Different types of advances

The basic function of the commercial bank is to accept deposit from the journal public. The amount received through deposits is not kept idle. The bank keeps a percentage of deposits as a cash reserve and the balance is offers for the loan and advances. The loans are the major source of income for the commercial banks. They can provide the loan in the following manner.

a)                 Running finance/over draft:

Running finance is granted to the approved and selected parties. The business man keeps current account with the commercial bank. The customers are allowed to overdrawn from their current account.

The amount can be withdrawn up to a section limit. A separate running finance account may be opened in a favor of the customer. Who can draw the amount from his account. The rate of interest is charged on the amount withdrawn on the daily basic. The running finance is short term advance but can be renewed at the direction of the bank.

The running finance is usually secured. The securities may be against government securities, shares, debenture of the company, fixed deposit receipt of the same bank. The finance may be granted to customers on personnel security or on the guarantee of third party.

b)                Cash finance/cash credit:

Cash finance is granted to industrial and commercial concerns. It is available through current account of customer against securities. The customer can also be provided by opening a separate account. The amount in be withdrawn lump-sum or instrument. It is short time finance. Its time period is usually more than running finance, the cash finance is granted to the approve customers they are the owners or managers of industrial and commercial concerns.

The cash finance is usually provided against goods, so other assets, accepted to banker. The cash finance is provided to the customer on security. The cash finance can be renewed at the option of the banker on the request of the customer.

c)                 Demand finance/demand loan:

The demand finance is granted to the persons against the assts. A fixed amount is debited to the newly opened demand finance account. The account is opened in the name of customer is a separate ledge. The demand finance is payable on demand. Therefore, the time period is depend upon the need of the bank. It may be more than one year. The project rate is charged on the whole amount of the loan and time for which is it issued. The securities acceptable are government securities and other tangible securities. The demand finance is not renewed. A customer is need of more funds can ask for another demand loan. The purpose of the demand loan is to meet the working capital requirements of the business for a short period of time. It is also a trade related mode of finance.  

d)                Discounting of bill:

Purchasing and discounting of bill of exchange is another short-term method of profitable investment of bank fund. Bill of exchange can be discounted on relate before its due date. The rebate or discount is earning of the bank. The bank by discounting the clean advances the amount to the payee on maturity of the bill the amount is collected from the drawer. The discount is the safe earning of the bank because the bill of exchange is a negotiable instrument. If at any time the bill is dishonored the payee is responsible to make a full payment of the bill to bank.

On the maturity of the bill there is creating of payment to the bank. It is thus short term advances with the certainly of the payment.

                      The banker has the facility of re-discounting the bill from the central bank.