Advances
Sanctioning advances to
its customers in different forms is one of the basic functions of a bank
Forms of advances can be
broadly categorized into the following:
a) Loans,
overdraft and cash credit;
b) Bills
purchased and discounted.
Loans
Loans are advances that are allowed for a specific purpose and
generally the period for payment is fixed. A loan is granted in a lump sum
which is payable either by installments or in lump sum with or without interest
or any charges. Generally loans are sanctioned to those borrowers who have a
fixed source of income or who is capable of repaying the whole debit amount.
Overdraft
Overdraft is a kind of advance that is allowed against a current
account. This current account must be operated by a cheque. There are
limitations as to the amount of money and the drawing time in case of an
overdraft. The borrower is allowed to draw money as many times as his
convenience satisfies but he cannot exceed the agreed limit.
Cash credit
This type pf advance is generally made to industrialists
and agricultural people etc. The agreement in this case is such that the limit
of credit will go up with the increased production and will go down with the
decrease in production. This privilege is provided by the bank on taking the
possession of the goods or products in the storage. However, the ownership
remains with the borrower.
Bills purchased and
discounted
By this type of grant the bank allows the advance payment under a
bill of exchange before the time of its maturity. In this case, when the person
draws money under the bill, the bank becomes the holder of the bill for value
and gets absolute title to it.
Guarantees
A guarantee contract is made in order to safeguard the payment of
an advance or loan made by the bank to a borrower. In case the borrower fails
to repay the lent amount and his personal security is not sufficient, an
additional security in the form of guarantee is sought by the bank from a third
person. The guarantor gives personal undertaking to the bank for the payment of
debt.
Statutory definition:
A contract
of guarantee is a contract to perform the promise or discharge the liability of
a third person in case of his default. (Sec: 126, Contract Act, 1872)
Kinds of Guarantee:
a) Specific
Guarantee;
b)
Continuing Guarantee.
Specific Guarantee:
A
guarantee is given in respect of a single transaction undertaken by
the principal debt.
Continuing Guarantee:
A guarantee
is given in respect of a series of transactions. However, the amount up to which
the guarantor will be liable.
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