Loans and Advances Principles of Good lending Creditworthiness of borrowers Securing advances Lien Pledge Mortgage Hypothecation Documents of title to goods Life Insurance Policy Fixed Deposit Receipts Mutual Funds Government Securities Gold Loans

1. SRM INSTITUTE OF SCIENCE AND
TECHNOLOGY
DEPARTMENT OF COMMERCE
CLASS : I BCOM G & H
COURSE CODE : UCM20201J
COURSE NAME : BANKING LAW &
PRACTICES
UNIT IV
DR.S.MANI

2. LOANS AND ADVANCES
ADVANCES
‘Advance’ 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. 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.
LOAN
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’.

3. UTILITY OF LOANS AND ADVANCES.
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
1)Loans and advances can be arranged from banks in keeping with the
flexibility in business operations.
2)Loans and advances are utilized for making payment of current
liabilities, wage and salaries of employees, and also the tax liability of
business.
3)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.
4)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.
5)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

4. TYPES OF ADVANCES
Banker renders different types of borrowing facilities to their customers. They are
1.Loans
The bank lends lump sum for a certain period at an agreed rate of interest loan may be given without
security. The loan may be rapid in instalments or at the expiry of a certain period. Loans may be of
demand loan or a term loan. Demand loan is payable on demand whereas term loan may be medium term
or long term loan.
2.Cash credit
It is an arrangement by which the customer is allowed to borrow money up to a certain level. It is active
account to which deposits and withdrawals may be affected frequently. If the customer does not use the
cash credit limit to the full extent, a commitment charge is made by the bank. It provides an elastic form
of borrowing since the limit fluctuates according to the needs of the business.
3.Overdraft
It is an arrangement between a banker and his customer in allowing the latter to withdraw over and above
his credit balance in the current account up to a specified limit. The interest is charged only to the amount
drawn and not to the whole amount sanctioned. Overdraft is made occasionally and for short duration.
Banks, sometimes grant unsecured overdraft for small amounts to customers having current account with
them. Such customers may be govt. employees with fixed income or traders. Temporary overdrafts are
permitted only where reliable source of funds are available to a borrower for repayment.
4.Bills discounted and purchased
Banks lend advances to their customers by discounting bill of exchange or pro-note. In this form
of lending, the interest is received in advance by the banker. Sometimes banks purchase bills. In these
cases, the banker grants loan in the form of overdraft or cash credit against the security of the bills.

5. SECURED AND UNSECURED ADVANCES.
If the loans and advances are made on the personal security of the borrower, it is called as unsecured
advances. If the loans and advances are made on the security of some tangible asset it is called
secured advances.
SECURED ADVANCES
Section 5(1) (N)of the Banking Regulation Act, 1949, defines secured advances as “secured loan or
advance means a loan or advance made on the security of asset the market value of which is not at any
time less than the amount of loan or advance.”
The kind of security offered differs from one place to another. Stock exchange securities are offered in big
cities like Bombay, Calcutta and Madras. In large industrial areas raw materials and finished goods are
given to cover the loan amount. A banker can also lend against movable properties, book debts, life policy
etc. Security can be classified as, primary security and collateral security.
Primary Security
It is the security which is deposited by the borrower himself to cover the loan. Machinery has been bought
with the help of bank finance. The machinery here constitutes the primary security to the banker. All
other securities deposited to cover the same advance are known as collateral securities.
Collateral Security
It is used in two senses. In a narrow sense, it means the securities deposited by the third party to secure
advance for the borrower. In a wider sense, it means any type of security on which the creditor has a
personal right of action on the debtor in respect of the advance.

6. UNSECURED ADVANCES
Section 5(1)(N) of the Banking Regulation Act defines unsecured loan as “unsecured loan or
advance means a loan or advance not so secured”
Unsecured advances are granted to customers of integrity with a sound financial backing, high
business reputation and capacity to manage the business. Confidence in the borrower is the basis of
unsecured advances.
The confidence is judged by three considerations, character, capacity and capital normally known as 3 C’s.
Character
The word character means personal qualities viz, honesty, responsibility, promptness, reputation and
goodwill. A bank can extent credit facilities to a person who posses all the said qualities.
Capacity
The capacity of a borrower means his ability to manage the business. Any enterprise’s success depends on
initiative, interest experience and managerial ability of the entrepreneur. To know the capacity, reliance is
made on the economic viability of the project to which the loan is sought. Economic viability refers to the
capacity to manufacture goods at the lowest cost and to leave sufficient profit to meet its commitment of
loan.
Capital
A borrower should possess sufficient capital to conduct his business and adequate plant and machinery to
carry out normal productive activity. Dr. C.B.Memoria has given a formula.

7. LENDING PRACTISE
According to Crowther “The secret of successful banking relies in the
distribution of the resources between various forms of assets in such a
way so as to strike a sound balance between liquidity and profitability, so
that there is enough cash to meet every claim and at the same time,
income to pay its expenditures and earn profits for share holders.”
Liquidity and profitability are the two principles playing important role and
stresses the need to invest. Investment of funds may be on the following types
of assets.
Liquid Assets consist of Cash on hand, Cash with other banks and Cash with
Reserve Bank of India
Semi – Liquid Assets consist of Money at call and short notice and Bills
discounted
Assets termed as earning assets

8. 8
LIEN:
A lien is just a claim on an asset of the borrower that is used as collateral against
the funds borrowed or for the payment of obligations or performance of services
to another party. The lien provides the lender with the right to detain the asset
until the repayments are made & do not have the right to sell the assets unless
agreed upon in the contract, for example - Banks grant a loan against
marking the lien on customers’ deposits, real-life examples – cloth given to
a tailor for stitching, a bike given to a mechanic for a repair in both the cases the
claim on goods will rest with the service provider unless the payment for the
services is paid.

9. Bailment
Section 148 to 181 of the Indian Contract Act, 1872 provides the law in
respect of contract of “Bailment”. Out of these provisions, Section 168 and
169 provides the rights and duties of the finder of goods. The term bailment
implies a relationship in which the personal property of one person temporarily
goes into the possession of another. Delivering a vehicle, watch or other
article for repair or leaving a vehicle at parking stand etc. are common
examples which create the relationship of bailment.
Meaning
The word ‘bailment’, is derived from ‘bailer’, a french word which means ‘to
deliver’. Bailment has been defined under section 148 of the Indian Contract
Act, 1872, according to which Bailment involves the delivery of goods from
one person to another for a specific purpose and upon a contract, when the
purpose is fulfilled, the goods has to be returned or dealt with on the direction of
the person who has delivered the goods.

10. Pledge
Section 172 to 179 of the Indian Contract Act provides the law in respect of
contract of pledge. Section 172 provides the definition of some important terms
like “pledge”, “pawnor”, “pawnee”.
What is Pledge?
Pledge can be defined as that special form of bailment in which goods
are bailed as security by one party to another, for the repayment of debt or
performance of a promise.
Pledges are form of security to assure that a person will repay a debt or perform
an act under contract. In a pledge one person temporarily gives possession
of property to another party. Pledges are typically used in securing loans,
pawning a property for cash, and guaranteeing that contracted work will be
done.

11. 11
Hypothecation
Definition of Hypothecation
Hypothecation refers to a financial arrangement where the borrower borrows
money against the security of goods (Here goods mean movable property). In
business parlance, hypothecation is defined as the charge created over the asset
(usually inventories, debtors, etc.) for the repayment of debt of suppliers,
creditors, and other parties.
In this arrangement, the asset is not delivered to the lender but kept by the
borrower until he defaults in payment of debt. So, the possession of asset
belongs to the debtor only. There are two parties to hypothecation, where
hypothecator is the borrower while hypothecatee is the lender. The right of the
two parties depends on the agreement signed between them.
If the hypothecator fails to pay the amount, then firstly, the hypothecatee has to
take the possession of the goods hypothecated. Thereafter, he can sell them off
to adjust the amount of his loan.
In Hypothecation, the Bank (hypothecatee) is treated to be a secured
creditor and has a preferential right to recover with respect to the other
creditors.

12. Mortgage
A mortgage is a transfer of an interest in immovable property and it is
given as a security for a loan. The ownership of an immovable property
remains with the mortgagor itself but some interest in the property is
transferred to the mortgagee who has given a loan.
DEFINITION:
Section 58 (a) defines mortgage in the following words:
A mortgage is the transfer of an interest in immovable property for the
purpose of securing the payment of money advanced, an existing or future
debt or the performance of an engagement which may give rise to a pecuniary
liability.
Pros and Cons of Hypothecation
Pros
Makes it possible to afford large purchases
Can help reduce the cost of borrowing
Can help a borrower qualify with less-than-stellar credit Cons
The borrower may lose the asset if they default
The application process can be more complicated

13. 13
Life Policies as a Security for the Loan/Advance Purpose of Life
Policy A life policy is taken for two purposes:
 It is a source of income for the dependents of the assured in case of
his death.
 It is an ideal form of saving since along with income tax deduction
on the premium, paid loans can be raised on the policies in times of need.

14. 14
MUTUAL FUNDS
Mutual Funds play a key role as a financial intermediary in the
financial services sector. A mutual fund pools money from investors
and invests in Stocks, Debt and other financial securities. SEBI
Regulations 1993 defines a mutual fund as: “ a fund established in the
form of a trust by a sponsor to raise monies by the trustees through the
sale of units to the public, under one of more schemes, for investing in
securities in accordance with these regulations”

15. 15
Government securities
Government securities play a crucial role in the financial market, serving as a
means for the government to borrow funds from the public. These securities are
considered safe investments, as the creditworthiness and stability of the
government back them. In this article, we will explore the concept of
government securities, their types, trading in India, and their advantages as an
investment option.

16. 16
Gold Loan
Gold loan (also called loan against gold) is a secured loan taken by the
borrower from a lender by pledging their gold articles (within a range
of 18-24 carats) as collateral. The loan amount provided is a certain
percentage of the gold, typically upto 80%, based on the current
market value and quality of gold.

17. Documents Required to Process Loan Application
Documents that are required to seek a gold loan vary
from lender to lender. However, the common list of
documents includes: Passport Size Photographs, Identity
proof (PAN Card, Voter’s ID, Aadhar Card etc.) and Address
proof (Passport, Driver’s License, Electricity Bill
etc.).personal liability to repay the non-recourse loan. The
LTV in the case of a non-recourse loan can be anywhere
between 60% to 80%.

18. IMPORTANT QUESTIONS 2 MARKS
1. What is an advance?
2.What is a Mortgage?
3.What do you mean by pledge?
4.What do you meant by Hypothecation?
5.What is FDR?
6.What are Mutual Funds?
7.What is Government Security In India?
8. What is a Gold Loan?
10 MARKS
1. Explain the principles of sound bank lending.
2.Discuss the forms of advances or types of advances.
3.Explain the principles that guide a banker in granting loans and advances.
4. Which are the documents required to process loan application?