Question

Name the types of loans given by the commercial banks.

Explain various types of loans provided by a commercial bank.

Answer 1

The types of loans given by the commercial banks are as follows:

1. Cash Credit: Cash credit is a type of borrowing where the loan is provided against the borrower's current assets, such as stocks, bonds, or inventory. The borrower does not receive the full sanctioned loan amount all at once. Instead, the bank creates a separate account in the borrower’s name and permits withdrawals as per the borrower's need. Interest is charged only on the portion of money actually withdrawn, not on the entire sanctioned amount. This lending method is widely used by Indian business owners.
2. Outright Loans and Advances: In this method, banks disburse loans for a specified duration, typically short- to medium-term. The total sanctioned amount is credited in full to the borrower’s current account in one lump sum. Regardless of how much of the loan is actually utilised, interest is levied on the entire amount credited.
3. Overdraft Facilities: This facility is offered by banks to their customers holding current accounts. Under this arrangement, a customer is allowed to issue cheques that exceed the actual balance in their account, up to a pre-approved limit. This means the customer can temporarily overdraw their account within the sanctioned overdraft limit.
4. Discounting Bills of Exchange: Another key lending method is the discounting or purchasing of bills of exchange. A bill of exchange is a written order by a creditor to a debtor, stating the amount owed and the date it is due, usually within 90 days. As these bills cannot be encashed before the due date, banks step in and discount them, offering immediate funds to the creditor at a discounted value.