INTRODUCTION:

There are two primary functions of commercial b i.e. (1) receiving deposits (II) advancing
loans. All the functions are well connected with these primary functio Banks collect funds
from different sources to make t profitable use. The main sources of bank funds are as under

(SOURCE OF BANK FUNDS)

Bank's Own Capital

Deposits

Loan from Other Banks

Reserve Fund
Bank's Own Capital:

At the time of formation of the bank, capital is colle by selling its shares to the general public.
It is also know share capital or paid-up capital of the bank. The people purchase shares of the
bank are known as share holders/ow economy of the bank

Deposits:

Receiving deposits from the customers or acc holders is the second important source of bank
funds. No the banks have three kinds of accounts i.e. saving acco(a) S fixed deposit account
and current account and the custo deposit their surplus money in these bank accounts
Loan from Other Banks:

Banks get loans and grants from other banks financial institutions at the time of need. Central
bank major source of these loans.

Reserve Fund:

It is a part of profit yearly earned by the bank Normally, the profit is divided into two parts i.c.
(1) dividend 2. Reserve. Dividend is divided among the shareholders and the bank with a view
to meet any deficiency in the future withholds other part. The accumulated reserve fund
becomes a huge amount and a good source of further investment
USE OF BANKER'S FUND

Commercial banks use their funds to make the maximum profit. The important use of these
funds is advancing Joans (Financing). Banks also keep some of their funds as cash reserve to
meet their current obligations. Main uses of bank funds are:

Use of Banker's Fund

Advancing Loans

Direct Investment

Purchase of Shares & Debentures

ADVANCING LOANS:

The loans are granted to the different sectors of holden economy to meet the increasing
needs of economic development. The commercial banks after evaluating the prospective
borrower's application precisely and objectively extend credit for a certain period.

Secured Loans:
The loans granted after keeping certain valuables as security (collaterals) are known as
secured loans.

Unsecured Loans:
The loans against which no security is kept with the bank are called unsecured loans. These
loans are granted when goodwill or personal guarantee of borrower is thought enough.
Following are the kinds of secured and unsecured
Demand Loans: These are the loans, which can be demanded by the at any time. Generally,
these loans are issued to rich an worthy people. The loans have no fix-determined period sec
be demanded at any time in need. Demand loans play role to meet the immediate
requirement of the business

Overdraft: Banks allow their trustful customer to draw mone the deposited amount in bank.
Banks charge interest on modern banking overdraft facility is known as a Finance". The facility
of O.D. is only provided to accountholders.

Discounting of B/E:
This is also a source of income for the bank to disco chase more bills of exchange. They charge
nominal interest and discthority in all only on the reputed and clear bills of exchange
Cash Credit:

Banks also give cash credit against current assets as shares and bonds etc. In this type of loan
interest is charg on the amount actually withdrawn.

Fixed Loans (By Opening Loan Account):

If the amount and period for a loan are decided beim its issue then it is called fixed loan. The
amount of loans transferred to loan account in the name of borrower whi interest is charged
on the whole amount whether utilized not. The banks ask moveable and immoveable
securities in such loan. These loans may be of following types.
Short Term Loans:

These loans are granted to meet the day-t requirements of the business for the period up to
one year.

Medium Term Loans:

These loans are given to purchase raw material and to meet the administrative expenses for
the period of one to five

Long Term Loans:

These loans are issued for the purpose of investment and to purchase fixed assets for the
period of 6 to 10 years. Note: The concept of medium term loan has been vanishing gradually
in modern banking.
DIRECT INVESTMENT:

Some banks having sound financial background establish their own business projects like
manufacturing units, commercial enterprizes etc. By this type of investment banks can earn
more profit through direct operations.

PURCHASE OF SHARES AND DEBENTURES:

Banks also employ their funds in purchasing shares and bentures of different companies to
earn profit. Some times they ount purchase more than 50% shares of a company and become
the Our athority in all the decisions of the company due to majority.
COMPARISON OF OVERDRAFT, CASH CREDIT AND TIME LOANS

Nature of The facility of Account:

Overdraft

overdraft or running finance is provided to current accountholders only. It means the

customer should have an account to obtain this loan.

Cash Credit

Generally the bank grants credit by opening a new bank account. It means the customer can
obtain loan without having a bank account.
Time Loans
In case of time or fixed loans, the bank transfers the amount of loan after opening new
account in the name of customer or issues a cheque to customer who can obtain the amount
of loan by depositing the cheque in his already opened bank account.
Security
Overdraft
The bank accepts both types of security (i.e.) personal or impersonal for granting overdraft
facility.
Cash credit
Generally, these loans are granted against movable properties.

Time loans
The banks demand immovable property as security for granting time loan.
Markup:

Overdraft

The bank receives markup only on withdrawn amount from the account.

Cash credit

The bank should aslo charge mark up on the amount

Time loans

The bank charges charges markup on markup The bank also the used amount of amount of
loan the account whether utilized not.
• Period:

• Overdraft

• Overdraft facility is provided for a very short period of time (which may be in days)

• Cash credit

• Generally, cash credit is provided for short term.

• Time loans

• Fixed loans are mostly issued for long term.

• Renewal:

• Overdraft

• Running finance can be renewed.

• Cash credit

• Cash credit can also be renewed.

• Time loans

• Time loans can not renewed.

• Payment of loan:

• Overdraft

• Customer repay the loan

• Cash credit

• The customer can repay the loan, as he desires (i.e.) wholly or partially

• Time loans

• Customer should repay the loan in installments

• PRINCIPLES OF ADVANCING
• 1. Principle of Safety:
• Banks are profit oriented institutions, so that their firs preference is to get the
amount of loan back. If he lo likely to be unsafe the bank would not favour
such loan. I true in' saying that the safety of loan is always preferred o profit.
• Principle of Security:
• Security is demanded to ensure the payment of loan with in the due time.
Following qualities are essential for a good security:
• -Easily Marketable
• -Stable price
• -Non-perishable
• -Reasonable Margin
• -Easily transferable
• Principle of Income:

• The main object of a commercial bank is to earn profit. So, the granted loan
should be a source of reasonable profit. Bankers try to lend their money at
higher rates.

• Principle of Diversifications:

• It means grant of loans to different sectors. Some one has truly said "All the
eggs should not be in one basket". If the advances are made to different
persons instead of one party, or to many sectors, the risk is divided. Hence
there is least chance of loss.
• Principle of Liquidity:

• Liquidity means repayment of issued loan or its immediate conversion into

cash at the time of need. Loan should be easily recoverable by the bank in case
of emergency at short notice or on demand. While advancing loan, the bank
must observe its liquidity.

• Principle of Repayment:

• Bank is not a non-trading concern. So, the bank must observe all the aspects
regarding the repayment of issued loan
• PRECAUTIONS OF ADVANCING

• Safety of Loan:

• Banks are profit oriented institutions, so that their first preference is to get the
amount of loan back. If the loan is likely to be unsafe the bank will not favour
such loan. It is true in saying that the safety of loan is always preferred over
profit.

• Reasonable Profit:

• The main object of the commercial bank is to ear profit. So, the granted loan
should be a source of reasonable profit. Bankers try to lend their money at
higher rates.
• Diversifications of Loan:

• It means grant of loans to different sectors. Some one has truly said "All the
eggs should not be in one basket". If the advances are made to different
persons instead of one party, or to many sectors, the risk is divided. Hence
there is least chance of loss.

• Liquidity:

• Liquidity means repayment of issued loan or its immediate conversion into

cash at the time of need. Loan should be easily recoverable by the bank in case
of emergency at short notice or on demand. While advancing loan, the bank
must observe its liquidity.
• Security of Loan:

• Security is demanded to ensure the payment of loan with in the due time. Following
qualities are essential for good security:

• -Easily Marketable
• -Stable price
• -Non-perishable
• -Reasonable Margin
• -Easily transferable

• Custody of Security:

• Security may be in shape of documents or property. It is favourable for the bank to take all
the securities under its own custody.
• Joint Property:

• Joint property might be a source of loss in case of non- payment, so the bank should avoid it. So
the bank should obtain the consent of all owners in writing.

• Disputed Security:

• The bank should not accept any disputed property as security for loan. It means the rights of
ownership of security should be confirm and clear.

• Objective of Loan:

• Loan granted for productive purposes are more useful for the banker as compared to non-
productive loans.
• Amount of Loans:

• Instead of granting loan of huge amount, the bank should try to give small loans a large
number of people.

• Duration of Loan:

• Loan should be issued for a possible minimum duration. Long-term loans should be avoided.

• Source of Payment:

• The borrower should have a reasonable and adequate source for the payment of loan
otherwise recovery would be impossible.
• Moral Character:

• Personal character of the borrower should be considered. He should bear a good

moral character.

• Capability of Business:

• Borrower's capability of doing successful busines should be observed well by the

bank before granting the loan.

• Financial Position of Business:

• Financial position of the borrower's business would be a source of satisfaction for

the banker. So audited Balance Sheet should be demanded.
• Assets Already Accepted as Security:

• A bank should be very careful about the fact that the presented asset has not been
already accepted as security.

• Increase in Value:

• The value of security should be of increasing nature. This type of security is more
favourable.

• Insured Security:

• Merchandise, vehicles and building etc. should be insured if these are being kept as
security against certain loans.
• SPECIAL PRECAUTIONS FOR DIFFERENT CUSTOMERS

• Individual:

• A bank should take following points into consideration while advancing loans
to any individual for personal need (not for business).

• The bills of exchange of such individual should not be discounted due to

accommodation bill. the possibility of being

• The loan should not be issued on the basis of individual's income only because
the death of unemployment of such individual can be a hindrance for recovery
of loans.
• The security offered for loan should be properly checked or investigated.

• Sole Proprietorship:

• A bank should observe following precautions for vancing loan to the owner of sole trader
ship.

• The statements or accounts of few previous years should be analyzed or checked the
income and capability of business.

• The personal property of owner should be demanded as security due to his unlimited
liability.

• The assets offered, as security should be examined carefully.

• Partnership Business:

• The partnership business or firm is considered more suitable for the purpose of advancing
specially registered firm. Normally, the liability of partner in business is unlimited but the
bank should pay proper attention to the following point.

• The statements or accounts of few previous years should be analyzed check the income and
capability of business.

• The personal property of partners should be demanded as security due to their unlimited
liability.

• The assets offered, as security should be examined carefully.

• A bank should get the copies of partnership deed and registration certificate if the firm is
registered.
• Joint Stock Company:

• A joint stock company is formed under company's ordinance 1984 in Pakistan.

The government itself supervises the working of J.S.C. to secure the
investment of shareholders. A board of directors has special power to
administrate or run the operation of company. The following factors should be
taken into consideration while advancing loan to J.S.C.

• The articles of company should be examined to now g person who is

authorized to obtain loan on the basis e objective.
• The certificate of incorporation is necessary in case of new company.

• If the company is for limited liability then the undertaking of directors is

necessary to know their individual and joint liability.

• The assets offered, as security should be examined carefully.

• The bank should not grant loan to a company on the security of its own share
and debentures.