Commercial Bank Lending Products
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Questions and Answers

What is the typical repayment period for a working capital demand loan?

  • 6 months
  • 1 year
  • 1 month
  • 3 months (correct)

    • How many parties are involved in a letter of credit?

  • 2
  • 4 (correct)
  • 3
  • 5

    • What is the primary purpose of a letter of credit?

  • To guarantee payment to the supplier (correct)
  • To facilitate international trade
  • To ensure timely delivery of goods
  • To provide finance to the customer

    • What is the difference between a revocable and irrevocable letter of credit?

    <p>The ability to cancel or amend the terms</p> Signup and view all the answers

    What is the primary purpose of working capital loans provided by banks?

    <p>To meet the day-to-day running expenses of a business</p> Signup and view all the answers

    What is a guarantee in the context of banking?

    <p>A non-fund based facility that assumes responsibility for the customer's behavior</p> Signup and view all the answers

    What is the main feature of a term loan?

    <p>Fixed repayment period of 3-5 years</p> Signup and view all the answers

    What is the amount that can be borrowed at any point in time in a cash credit arrangement?

    <p>The lower of the sanctioned limit and the value of security less margin</p> Signup and view all the answers

    What is the difference between a clean and documentary letter of credit?

    <p>The presence of evidence of movement of goods</p> Signup and view all the answers

    What is the security offered by the customer in a cash credit arrangement?

    <p>Hypothecation or pledge of inventory and receivables</p> Signup and view all the answers

    What is the primary role of the advising bank in a letter of credit?

    <p>To inform the exporter about the letter of credit</p> Signup and view all the answers

    How is the value of finished goods determined as security in a cash credit arrangement?

    <p>At cost of production or list price, less trade discount and profit margin or market price, whichever is the lowest</p> Signup and view all the answers

    How is interest charged on a cash credit arrangement?

    <p>Only on the utilized portion</p> Signup and view all the answers

    What is the minimum amount that a borrower is required to maintain in a cash credit account?

    <p>The compensatory balance</p> Signup and view all the answers

    How is the value of stocks in process determined as security in a cash credit arrangement?

    <p>At cost price or market price, whichever is lower</p> Signup and view all the answers

    What is the purpose of long-term loans provided by banks?

    <p>To purchase fixed assets</p> Signup and view all the answers

    What is the primary purpose of a Term Loan?

    <p>Acquire block assets like land, building, and machinery</p> Signup and view all the answers

    Which type of loan operates against the security of inventory and accounts receivables?

    <p>Cash Credit account</p> Signup and view all the answers

    What is the primary advantage of Rupee Packing Credit (RPC) over Packing Credit Foreign Currency (PCFC)?

    <p>RPC allows the borrower to hedge the currency risk</p> Signup and view all the answers

    What happens when a bill is dishonoured under the bills purchased/discounted facility?

    <p>The amount due, including interest and other charges, is debited to the drawer's account</p> Signup and view all the answers

    What is the key difference between Pre-shipment and Post-shipment packing credit?

    <p>Pre-shipment finances production against a definite order, while Post-shipment lends against finished goods</p> Signup and view all the answers

    Which type of loan operates against the security of shares and securities, and sometimes even mortgage of fixed assets?

    <p>Overdraft arrangement</p> Signup and view all the answers

    What is the primary purpose of a Cash Credit account?

    <p>Provide short-term credit against inventory and accounts receivables</p> Signup and view all the answers

    What is the interest rate basis for Packing Credit Foreign Currency (PCFC)?

    <p>Based on the London Inter-bank Rate (LIBOR)</p> Signup and view all the answers

    Study Notes

    Commercial Bank Lending Products

    • Banks provide a significant portion of new funds raised by corporations.
    • Companies borrow from banks to purchase assets, repay debt, or meet working capital requirements.
    • Repayment of loans can come from business cash flow, asset sales, or new capital infusion.

    Fund-Based Credit Facilities

    • Cash credit allows borrowers to withdraw funds up to a predetermined limit, with security in the form of inventory.
    • Valuation of stocks is done based on cost price or market price, whichever is lower.
    • Interest is charged only on the utilized portion, with a service charge on the unutilized portion.
    • The borrower must maintain a minimum balance, known as a compensatory balance, in the cash credit account.

    Term Loans

    • Term loans are granted for periods between 3 to 5 years, depending on the unit's profit generation capacity.

    Working Capital Demand Loans

    • These are short-term loans with a minimum repayment period of 3 months, used to fund working capital requirements.

    Non-Fund Based Limits

    • Letter of Credit (L/C): a bank undertakes to pay a third party a predetermined amount by a given date, against presentation of stipulated documents.
    • Four parties are involved in an L/C: applicant, issuing bank, beneficiary, and advising bank.
    • Types of L/C: revocable, irrevocable, confirmed, clean, and documentary.
    • Guarantee: a non-fund based facility where the bank assumes responsibility for the customer's behavior.

    Other Facilities

    • Overdraft arrangement: similar to cash credit, but operates against the security of shares, securities, or fixed assets.
    • Packing credit: financing for exports, with options for pre-shipment or post-shipment credit.
    • Bills purchased/discounted: a banker purchases/discounts bills and credits the customer's account, deducting discounting charges.

    Important Terms

    • Hypothecation: the borrower's inventory and receivables are hypothecated to the bank in a cash credit arrangement.
    • Pledge: security offered by the customer in the form of shares, securities, or fixed assets.

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    Description

    This quiz covers the basics of commercial bank lending products, including credit worthiness evaluation and types of bank loans. Learn about the role of banks in providing short-term and long-term financing to corporations.

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