Important Concepts of Bank.

Lending money is one of the two major activities of any Bank. Banks accept deposit from public for safekeeping 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 have the need for money to carry out business transactions. The difference between the rate at which the interest is paid on deposits and is charged on loans, is called the "spread". Cash credit 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 It runs like a current account except that the money that can be withdrawn from this account is not restricted to the amount deposited in the account.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 Bank. Overdraft 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 than has been deposited in it. How does this account then differ from a Cash Credit Account? The difference is very subtle and relates to the operation of the account. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other hand, is allowed against a host of other

securities including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures etc. Some overdrafts are even granted against the perceived "worth" of an individual. Such overdrafts are called clean overdrafts. Bill Discounting Bill discounting is a major activity with some of the smaller Banks. Under this type of lending, Bank takes the bill drawn by borrower on his(borrower's) customer and pay him immediately deducting some amount as discount/commission. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. If the bill is delayed, the borrower or his customer pay the Bank a predetermined interest depending upon the terms of transaction. Term Loan Term Loans are the counter parts of Fixed Deposits in the Bank. Banks lend money in this mode when the repayment is sought to be made in fixed, predetermined installments. This type of loan is normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower over a long period (exceeding at least one year). Purchases of plant and machinery, constructing building for factory, setting up new projects fall in this category. Financing for purchase of automobiles, consumer durables, real estate and creation of infra structure also falls in this category. Classification of loans Another way to classify the loans is through the activity being financed. Viewed from this angle, bank loans are bifurcated into :

Priority sector lending

Commercial lending

Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply Difference between Bank Rate and Repo Rate While repo rate is a short-term measure, i.e. applicable to short-term loans and used for controlling the amount of money in the market, bank rate is a long-term measure and is governed by the long-term monetary policies of the governing bank concerned Repo rate Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get Money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.

Types of Bank Rates Here are the different types of monetary instruments on which financial institutions offer the following bank rates: Savings account bank rate: Modest rates are charged on funds that are deposited in the savings accounts. However, investors have high flexibility in withdrawing the deposits.

Certificates of deposit (CD) bank rate: These offer comparatively high interest rates compared to savings accounts. Bank rates on CDs are determined by the term period of a deposit and the current economic situation. The longer the term of a CD, the higher will be the bank interest rate. Money-market funds bank rate: The interest rate on money-market funds is relatively low. As most of the money market accounts are privately insured, it is a secure method of investment. Deposits in a money market account generate interest through short-term investments.

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