Page 117 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes activity, that is, cash flow from operations. This cash flow must be sufficient to make
interest and principal payments on debt. It may differ substantially from reported profits.
4. Financial Projections: Projections of the borrower’s financial condition reveal what the
loan proceeds are needed for, how much financing is required, how much cash flow can be
generated from operations to service new debt, and when, if at all, a loan can be repaid. In
order to understand the range of potential outcomes, an analyst should make forecasts
that incorporate different assumptions about sales, inventory turnover, the level of interest
rates, and the growth in operating expenses. Pro forma analysis is a form of sensitivity
analysis. At a minimum, three alternative scenarios or sets of assumptions should be
considered: a best case scenario, a worst case scenario and a most likely scenario.

Self Assessment

Fill in the blanks:
15. The key element of cash flow analysis is to determine how much cash flow a firm generates
from its normal business activity, that is, cash flow from …………………..
16. The biggest asset is normally the ………………………..

7.7 Nature and Characteristics of Loans Granted by Commercial

Banks
Let us discuss the nature and characteristics of commercial bank loans:
1. Secured loan: A secured loan is a loan in which the borrower pledges some asset
(e.g., a car or property) as collateral (additional security) for the loan.
2. Unsecured loan: Unsecured loans are monetary loans that are not secured against the
borrowers assets. These may be available from financial institutions in many different
ways or marketing packages like:
(a) Credit card debt

(b) Personal loans: Nature of Loans Granted by Commercial Banks
(c) Bank overdrafts
(d) Credit facilities or lines of credit
(e) Corporate bonds

7.7.1 Characteristics of Commercial Bank Loans

Some of the most important characteristic features of bank loans in India are discussed below:

1. Industrialists and Traders Major Receivers of Loans: The bulk of the bank loans in India
are provided to trade and industries. Banks are less interested in making advances to the
agricultural sector because of the relatively greater credit risks related to them and because
of the inability of agriculturists to furnish good security.

However, since nationalisation, banks have shown keen interest in this sector but still
industrialists and traders are the major borrowers of the banks.

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