Month: June 2017

I have got a call from a lady “Sir I am calling from **** bank, we are providing personal loan…” and I disconnected the call.

Frankly speaking, today’s marketing gimmick of agents have made various loans very popular. Still I think there is good scope to discuss about various credit facilities provided by banks.

We can bifurcate loans into simply two parts (a) Secured Loans (b) Unsecured Loans. Today let us only focus on loans / credit facilities available for businesses. Loans provided to retail customers will be discussed later.

1. Term Loan:

These loans are specifically provided to buy fixed assets for businesses like plants, properties, equipments, machinery, furniture, fixtures etc. this loans are secured loans against assets being created through such loan. Generally as per current market practice and depending upon financial strength of the borrower, in India margin of 25-40% is called from entrepreneurs and rest is funded by banks.

2. Working Capital Limits:

These are basically limits sanctioned by banks to businesses. Businesses are charged interest, when they use the limit to the extent of use of credit. These limits are secured against current assets of the business. Many times, these limits are referred as Cash Credit or Over Draft, but they are not the same. Sanction of such limits depends upon working capital cycle, current asset position, liquidity of the business and of course financial strength of the business. Banks have their own criteria, how much to sanction to a particular business.

3. Project Loan:

These are basically loans provided to a particular project of an entrepreneur. Depending upon the nature of the project, green field, brown field, white field etc. as well as industry, sector, financial strength of the promoters, past experience of the promoters and such other risks involved in the project, banks appraise the project and decide the margin requirements, payment tenure as well as rate of interest. These loans are many times mixure of term loans + working capital limits + letters of credit + bills discounting etc.

4. Letter of Credit:

Mainly used by businesses involved in export / import businesses. LC is issued by banker of the customer for release to the banker of the supplier once certain pre-agreed conditions are met by the supplier. Banker of the supplier in effect credits the sum to the account of the supplier. Banks do charge commission and interest depending upon the situation on providing such facilities. We will talk more about LCs in some other article, as it requires some more focus.

5. Bill discounting:

Bills / promissory notes of customers / bankers of the customers are accepted by banks and the same are paid before due date to the businessmen. This credit facility involves discounted payment release and the same may be as an interest.

6. Infrastructure Finance:

In India, our infrastructure requirements are massive. Banks have a big role to play in this sector. These loans are generally long tenured loans. All these loans are secured loans. Many times, sponsors / govt. / public authorities stand guarantee to these loans. Infrastructure finance itself is a large topic of study research and discussion, which may require detailed focus in separate article.

8. Foreign Currency Loans:

Many businesses, subject to RBI guidelines are eligible to obtain foreign currency loans from banks. Banks lend the customer in foreign currency. Many of these loans are used specifically by exporters and can prove to be cheaper than rupee loans, since many developed nations have lower interest rate regime.

7. Other credit facilities:

Many other credit facilities are provided by banks to businesses like overdraft, FDOD, drop line credit, packing credit, bridge loans etc.

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– Tejas Patel