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What are the Credit Facilities Available in BanksBusiness Strategy,Financial Management

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There are different types of credit

facilities available in commercial banks. The types of loans thatare permitted are clearly indicated in commercial banks creditpolicy in line with central banks guidelines. Bank financing isthe primary capital source for the corporations that are going tostart its new investment project. Working capital may also befinanced through using bank financing facilities all around theyear. Depending upon the nature of financing in respect ofpurpose, security as well as repayment terms, credit or simply

loan facilities in commercial banks have been put under thefollowing broad categories:

Credit Facilities Available in Banks

Overdraft: The word overdraft means the act of overdrawingfrom the Bank account. In other words, the account holderwithdraws more money from the Current Account than hasbeen deposited in it. The loan holder can freely draw money

from this account up to the limit and can deposit money inthe account. The Overdraft loan has an expiry date afterwhich renewal or enhancement is necessary for enjoyingsuch facility. Any deposit in the overdraft account is treatedas repayment of loan. Interest is charged as balanceoutstanding on quarterly basis. Overdraft facilities aregenerally granted to businesspersons.

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Cash Credit: These are also the facilities where, likeoverdrafts, a limit is set in the account not exceeding oneyear. However difference is that a separate Cash Creditaccount is opened by the bank where limit is applied instead

of clients account. Banks lend money against the security oftangible assets or guarantees in the method. It runs like acurrent account except that the money that can bewithdrawn from this account is not restricted to the amountdeposited in the account. Instead, the account holder ispermitted to withdraw a certain sum called limit or creditfacility in excess of the amount deposited in the account.Once a security for repayment has been given, the business

that receives the loan can continuously draw from the bankup to that certain specified amount. The purpose of cashcredit is to meet working capital need of businesspersons.

Bill Discounting: Under this type of lending, Bank takes thebill drawn by borrower on his (borrowers) customer andpays him immediately deducting some amount as discountand commission. The Bank then presents the Bill to theborrowers customer on the due date of the Bill and collectsthe total amount. If the bill is delayed, the borrower or hiscustomer pays the Bank a pre-determined interestdepending upon the terms of transaction.

Term Loan: This type Banks lend money in this mode whenthe repayment is sought to be made in fixed, pre-determinedinstallments. These are the loans sanctioned for repaymentin period more than one year. This type of loan is normally

given to the borrowers for acquiring long-term assets. Short Term loan: Term loan extended for short period

usually up to One year is term as STL. This type of loan mayor may not have specific repayment schedule. However,STL with repayment schedule is preferable.

Letter of Credit: This is a pre-import finance, which is madein the form of commitment on behalf of the client to pay anagreed sum of money to the beneficiary of the L/C upon

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fulfillment of terms and conditions of the credit. Thus at thisstage bank does not directly assume any liability, as suchthe same is termed as contingent liability.

Payment against Documents: Payment against Documentsor simply (PAD) is a post-import finance to settle theproperly drawn import bills received by the bank in caseadequate fund is not available in clients account. This is ademand loan for interim period and liquidates by retiringimport bills by the client. The bank shall immediately serve anotice upon the client mentioning arrival of documents with arequest to arrange retirement of the same immediately.

Loan against Trust Receipt (LTR): This is also a post-importfinance facility awarded to retire import bill directly or underPAD as the case may be. In this case, bank may or may notrealize margin on the total landed cost, depending uponbanker-customer relationship. Here the possession of thegoods remains with the borrower and the borrower executesLetter of Trust Receipt in acknowledgement of debt and itsrepayment along with interest within agreed period of time.

Export Finance: Like import finance DBL advances in exporttrade at both pre and post shipment stages. In this type ofadvance, standing of both opener and beneficiary of exportL/C as well as standing of the L/C issuing bank are ofimportant consideration. The pre-shipment facilities areusually required to finance the costs to execute exportorders, such as: procuring & processing of raw materials,packaging and transportation, payment of various fees and

charges including insurance premium. While post-importfacilities are directed to finance exporters variousrequirements, which are required to be settled immediatelyon the backdrop that usually, settlement of export proceedstakes some time to complete.

Syndicated Loan: These are the loans usually involving hugeamount of credit and such to reduce a particular banksstake. A number of banks and financial institutions

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participate in such credit, known as loan syndication. Thebank primarily approached by arranging the credit is knownas the lead or managing banks.

Lease Finance: These types of finance are made to acquirethe assets selected by the borrower (lessee) for hiring of thesame at a certain agreed terms and conditions with the bank(lessor). In this case, bank retains ownership of the assetsand borrower possesses and uses the same on payment ofrental as per contract. In this case, no down payment isrequired and usually purchase option is not permitted.

Bank Guarantee: Bank Guarantee is one sort of non funded

facility. Bank Guarantee is an irrevocable obligation of abank to pay a pre-agreed amount of money to a third partyon behalf of a customer of a bank. A contract of guarantee isthus secondary contract, the principal contract beingbetween the beneficiary and creditor and the principal debtorthemselves to which guarantor is not a part. If the promise orthe liability in the principal contract is not fulfilled ordischarged, only then the liability of guarantor or surety

arises.