Question

Sohail requires ₹ 3 lakhs to meet his business needs. He has ₹ 1 lakh in his current account. He decides to arrange the amount in the following ways:

1. Withdrawing ₹ 1.75 lakhs from his current account.
2. Collecting the remaining amount as cash credit.

With reference to subparts (a) and (b), explain the credit facilities enjoyed by Sohail.

Answer 1

1. Overdraft from current account: By drawing ₹ 1.75 lakhs when he had only ₹ 1.00 lakh, Sohail has overdrawn his current account by ₹ 0.75 lakh. This is an overdraft: a short‑term facility allowed to current‑account customers that permits them to write cheques or withdraw amounts in excess of their actual balance up to an agreed limit. Interest is charged only on the amount overdrawn, not on the authorised limit or on the whole account balance; overdrafts are normally granted to reliable business customers, often against appropriate security, and are repayable on demand or within a short period.
2. Cash credit: The remainder Sohail needs to reach ₹ 3.00 lakhs is ₹ 1.25 lakhs (3.00 − 1.75 = 1.25). He arranges this as cash credit, a working‑capital loan where the bank sanctions a limit and opens an account for the borrower; the borrower may draw funds as required up to the sanctioned limit. Cash credit is typically granted against current assets (stocks, book debts, etc.) and the bank charges interest only on the amount actually withdrawn/used, not on the entire sanctioned limit. It is a common short‑term facility for businessmen and is structured to match fluctuating working‑capital needs.