Classes of Advances

Advances by Bank

Standard Assets:

Standard assets are those which do not pose any problems and which do not carry more than normal risk attached to the business. They are non-performing assets (NPA). No provision is required to be made against them. However, banks have been asked to make provision at the rate of 0.25% on their standard advances also from the year ending 31st March, 2000.

Sub-Standard Assets:

Sub-standard assets are those which have been classified as NPA for a period not exceeding 18 months. In such cases, the security available to the bank is inadequate and there is a distinct possibility that the bank will suffer some loss, if deficiencies are not corrected. Provision has to be made at the rate of 10% of the total outstanding amount of sub­standard assets.

However, in respect of accounts where there are potential threats of recovery on account of erosion in the value of security or non-availability of security and existence of other factors, such as frauds committed by borrowers, it will not be prudent for banks to classify them first as sub­standard and then as doubtful after expiry of two years from the date the account has become NPA. Such accounts should straightaway be classified as doubtful assets, or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.

Doubtful Assets:

Doubtful assets are those which have remained NPA for a period exceeding 18 months. This period of two years is being reduced to 18 months by 31st March, 2001. These assets are so weak that their collection or liquidation in full is considered highly improbable. A loan classified as doubtful has all the weaknesses inherent in the classified as sub­standard with the added characteristic that the weaknesses make collection or liquidation in full, high questionable and improbable, on the basis of currently known facts, condition and values.

In order to arrive at the amount provision to be made against doubtful assets, the unsecured portions and the secured portions of these assets have to be considered separately. The unsecured portion has to be fully provided for, i.e., provision has to be made equal to 100% of the amount by which the advance is not covered by the realisable value of the security.

Advances in Bank

Cash Credit

Cash Credit is an arrangement by which the customer can borrow money up to a certain limit known as the ‘cash credit limit.’ Usually, the borrower is required to provide security in a pledge or hypothecation of tangible securities. Sometimes, this facility is also provided against personal security.

This is a permanent arrangement, and the customer need not draw the sanctioned amount at once but draw the amount as and when required.

He can put back any surplus amount which he may find with him. Thus cash credit is an active and running account to which deposits and withdrawals may be affected frequently.

Overdraft

Oxford Dictionary of Finance and Banking defines overdraft as “a loan made to a customer with a cheque account at a bank or building society, in which the account is allowed to go into debt, usually up to a specified limit.”

According to the Cambridge Advanced Learner’s Dictionary, overdraft means “an amount of money that a customer with a bank account is temporarily allowed to owe to the bank or the agreement which allows this.”

The Economist defines an overdraft as “a credit facility that allows borrowers to draw upon it (up to a specified limit) as and when they need to. Borrowers pay only for what they use”.

Overdraft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account up to an agreed limit. This is only a temporary accommodation usually granted against security.

The borrower can draw and repay any number of times, provided the total amount overdrawn does not exceed the agreed limit. The interest is charged only for the amount drawn and not for the whole amount sanctioned.

A cash credit differs from an overdraft in one respect. Cash credit is used for the long-term by businesses in regular business, whereas overdraft is made occasionally and for a short duration.

Banks sometimes grant unsecured overdrafts for small amounts to customers having a current account with them. Such customers may be government employees with fixed incomes or traders.

Temporary overdrafts are permitted only where a reliable source of funds is available to a borrower for repayment.

Loans

Loan is the “money lent on condition by a bank that it is repaid, either in installments or all at once, on agreed dates and usually that the borrower pays the lender an agreed rate of interest (unless it is an ail interest-live loan).”

Oxford Dictionary of Finance and Banking defines a bank loan as “a specified sum of money lent by a bank to a customer, usually for a specified time, at a specified rate of interest.”

According to Cambridge Advanced Learner’s Dictionary, a loan means “a sum of money which is borrowed, often from a bank, and has to be paid back, usually together with an extra amount of money that you have to pay as a charge for borrowing.”

Purchasing and Discounting Bills

Bills of exchange, as defined in the Negotiable Instruments Act, 1 SSI, is “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay (on-demand or at a fixed or determinable future time) a certain sum of money only to, or to the order of, a certain person or the bearer of the instrument.”

Banks grant advances to their customers by discounting bills of exchange. The net amount, after deducting the amount of interest/discount from the amount of the installment, is credited to the account of the customer.

In this form of lending, the interest is received by the banker in advance. Banks sometimes purchase the bills instead of discounting them.

Bills accompanied by the document of title to goods such as bills of lading or railway receipt are purchased by the bankers.

In such cases, the banker grants a loan in the form of overdraft or cash credit against the security of the bills.

The term ‘bill purchased’ seems to imply that the bank becomes the purchaser or owner of such bills. But in almost all cases, the bank holds the bill only as a security for the advance.