Page 104 - DCOM208_BANKING_THEORY_AND_PRACTICE
P. 104
Unit 7: Loans and Advances
Notes
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 predetermined
interest depending upon the predetermined terms.
Thus, by discounting bills, the bank pays money to the creditor when he needs it and allows the
debtor to make payment only when the bill is due for payment. Discounting of bills of exchange
is, therefore, really important form of bank lending.
Tasks
1. Discuss agricultural loans by United Bank.
2. Practices of code on Lender’s liability by Allahabad Bank.
3. Search and evaluate various types of loans granted by State Bank of India.
Self Assessment
Fill in the blanks:
1. Banks provide outright loans for a ………………………. period.
2. Term loans are the ………………………. of fixed deposits in the bank.
3. The word ………………………. means the act of drawing more than the money deposited
in the bank account.
4. Sometimes, loans are named ………………………. the purpose for which they are granted.
7.2 Classification of Loans on the Basis of Activity
Another way to classify the loans is through the activity being financed. Viewed from this angle,
bank loans are divided into:
1. Priority Sector Lending
2. Commercial Lending
7.2.1 Priority Sector Lending (Directed Credit)
The Government of India through the Reserve Bank of India (RBI) dictates certain type of lending
on the banks operating in India. The RBI sets targets in terms of percentage (of total money lent
by the banks) to be lent to certain sectors, which in the RBI’s view do not have access to organized
lending market or cannot afford to pay the interest at the commercial rate. This type of lending
is called Priority Sector Lending.
Financing of small scale industry, small business, agricultural activities and export activities fall
under this category. This is also called directed credit in Indian banking system.
Financing of priority sectors is done at a concessional rate of interest. Export finance is, in fact,
available at a discount of 20% or more on the normal rate of interest to Indian corporates.
Notes Part of the cost of this concession is borne by the RBI by means of refinancing such
loans at concessional rate.
LOVELY PROFESSIONAL UNIVERSITY 99