DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : Sreenivasa Rao B.
Designation : Lecturer in CCP
Branch : Commercial and Computer Practice
Institute : S.U.V.R&S.R GPW, Ethamukkala
Semester : VI
Subject Name : Banking II
Subject Code : CCP 604 (B)
Major Topic : Loans and Advances – Short term
& Long term
Duration : 50 minutes
Sub Topic : Different Styles of Credit
extended by the Banker
Teaching Aids : PPTs

CCP-604(B).4 1
Objectives :
On completion of this period you would be
able to

 Classify various loans and advances granted by

banks.

 Explain different forms of lending by Commercial

Banks.

CCP-604(B).4 2
Recap

 So for you have learnt

 Main Business of Banking

 Purpose of loans
 The General Principles of Sound lending Policy

CCP-604(B).4 3
 Introduction

 Lending is made by Commercial Banks in

different forms.

 Banks provide advances generally for a short term

as they can not afford to lock up their funds for
long periods.

CCP-604(B).4 4
 Bank credit enables individuals and business
enterprises to purchase goods and services
ahead of their ability or desire to pay.

 In business the demand for credit arises on

account of the time gap between production,
distribution and consumption.

 Banks, out of the savings collected from

customers and other sources , meet demand for
credit.

CCP-604(B).4 5
Following are the different forms of
loans and advances granted by a
banker

 According to the Banking Regulation Act, 1949,

the loans and advances granted by banks can be
broadly classified into :
ii) Secured and
iii) Unsecured loans and advances.

CCP-604(B).4 6
Secured Advance or Loan:

 It means an advance or loan made on the

strength of security of assets.

 The market value of the security should be

always greater than the amount of the loan.

CCP-604(B).4 7
Unsecured Advance or Loan:

 It is one in which the banker grants a loan

without any security . The Unsecured advances
are given on the credit-worthiness of the
borrower i.e. on the basis of his character,
capacity and capital. They are called three Cs of
Unsecured advances.

CCP-604(B).4 8
Unsecured Advance or Loan:
 Among these advances the following are
important.
i) Loans
ii) Cash credit system
iii) Overdraft
iv) Bills purchased and/or discounted
v) Hire purchase advances, etc.,

CCP-604(B).4 9
i) Loans:
 Sanctioning of a specified lump sum amount
by the banker to a customer for a specified
period at a certain rate of interest is called a
loan.

 The customer is required to pay interest on

the full amount irrespective of the fact that the
amount is used or not.

 The loan may be repaid in installment or at

the expiry of a certain period.

 The loan may be granted with or without

security. CCP-604(B).4 10
i) Loans…

Loans are two types:

They are Demand Loan and Term Loan.

i. Demand Loan:
 It is payable on Demand.
 It is granted for a short period.
 Usually granted to meet the working capital needs
of the borrower.

CCP-604(B).4 11
ii) Term Loans:
 These loans may be short term loans or medium
term loans or long term loans.
 A short term loan is given for a period of not
exceeding one year .
Example: working capital requirements of Industries.
 Medium Term Loans are granted for a period not
exceeding 5 years.
Example : For purchase of Vehicles, Tractors, Tools
and Equipment.
 Long Term Loans are granted for a period of
above 5 years for meeting capital expenditures
such as purchase of new machinery,
modernization, construction of factory building,
purchase of land etc.,

CCP-604(B).4 12
2. Cash Credit:

 It is an arrangement by which a banker allows his

customer to borrow money up to a certain limit.

 Cash Credit arrangements are usually made

against the security of commodities hypothecated
or pledged with the bank.

 This is a permanent arrangement and the

customer need not draw the total sanctioned
amount at once but draw the amount as and when
required.

 Further he can pay back any surplus amount

found with him.
CCP-604(B).4 13
2. Cash Credit…

 Interest is charged only for the amount

withdrawn and not for the whole amount.

 If the customer does not use the cash credit to

the full extent, a commitment charge is made
by the bank on unutilized portion of cash credit
only.

 This kind of loan is more beneficial to such

borrowers who require funds on a seasonal
basis.

Example : Industries purchasing raw material

from the market at a particular season when
CCP-604(B).4 14
the price will be lower.
Summary
 We have discussed so far about the purpose for
which banks are granting loans and advances to
the individuals and business enterprises.
 According to the Banking Regulation Act, 1949 ,
the loans and advances granted by the banks
have been classified into secured and unsecured
advances.
 Secured advances are those which are granted
against tangible securities, the value of which
greater than the amount of the loan. Advances
not so secured are called unsecured advances.
 Different forms of lending by commercial banks --
loans, cash credit system.
CCP-604(B).4 15
Quiz

1. Advances against guarantees are called as:

c) Secured loans
d) Un secured loans
e) Personal loans
f) Govt. securities.

CCP-604(B).4 16
Quiz

2. What are the three C’s of Unsecured advances

are

c) Character, Capacity, Capital

d) Character, Capital, Customer
e) Capital, Capacity, Courage
f) Clean image, Character, Capacity

CCP-604(B).4 17
Frequently Asked Questions
 1. Explain various loans granted by banks?

 2. Explain a) Secured Loans

b) Unsecured Loans.

CCP-604(B).4 18