Page 169 - DMGT303_BANKING_AND_INSURANCE

Banking and Insurance

Notes The usual types of facilities sanctioned by banks to the borrowers, as also other aspects like
project appraisal, post-sanction follow up, management of NPAs, documentation, limitation
etc. are discussed individually in the book. These are briefly explained hereunder:

Overdrafts

All overdraft accounts are treated as current accounts. Normally, overdrafts are allowed against
the bank's own deposits, government securities, approved shares and/or debentures of
companies, life insurance policies, government supply bills, cash incentive and duty drawbacks,
personal security, etc.
Overdraft accounts are kept in the ordinary current account head of the bank branches. Temporary
clean overdrafts in current accounts are maintained in the ordinary current account ledgers,
today in an electronic form.

Demand Loans

A demand loan account is an advance for a fixed amount and no debits to the account are made
subsequent to the initial advance except for interest, insurance premia and other sundry charges.
As an amount credited to a demand loan account has the effect of permanently reducing the
original advance, any further drawings permitted in the account will not be secured by the
demand promissory note taken to cover the original loan. A fresh loan account must, therefore,
is opened for every new advance granted and a new demand promissory note taken as security.
Demand loan would be a loan, which is repayable on demand in one shot i.e. bullet repayment.
Normally, demand loans are allowed against the bank's own deposits, government securities,
approved shares and/or debentures of companies, life insurance policies, pledge of gold/silver
ornaments, mortgage of immovable property. A separate account for each demand loan is kept
in the appropriate demand loan ledger of the banks.

Term Loans

Term loans are sanctioned for acquisition of fixed assets like land, building, plant/machinery,
office equipment, furniture-fixture, etc., for purchase of transport vehicles and other vehicles,
for purchase of agricultural equipment, machinery and other movable assets e.g. tractors, pump
sets, cattle etc. under various schemes of agricultural advances introduced from time to time, for
purchase of house, consumer durables, etc. under special schemes introduced from time to time.
The term loan would be a loan, which is not a demand loan and is repayable in terms i.e. in
instalments irrespective of period or the security cover.
Term loans are normally granted for periods varying from 3 to 7 years and in exceptional cases
beyond 7 years. Term loans for infrastructure projects are allowed even with longer repayment
period. The exact period for which a particular loan is sanctioned depends on the circumstances
of the case.

Cash Credit Advances

Cash credit account is a drawing account against credit granted by the bank and is operated in
exactly the same way as a current account on which an overdraft has been sanctioned. The
various types of securities against which cash credits are allowed are pledge/hypothecation of
goods or produce, pledge of documents of title to goods, mortgage of immovable property,
book debts, trust securities, etc. In cash credit accounts the borrower is allowed to draw an
account within the prescribed limit, as and when required.

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