Meaning: Banks play an important role in terms of providing finance to the companies.
They provide short-term finance for working capital, in the form of bank and trade credits.
The innovative schemes by banks for disbursement of credit are as follows:
(i) Overdraft:
- A company having a current account with the bank is allowed an overdraft facility.
- The borrower can withdraw funds/overdraw on his current account up to the credit limit sanctioned by the bank.
- Any number of drawings up to the sanctioned limit is allowed for a stipulated term period.
- Interest is determined/calculated on the basis of the actual amount overdrawn.
- Repayments can be made during the time period.
(ii) Cash Credit:
- The borrower can withdraw the amount from his cash credit up to a stipulated/granted limit based on security margin.
- Cash credit is given against pledge or hypothecation of goods or by providing alternate securities.
- Interest is charged on the outstanding amount borrowed and not on the credit limit sanctioned.
(iii) Cash Loans:
- In this, the total amount of the loan is credited by the bank to the borrower’s account.
- Interest is payable on the actual outstanding balance.
(iv) Discounting bills of exchange:
- In the bill of exchange, the drawer of the bill (seller) receives money from the drawee (buyer) on the date or after the due date (the term mentioned in the bill).
- But due to discounting facility the drawer can receive money before the due date by discounting the bill with the bank (by giving the bill as security to the bank).
- The bank gives money to the drawer less than the face value of the bill (amount mentioned in the bill) after deducting a certain amount known as discounting charges.
- The bills are usually traded bills i.e. outcome of trade transactions.
- The bills are accepted by the banks and cash is advanced against them.
