Explain the main kinds of bank advances or what is the difference between running finance, cash credit and discuss the precautions which should be taken before advancing loan
It is also called over draft facility. In this account banker allows his customer to over draw his account up to a fixed limit for a short period.
For example Mr. Ajay has current account in ICICI Bank. The bank has provided one lakh rupees overdraw limit. Now he can draw one lakh excess than his deposit by issuing the cheque.
If this facility is given against the personal security, it is called clean draft. On the other hand if overdraft facility is given against the collateral security it is called secured overdraft.
Following are important features of over draft facility :
1. It is very useful to provide the working capital according the needs of businessman.
2. The interest is charged only on the amount overdrawn.
3. The amount can be redeposited at any time.
4. When ever a client feels the problem he can draw the amount up to the fixed limit.
5. A cheque book is issued.
6. Amount is drawn by issuing cheque.
7. This facility is given for a short period.
8. It is a considered safe investment by the bank.
CASH FINANCE :-
It is also called cash credit. It is a short term finance. In this case bank allows his customer to borrow money up to a fixed limit.
But the borrower is required to pledge security of goods produced or merchandized. Bank advances this loan to meet the needs of the working capital. This cash is draw by the customer according to his needs. He may adjust this debt whenever he likes. The interest is charged only for the period amount actually drawn by him.
Cash finance is payable on demand. Some times this condition is also imposed on the customer that if he will not utilize the sanctioned loan then he will have to pay the mark up and service charges.
Following precautions should be kept in view by the bank while advancing the loan against the security of goods.
1. Character Of The Customer :-
The banker must satisfy himself about the character of the customer. He should be honest and trustworthy. His previous record should be reasonable in trade.
2. Careful Evaluation :-
While evaluating the value of pledged goods banker must be very careful. He must know the real prices of the goods pledged with the bank. He must get the proper information from the broker and market agents.
3. Possession Of Goods :-
The goods which are pledged, the actual or constructive possession must be taken by the bank. The banker must have a direct link with the owner or agent who is in possession of these commodities. It will secure the loan.
4. Sale-able Goods :-
Those commodities should be preferred to pledge which are readily sale-able in the market. If the goods are perishable these will create the problem.
5. Proper Storage Facility :-Storage facility must be checked by the banker. If pledged goods are not stored properly these will be destroyed and the loan advanced against these goods will be must secure.
6. Control On Godown :-
A watchman should be appointed on the godown by the bank. The key and lock system should be under the control to the bank or the bank can use its own godown.
7. Insurance :-
The goods of the customer which are pledge must be insured against the loss of theft or fire insurance reduces the risk of the bank.
8. Stable Markets Goods :-
The banker should prefer the goods having stable markets and their demand is less elastic. The prices of such commodities remain stable and the chances of loss reduces.
9. Upto Date Knowledge :-
A banker must have the up to date knowledge about the market fluctuations. He must know about the changing prices of the goods pledged with bank.
DIFFERENCE BETWEEN RUNNING FINANCE AND CASH FINANCE CREDIT :-
1. Period :-
Running finance is for very short period while cash finance is comparatively for a long period.
2. Rate Of Interest :-
The rate of interest on cash credit is higher while on overdraft is relatively lower.
3. Types Of Account :-
A separate account is opened for cash credit while current account is used for overdraft facility.