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Sources of Business Finance — OCM STD 11 Commerce — Question

Gujarat BoardEnglish MediumSTD 11 CommerceOCMSources of Business Finance3 Marks
Question
Explain lending policy of commercial bank.
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Answer

  • Commercial banks normally lend money through the following three methods.
$(1)$ Loan $(2)$ Cash credit $(3)$ Overdraft.
  1. Lending through loan :
  • Bank considers financial necessity, capacity to return money, accounts of previous years, profitability of business, etc. matters are examined and before granting the loan for any business unit.
  • Bank keeps mortgaged the assets of business unit and then sanctions loan as per rules and policy of the bank. Interest is to be paid on the amount of loan sanctioned by bank.
  • The rate of interest is fixed by bank. Amount of loan is repaid at a time or within stipulated time.
  1. Lending through cash credit :
  • Bank sanctions the amount against the security of personal assets or stock of business unit for their business requirement is called cash credit.
  • Out of this amount sanctioned the person has to pay interest on the amount he is using. The rate of interest fixed by the bank.
  1. Lending through overdraft :
  • Bank provides facility to the current account holder to use money more than he is having in his account. It is called overdraft. Account holder can get overdraft facility on his personal credit or security.
  • Current account holder has to pay interest fixed by bank on the amount used by him. For how much time money is used is taken into consideration.

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