Lending money is one of the two major activities of any bank.
Banks accept deposits from public
for safe keeping and pay interest to
them. They then lend this money to
earn interest on this money. In a
way, the banks act as intermediaries between the people who have the money to lend and those who need the
money to carry out business
transactions.
Spread – The difference between the rate at which the interest is paid on deposits and is charged on loans, is
called the “spread”.
Lending Activity
– Commodities, Debts, Financial instruments, Real Estate, Automobiles, Consumer
durable goods, Documents of title.
Apart from the above categories, the Banks also lend to
people on the basis of their perceived
personal worth. Such loans are
called clean and the banks are
understandably cagey about extending such loans. The credit card arms of the various banks, however, fill up this void.
a. CASH CREDIT (CC) ACCOUNT – This account
is the primary method in which banks lend money against the security of commodities and debt. It runs like a current account except that the money
that can be withdrawn is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess
of the amount deposited in the
account.
Cash Credits are, in theory, payable
on demand. These are, therefore, counter part of Demand Deposits of the banks.
b. OVERDRAFT (OD) – The word “overdraft” means the act of overdrawing from a bank account. In
other words, the account holder withdraws
more money from a bank account that
has been deposited in it.
The primary
differences between cash credit and over draft is how they are secured and whether the money is lent out of a separate account.
Cash Credit (CC)
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Over Draft (OD)
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User
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More commonly offered for businesses than individuals
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Can be used for any purpose, individual or business
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Security
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Security can be a tangible
asset, such as stock, raw
materials, or some other commodity
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Allowed against a host of other securities including financial
instruments, like shares, units
of MFs, surrender value of LIC
policy and debentures etc.
Some ODs are even granted against
the perceived “worth” of an individual, known as clean ODs.
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Credit Limit
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A certain
percentage of the value of the
commodities / debts pledged by the
a/c holder
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Acts more like a traditional
loan. Money is lent as with a cash
credit account, but a wider range of collateral
can be used to secure the credit.
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