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 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 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.
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.
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.
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.
A guarantee is given in respect of a single transaction undertaken by the principal debt.
A guarantee is given in respect of a series of transactions. However, the amount up to which the guarantor will be liable.