as and when he requires the money.
The bank charges interest, not on the amount of loan (CC) sanctioned, but on the actual amount
withdrawn from the bank. Cash credit is very popular with Indian businessmen.
This account is the primary method of lending. Banks lend money against the security of
commodities and debt. It runs like a current account except that the money that can be withdrawn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.

7.1.3 Overdraft Facilities (O/D)

The word overdraft means the act of drawing more than the money deposited in the bank
account. In other words, the account holder overdraws.

When a customer gets an overdraft facility from a bank, he is allowed to draw cheques in excess
of the balance standing to his credit to the extent of the amount of overdraft.

Example: If a bank has allowed overdraft to the extent of ` 50 lakh to a businessman, he
can draw cheques in excess of the amount of his own deposits with the bank to the tune of ` 50
lakh.
The bank charges interest only on the amount overdrawn. For a businessman, the overdraft
facility is the easiest and most convenient method of borrowing funds from banks.

Difference between the Cash Credit Account and Overdraft
The difference is very minor and relates to the operation of the accounts. In the case of cash
credit, a proper limit is sanctioned, which normally is a certain percentage of the value of the
stock/debts pledged by the account holder with the bank.
Whereas the overdraft is allowed against a set of other securities including financial instruments
like shares, units of mutual funds, surrender value of LIC policy and debentures, etc.

Did u know? What are clean overdrafts?

Those overdrafts which are granted against the supposed ‘worth’ of an individual.

7.1.4 Discounting of Bills of Exchange (B/E)

Discounting or purchasing the bills of exchange is an important form of bank lending. Bill
discounting is a major activity of some of the smaller banks. The bank takes the bill drawn by
borrower on his (borrower’s) customer and pays him immediately deducting some amount as
discount/commission.

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