IIBF CCP TYPES OF CREDIT FACILITIES | TYPES OF BORROWERS
Cash Credit (CC), Overdrafts-OD, Demand Loan-DL, Bills Finance
Types of Borrowers
Mention below are the types of borrowers who are usually eligible to get credit from the banking institutions:
- Hindu Undivided Family (HUF)
- Partnership firm & LLPs.
- Statutory Corporations
- Trusts & Co-operative Societies
- Limited Liability Partnership (LLP)
One of the Essential Elements of a contract is ‘the capacity of the parties to contract’.
The bank has to ensure (before entering into a contract with any person) that the person is competent to enter into a contract.
To understand which persons are competent to enter into a contract with, we have to understand who is incompetent as per the Contract Act. The below-mentioned individuals have been specifically defined as incompetent:
- A minor (below the age of 18)
- And any video is not of sound mind
- Disqualified persons by law (declared insolvent)
TYPES OF CREDIT FACILITIES: The above-mentioned categories of borrowers reveal the following types of credit facilities from the banking institutions. These credit facilities have been divided into two categories:
- Fund-based lending: The fund-based credit includes facilities such as Overdrafts, Bills Finance, Cash Credit A/c, Term Loans & Demand Loans, etc, wherein there is an immediate flow of funds to borrowers.
- Non-fund-based lending: These non-fund-based credit facilities include the issuance of a letter of guarantee, Letter of Credit (LC) for which the banks charge fees for these facilities. But under these facilities, there is no immediate outflow of funds from banks.
- CASH CREDIT SYSTEM
CC or a cash credit account like a current account is a running account. Here in debit balance is sanctioned up to the drawing power limit which is based on the stock holding. This limit is generally sanctioned for one year. After that, the limits get renewed (enhanced or reduced, as per the customers working capital requirements).
The borrower also has needs to submit periodic shock statements. The period depends on the cycle of operation, turnover, cash budget, or projected balance sheet. Sometimes it is also available against jewelry, national Savings certificates, LIC policies, and other personal assets of the borrower. In such cases, they are not required to submit stock statements.
Security: CC is offered generally against hypothecation or pledge of the borrowers prime security which could be raw material or book debts.
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Benefits of Cash Credit System:
- Flexibility: The borrower does not need to do the whole amount at once but can withdraw the money whenever the need arises.
- Operative Convenience: The borrowers can transact in their CC account to do their normal business activities. So, there is no need for them to open a new account whenever they need to withdraw the money from the CC account.
Disadvantages of Cash Credit System:
- Fixation of Credit Limit: Under the CC account, the limit gets prescribed on yearly basis.
- Bank’s inability to verify end-use of funds: Bank sanctions the CC limit for a particular use, which most commonly, is for working capital. But the bank can’t really verify whether the funds have actually been used for the purpose for which the credit facility has been sanctioned or not.
Under overdraft, my customer is allowed to draw and issue cheques above his or her balance that stands credit in the current account. This credit facility is normally available to the customers who have a current account in the banks, although, in some exceptional cases, saving bank account holders also get to withdraw money over and above their account balances.
The bank charges a high rate of interest on the daily debit balances. Overdraft facility is usually repayable on demand.
Banks offer two types of overdraft facilities mentioned below:
- Secured overdraft &
- Temporary overdraft or clean overdraft
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Temporary overdrafts: These overdrafts are purely allowed the owner personal credit to the customer for the purpose to enable them to meet some emergency situations in real cases. If a bank has allowed a customer to draw against his cheques, then that also falls under the category of temporary overdraft.
Secured overdraft: This kind of overdraft is offered to the customer against some security that is tangible in nature, for example, LIC policy, NSC: National security certificates, bank deposits, shares, and other similar kinds of securities. These are generally utilized by the traders who need credit at lower operating costs. They can also get it by a simple application process and after completing documentation formalities that are required to avail this facility.
- DEMAND LOANS
These are secured loans that need to be repaid on demand. They are granted by marking a lien on FDs, LIC policies (having adequate surrender value), national Savings certificates, etc. These loans have a high liquidity period, which can we make from months, quarters, half-yearly installments only one lump sum payment and the end of the credit period in one go.
Sometimes it can also be closed from the proceeds of the security against which it has been offered.
- BILLS FINANCE
This facility is provided only for a short period of time. Under this facility, the banks purchase the demand bill & Usance bill at discount from the customer. These bills can also be negotiated by the banks as in the case of letters of credit.
The main advantage of this facility is that the seller gets immediate money from the bank.
The demand bills can be clean or documentary. In general, banks accept me documentary bills for purchase. Although clean bills can also be purchased by the bank when the bills are from good parties. While Usance bills are those bills that mature on a future date.
- TERM LOANS
Term loans have a long commitment period. The maturity period can range from 10 to 15 years. These are prepared from the cash that is generated from the operations of the business.
These are sanctioned after proper credit appraisal of the borrower as well as the project in terms of borrowers’ integrity, status, the capacity of his business, his/her managerial competence, and the financial sources that he or she has personally invested in the business.
Various Bank reports CIBIL reports, promoter declarations, internal and external credit ratings are checked before the term loans are sanctioned to the parties.
There are also many more things that are considered before granting the term loans such as competition, quality and price sensitivity e of a business product, terms and conditions of sale and after-sale service of the business, technical feasibility, production processes, etc.
There are many other forms of fund facilities that are offered by the banks. They will be discussed in the next article.