Page 105 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Indian banks, thus, contribute towards economic development of the country by subsidizing the
business activities undertaken by small entrepreneurs in the areas, which are considering “priority
sector” by the RBI.

7.2.2 Commercial Lending

This lending is the basis of bread and butter of Indian banking.
Previously our nationalized banks have hugely indulged in “priority sector banking” yet it is
the part of their loan portfolio which has kept them floating and help them to meet the costs.

Fresh and innovative products are being launched to facilitate the corporate customer who
forms the heart of this business. There is big competition among banks to secure bigger share of
this business.
At present, commercial loans are available for practically any kind of activity and also for both
long and short-terms. Based on customer profile, these loans are of two types:
Corporate Loans

These loans are meant for corporate bodies, proprietorships, partnerships and HUFs engaged in
any legal business activity with the object of earning profit. Banks lend to such entities on basis
of:

1. Strength of their balance sheet,
2. The length of cash cycle, and
3. The products available with individual banks.

Lending on the Strength of Balance Sheet

Banks analyse the audited balance sheets of the potential borrowers to evaluate their needs and
also their capacity to utilize the loan.

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Caution Prospective borrowers are required to furnish their financial details to the bankers
along with application for the loan. This application is processed and a line of credit
(limit) is allowed to the borrower.

The overall limit (line of credit) is structured into various types of facilities or accounts–each
with its own limit within the overall line of credit – depending upon the needs of the customer.
The borrower is then asked to complete other formalities, like the bank’s standard documents,
surrender the security or title to the security to the bank and open suitable accounts (mostly cash
credit accounts with different underlying securities) with the bank. Thereafter, the borrower can
operate this account within the limit (line of credit).

Length of Cash Cycle

Length of cash cycle would mean the time, within which the cash gets converted into goods, then
goods are sold either for cash or if sold on credit the debt is realized after some time. The
average period of the whole activity is called cash cycle.

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