Loans and advances encompass various credit facilities offered by banks to customers. This document details fund-based and non-fund-based credit facilities, including cash credit, overdrafts, term loans, and guarantees. It also covers the principles of sound lending, emphasizing safety, liquidity, and profitability. Ideal for banking professionals and students studying finance, this resource provides insights into lending practices and risk management. Understanding these concepts is crucial for anyone involved in financial services or credit management.

Key Points

  • Explains fund-based credit facilities such as cash credit and overdrafts.
  • Details non-fund-based credit options, including guarantees and letters of credit.
  • Covers principles of sound lending, focusing on risk management and profitability.
  • Discusses consortium advances and the role of lead banks in joint lending.
Subhathra Murali
8 pages
Language:English
Type:Presentation
Personal Finance
Subhathra Murali
8 pages
Language:English
Type:Presentation
Personal Finance
286
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Unit 4
Loans and advances
TYPES / FORMS OF ADVANCES / CREDIT
FACILITIES
• The business of lending is carried on by the bank by offering various
credit facilities to its customers. Credit facilities may be broadly
classified into two types;
• I . Fund based credit facilities
• II. Non-fund based credit facilities
I . Fund based credit facilities:
Fund based credit facilities involve the outflow of funds from banks.
The money of the banker of the banker is lent to the customer. They
can be generally of following types:
• Cash Credit
• Overdraft
• Term Loans / Demand loans
• Bill Finance
• Money at Call and Short notice
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End of Document
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FAQs

What are the types of fund-based credit facilities?
Fund-based credit facilities involve the outflow of funds from banks to customers. According to the document, they can be classified into several types, including Cash Credit, Overdraft, Term Loans or Demand Loans, Bill Finance, and Money at Call and Short Notice. Each type serves different purposes and has specific terms regarding repayment and borrowing limits.
What is a Cash Credit arrangement?
A Cash Credit is an arrangement that allows a borrower to borrow up to a certain limit. This facility is typically used by businesses to manage their working capital needs. The borrower can withdraw funds as needed, up to the agreed limit, making it a flexible financing option.
What principles guide sound lending practices?
The document outlines several principles of sound lending that banks should follow to minimize the risk of default. These principles include Safety, Liquidity, Profitability, Purpose of the Loan, Sources of Repayment, Diversification of Risks, Productivity of the Loan, Adequacy of Margin, and the 3-C’s of customer. Each principle plays a crucial role in ensuring that loans are granted responsibly.
What are non-fund based credit facilities?
Non-fund based credit facilities are services offered by banks that do not involve the direct outflow of funds. The document specifies that these include Guarantee Facilities, Letter of Credit Facilities, and Underwriting and Credit Guarantee. These facilities help businesses secure transactions and manage risk without immediate cash flow implications.
What are Consortium Advances in lending?
Consortium Advances refer to loans provided to a borrower by two or more banks working together as a consortium. The document explains that this arrangement allows multiple lenders to jointly finance a single borrower, which can help meet larger credit needs. A lead bank is designated to coordinate the consortium, ensuring effective communication and management of the loan.
What is the purpose of Bill Finance in banking?
Bill Finance involves financing based on bills of exchange, which can include both bills discounting and bills purchasing. According to the document, this facility allows banks to provide short-term financing to businesses, helping them manage cash flow and meet immediate financial obligations.

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