Page 118 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 7: Loans and Advances

2. Period: Another striking feature of bank loans in our country is that nearly three fourths Notes
of them are given for a period of less than one year. Working capital loans are not always
for a year or less, but may extend for a period in excess of one year. On the other hand,
seasonal loans are taken for a few months.
Short-term loans may take the form of cash credit and overdraft, demand loans, and the
purchase and discounting of bills.
Some essential features are:
(a) High liquidity of these loans.

(b) The short-term loans are given to finance the seasonal needs of businessmen and
also for working capital purposes to facilitate the process of production and
distribution.
(c) Seasonal loans are primarily for the purpose of increasing the inventory of a business
firm and are repaid as the stock of goods is sold out.

(d) Short-term funds are borrowed for increasing the current assets and for expanding
production. Such loans are repaid out of the net operating earnings of the firm.
(e) Commercial banks in India demand sound security. A very high percentage of
advances (85-90 percent) by Indian banks are secured by goods, financial assets and
hypothecation. A major portion of bank credit is given against the security of
commodities, which represent short-term security.
(f) Unsecured credit facilities are given to firms with a sound financial position and
stable earning records.
3. Loan Documentation: Before the bank issues a cheque, customer needs to supply lots of
supporting papers. Major loans, such as a mortgage, require more papers and smaller
loans lesser papers. Some of the documents are:
(a) Tax returns for the last three years if self employed.
(b) Letter of employment.

(c) Most-recent statements for credit card accounts.
(d) Documentation of current outstanding home, auto or other loans.
(e) Letter of assessment.
(f) Bank account statements for the previous three months.

(g) Titles for any cars owned.
(h) Award letter and copy of payment for any legal settlement.
4. Bank borrowers generally from the average profitability group: Bank borrowers generally
fall in the average profitability group. An extremely well running and profitable firm
would rely less on bank loans to finance expansion or current needs because it has sufficient
earnings and capital of its own.
Bankers should be very careful while granting loans to firms and should take all possible
protective steps to minimise their risk of non-recovery.

As a matter of fact, growth is one of the very best reasons for the extension of bank credit. The
banker is reluctant to make advances to firms, which have been suffering losses.

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