Distinguish the following 1. Term finance 2. Discounting of bill or Discuss the main features of the term finance and discounting of bill
TERM FINANCE :-
Long term financing have been started by the commercial banks to the industrial and agricultural sector. These advances are repayable at a fixed future time in lump sum or in installments.
Following are its main features :
EXAMINATION OF DOCUMENTS :-
Before advancing such loans the banker should examine the following documents :
i. The financial position of the borrower.
ii. The purpose of borrowing.
iii. The period of loan applied for.
iv. The assets liabilities of the applicant.
v. Earning capital of the borrower.
1. This loan is issued in the name of borrower.
2. A separate account is opened for this loan.
3. This loan is sanctioned for a fixed period.
4. This loan is taken by the borrower in full and partially.
5. Borrower pays the interest from the date of the loan is transferred in the account.
6. There are two types of this loan, one is called clean loan and other is called secured loan.
7.This loan is advanced at the agreed rate of interest.
DISCOUNTING OF BILL OF EXCHANGE :-
Banks purchase and discount the bills and earn the profit. It is a short term method of investment. The banks discount the bills on rebate, which is called its profit. The bill of exchange is usually matured with in 99 days. The bank pays the money to the owner of a bill and collects the amount from the maker at the due date.
1. It is a safe investment of the bank because it is a negotiable instruments.
2. If the bill is dishonoured the payee responsible to return the payment to the bank.
3. The bank earns higher profit on the bill, because discount is higher than the interest rate.
4. By discounting the bill bank gets new customers.
5. Some times the amount credited to the payee also remains with the bank.
6. The bank can re-discount the bills from the central banks to meet its requirements.
7. The date of the bill is usually confirmed so it is considered a liquid advance.
PURCHASING OF BILL OF EXCHANGE :-
The bank purchases the bills on commission. Some bills are clean while either are documentary bills. These are demand bills and purchased from the approved customers of the bank. When bank purchases the bill it deducts its commission and pays the amount. This commission may be called profit. By purchasing the bill bank can not became the owner of the bill. It is held by the bank temporarily. When bank is in need of money it can be cashed.