The term ‘loan’ refers to the amount borrowed by one person from
another. The amount is in the nature of loan and refers to the sum paid
to the borrower. Thus. from the view point of borrower, it is ‘borrowing’
and from the view point of bank, it is ‘lending’. Loan may be regarded
as ‘credit’ granted where the money is disbursed and its recovery is
made on a later date. It is a debt for the borrower. While granting
loans, credit is given for a definite purpose and for a predetermined
period. Interest is charged on the loan at agreed rate and intervals of
payment. ‘Advance’ on the other hand, is a ‘credit facility’ granted by
the bank. Banks grant advances largely for short-term purposes, such
as purchase of goods traded in and meeting other short-term trading
liabilities. There is a sense of debt in loan, whereas an advance is a
facility being availed of by the borrower. However, like loans, advances
are also to be repaid. Thus a credit facility- repayable in instalments
over a period is termed as loan while a credit facility repayable within
one year may be known as advances. However, in the present lesson
these two terms are used interchangeably.
Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial
to individuals, firms, companies and industrial concerns. The growth
and diversification of business activities are effected to a large extent
through bank financing. Loans and advances granted by banks help in
meeting short-term and long term financial needs of business enterprises.
We can discuss the role played by banks in the business world by way
of loans and advances as follows :-
(a) Loans and advances can be arranged from banks in keeping withLoans and Advances :: 61
the flexibility in business operations. Traders, may borrow money
for day to day financial needs availing of the facility of cash
credit, bank overdraft and discounting of bills. The amount raised
as loan may be repaid within a short period to suit the
convenience of the borrower. Thus business may be run efficiently
with borrowed funds from banks for financing its working capital
requirements.
(b) Loans and advances are utilized for making payment of current
liabilities, wage and salaries of employees, and also the tax
liability of business.
(c) Loans and advances from banks are found to be ‘economical’ for
traders and businessmen, because banks charge a reasonable rate
of interest on such loans/advances. For loans from money lenders,
the rate of interest charged is very high. The interest charged by
commercial banks is regulated by the Reserve Bank of India.
(d) Banks generally do not interfere with the use, management and
control of the borrowed money. But it takes care to ensure that
the money lent is used only for business purposes.
(e) Bank loans and advances are found to be convenient as far as its
repayment is concerned. This facilitates planning for future and
timely repayment of loans. Otherwise business activities would
have come to a halt.
(f) Loans and advances by banks generally carry element of secrecy
with it. Banks are duty-bound to maintain secrecy of their
transactions with the customers. This enhances people’s faith in
the banking system.
Thanks,
Surbhi Maheshwari [MBA Fin / Mktg ]
Manager Finance
On Line Assistence :
