Page 226 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes (d) Loans: In a loan account, the entire advance is disbursed at one time either in cash or
by transfers to the current account of the borrower.
(e) Overdraft: Under this facility, customers are allowed to withdraw in excess of credit
advance standing to their current deposit account. A fixed amount is therefore granted
to the borrower within which the borrower is allowed to overdraw his account.
(f) Clean overdrafts: Request for clean advances is entertained only from parties, which
are financially sound and reputed for their integrity. The bank has to rely upon the
personal security of the borrowers.
(g) Cash credits: Cash credit is an arrangement under which a customer is allowed to
draw advance up to a certain limit against credit granted by bank. Generally, the
limits are sanctioned against the security of goods by way of pledge or hypothecation.
Though these accounts are repayable on demand, banks usually do not recall.
(h) Bills purchased/discounted: Advances are allowed against the security of bills, which
may be clean or documentary. Bills are sometimes purchased from approved
customers in whose favour limits are sanctioned. Before granting a limit, the banker
satisfies himself as to the credit worthiness of the drawer.
(i) Advance against documents of title to goods: A document becomes a document of title to
goods when its possession is recognized by law or business custom as possession of
the goods. These documents include a bill of lading, dock warehouse keeper’s
certificate, railway receipt, etc.,
(j) Term loan by banks: Term loan is an installment credit repayable over a period of time
in monthly/quarterly/half yearly or yearly installment. Banks grant term loans for
small projects falling under priority sector, small-scale sector and big units.
(k) Commercial paper: It is a form of financing that consists of short-term, unsecured
promissory notes issued by firms with a high credit standing. Most commercial
papers have maturity ranging from 3 months to 6 months and denomination of
minimum 5 lakhs.

Notes The companies satisfying the following conditions are eligible to issue commercial
paper:

(a) The tangible worth of the company is 5 crores or more as per audited balance sheet
of the company.
(b) The fund base working capital limit is not less than 5 crores.

(c) The company is required to obtain the necessary credit rating from the rating agencies
such as CRISIL, ICRA, etc., and the rating should not be more than 2 months old at
the time of applying to the RBI.
(d) The minimum current assets ratio should be 1.33:1 based on classification of current
assets and liabilities.
(e) For public sector companies there are no listing requirements, but for companies
other than public sector, the same to be listed or one or more stock exchanges.

(l) Public deposits: A company can accept public deposits subject to the stipulation of
Reserve Bank of India from time-to-time maximum up to 35 per cent of its paid up
capital and reserves from the public and shareholders. These deposits may be
accepted for a period of six months to three years. Public deposits are unsecured
loans and are used for financing working capital requirements.

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