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Questions and Answers
What is the typical repayment period for a working capital demand loan?
How many parties are involved in a letter of credit?
What is the primary purpose of a letter of credit?
What is the difference between a revocable and irrevocable letter of credit?
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What is the primary purpose of working capital loans provided by banks?
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What is a guarantee in the context of banking?
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What is the main feature of a term loan?
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What is the amount that can be borrowed at any point in time in a cash credit arrangement?
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What is the difference between a clean and documentary letter of credit?
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What is the security offered by the customer in a cash credit arrangement?
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What is the primary role of the advising bank in a letter of credit?
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How is the value of finished goods determined as security in a cash credit arrangement?
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How is interest charged on a cash credit arrangement?
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What is the minimum amount that a borrower is required to maintain in a cash credit account?
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How is the value of stocks in process determined as security in a cash credit arrangement?
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What is the purpose of long-term loans provided by banks?
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What is the primary purpose of a Term Loan?
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Which type of loan operates against the security of inventory and accounts receivables?
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What is the primary advantage of Rupee Packing Credit (RPC) over Packing Credit Foreign Currency (PCFC)?
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What happens when a bill is dishonoured under the bills purchased/discounted facility?
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What is the key difference between Pre-shipment and Post-shipment packing credit?
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Which type of loan operates against the security of shares and securities, and sometimes even mortgage of fixed assets?
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What is the primary purpose of a Cash Credit account?
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What is the interest rate basis for Packing Credit Foreign Currency (PCFC)?
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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.
