This article throws light upon the four main types of advances that can be availed from a bank. The types are: 1. Secured Loans 2. Cash Credit 3. Over Draft 4. Clean Advances.
Type # 1. Secured Loans:
These types of advances are granted against the collateral securities of different kinds, such as bullion, government securities of raw material or finished goods, real estate etc. While granting such loans, banks keep a margin of 10 to 40% and make loans to the extent of 60 to 90% of the present market value of the security to cover the risk.
The goods are lodged with the bank by two systems:
(i) Hypothecated, and
The goods are said to be “Hypothecated” when they remain with borrower. The borrower has full freedom in disposing them off at any time. Bank simply checks their accounts and stocks at regular intervals.
The goods are said to be “pledged”, when these are in the possession of the bank and the borrower therefore, has to take the permission of the bank, whenever he desires to sell or transport them.
Type # 2. Cash Credit:
This is an arrangement by which a borrower is allowed to draw funds upto a certain previously agreed maximum limit. He can draw the money within the limits as and when there is necessity but interest is charged on the amount actually utilized by the customer and not on the maximum amount sanctioned by the bank.
This system is very popular in our country and the majority of advances are given by this method. These are also advances against collateral securities.
Type # 3. Over Draft:
This is a temporary accommodation extended by a bank to its customer against collateral securities. The customer is allowed to draw money in excess of the balance in his current account and interest is charged on the amount which is overdrawn.
Type # 4. Clean Advances:
If a borrower wants loan for a longer period then he may request the bank to give him accommodation on his personal security. If the bank allows such advance, then he opens a loan account in the name of the customer. The customer can withdraw the money upto the limit of the loan and he has to pay interest on the full advanced amount no matter whether he draws it or not.
In addition to the above, banks also provide credit facilities like discounting of bills, promissory notes or hundies etc.