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In this form, the banker advances a lump sum for a certain period at
an agreed rate of interest. The loan may be repaid in installments or at the
expiry of a certain period.
The interest is charged for the full amount sanctioned.
The loan may be made with or without security.
Loan may be a demand loan or a term loan.
Demand loan is payable on demand. It is for a short period.
Term loans may be medium term or long term.
Medium term loans are granted for a period ranging from one year
to five years and
Long term loans are granted above five years.
d. Bill Finance:
Basically, a banker offers following types of bill finance
i. Bill Discounting:
Banks grant advances to their customers by discounting bill of
exchange or promissory note. After deducting the interest from the face
value of the instrument, the amount is credited in the account of the
customer. In this form of the lending, the interest is received by the banker
in advance.
ii. Bill Purchasing:
Banks, sometimes, purchase the bills instead of discounting them.
The bank purchases the bill at a discount. Once the bills purchased, the bank
becomes the purchaser and owner of such bills.
e. Money at Call and Short notice:
Money at call and short notice is a very short-term loan that does not
have a set repayment schedule, but is payable immediately and in full upon
demand
II. Non-Fund based Facilities:
In the business of lending, a banker also extends non-fund based
facilities. Non-fund based facilities
of funds. The baker undertakes a risk to pay amounts on happening of a
contingency. Non-fund based can be of following types:
a. Guarantee Facility
Under this facility, the banker undertakes to discharge the liability of
the borrower to third parties. The nature of guarantees include: Performance
guarantee, deferred payment guarantees, advance payment guarantees,
guarantees to government departments, etc.
b. Letter of Credit Facility
Letter of credit or documentary credit facility is another non-fund
based facility extended by the bankers to their constituents. Under this
facility the baker undertakes to pay on presentation of documents as
specified in the letter of credit.
c. Underwriting and credit guarantee:
Banks also do underwriting and credit guarantee business. Under
underwriting facility the obligation of the baker to provide funds or pay in
the event of the failure of the borrower to raise money or to repay money.
Credit guarantees are issued by banks on behalf of the customers. These
kinds of guarantees are mostly issued on behalf of customers/contractors
dealing with government departments.
Consortium Advances:
Consortium advances mean advancing loans to a borrower by two or
more Banks jointly by forming a Consortium i.e., two or more lenders join
together to finance a single borrower.
Under Consortium advances lending banks formally join together,
by way of an inter-se agreement to meet the credit needs of a borrower.
There is no restriction on the number of banks for participation in
consortium.
Lead Bank:
