15.2 Bankeng Law and Practice Loans and Advances 15.8 largely payable on demand. The banker must ensure that the borrowervis able to repay the ‘misfortune, or certain trades or industries are affected adversely, the overall position of the Joan on demand or within short period, This depends upon the nature of assets one by bbank will not be in Jeopardy. fe ‘ : | Bank Credit, National Policy and Objectives. Banking institutions are amon commanding heights of an economy. They must serve the national policy and objectives. ‘Twenty major banks in India were nationalised “to serve better the needs of development of the economy in conformity with the national policy and objectives." Necessary changes in the 8, Profitability. Commercial banks are profit-earning institutions; the nationalised banks fare no exception to this. They must employ thelr funds profitably so as to earn sulicent Income out of which to pay interest tothe dep banks’ advances within the priority sectors are given increasingly to the weaker and | underpriileged sections at concessional rate of interest. Security of funds lent 1s not sought | exelusively in the tangle assets of the borrower but also in his technical competence, | managerial ability, honesty and integrity. Loans are being given in large numbers for the setting up of small businesses or for starting practice by professional persons, The Credit Guarantee Fund Trust guarantees the loans granted to Micro and Small Enterprises without terest charged from different customers depend upon the degr fm lending to them. A customer with high reputation is charged the lower ‘compared to an ordinary customer. The sound principle of lending is not advances to unsound parties with doubtful repaying capacity, even if they very high rate of interest. Such advances ultimately prove to be lrrecoverabl collateral security or third party gus It is to be noted that bank credit has to act as an of the interests of the bank and its depositors. important instrument for achleving wider soclal purpose, national policies and objectives. | However, the baste principles of sound lending are fundamental and are observed even by 4. The Purpose ofthe Loan, Whilelendinghis funds, the banker enquires rom theberrower | ——_the nationalised banks, The ways in which the Basie principles are followed, of course, the purpo: may be modified to sult the needs ofthe Nour. parpos iy be modified o ups iy a, or mevig orga STYLE OF CREDIT ven for reductive ad eet tean Ce teay © Commercial banks finance working capital requirements of thelr customers, The main sjle pleasure trips or forthe repayment ofa prior loan. Loans for capital expenditure for establish ‘tnancing pew coum Busines are of longterm nstare and the banks grant uch term nas also Aer ee taonaletion ofmalor bans loans for ntl expenditure to star small tees, usin Industries, ete. are also given by the banks. Banks are now granting personal loan: Individuals to buy a house or consumer durable goods and for educational expen: ‘5, The Principle of Diversification of Risks. This is also a cardinal principle of sound lending. A prudent banker always tres to selec the borrower very carefully and takes tangible assets as securities to safeguard his interests, Tangible assets are no doubt valuable and the banker fels safe while granting advances on the security of such assets, yet some risk is always involved therein, An Industry or trade may face depressionary conditions and the 7 1, Cash eredit system to 2. Overdrafts 3, Loan system 2 4. Purchase and discounting of bis. ‘The terms and conditions, the rights and privileges of the borrower and the banker differ ‘m each ease, In India, the eategory of loans, cash credits and advances accounts for the bull of bank credit, Purchase and discounting of bills is not as popular a means of bank credit of India as its in foreign countries. Efforts have been made to popularise the use of bills of ‘exchange for extending bank credit, This chapter describes the existing practices in relation to loans, cash credits and overdrafts in India. The business of purchase and discounting of, bills wil be discussed in a subsequent chapter. 1, CASH CREDIT SYSTEM big firms only or to concentrate them in a few industries or in a few eities or regions of the Cash eredit is the main method of lending by banks in India and accounts for about 70 per ‘country only. The advances, on the other hand, should be spread over a reasonably wide cent of total bank eredit, Under the system, the banker specifies a limit, called the cash credit area, distributed amongst a good number of customers belonging to different trades and lima for each customer, up to which the customer is permitted to borrow against the security ‘industries. The banker thus diversifes the risk involved im lending, Ia big customer meets _-—_of tangible assets or guarantees. The customer withdraws from his cash credit account as