Application Of Bank Funds
Bank Investment and Function
Bank Lending and Function
Types Of Bank Lending
Introduction Of Application Of
The application of is part of funds statement which
shows the various uses of bank funds.
Banks undertake a wide of activities, which play a
critical role in the economy of a country.
In addition they provide a smooth functioning
payment system that allows financial and real
resources to flow relatively freely to their highest
Banks are important source of funds for small
borrowers who often have limited access to other
sources of external finance.
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RBI require lenders to maintain a portion of their deposits
in liquid asset. These liquid asset can be cash, gold and
SLR ratio set by RBI based is monetary police
Current SLR Is 22% Decreased
It is the bank Invest in various capital market instrument
such as stock & bonds issued by govrment and public
company and mutual fund units
Function Of Bank Investment
There are three main objective of investment like
safety, growth and income.
Every investor with specific objectives in mind
and each investment has its own unique set of
benefits and risk.
Importance Function Of Investment;
4. Other Objectives
• Tax Exemption
The primary function of a bank receive
deposits and loans
The majority of funds are used for lending
The Lending accompanied by risk
Loans provide specific time period short term
loan but term loan i.e loans for more than a
The borrower may be give entire amount in
lump sum or installment
Loans Granted Against Of securities
Document Of Title
Principles Of Bank Lending Policy
Character Of The Borrower
Object Of Loan
Types Of Lending
Fund Based Lending
Non Fund Based Lending
Asset Based Lending
Fund Base Lending
On the basis of fund based lending bank
commits the physical outflow of funds.
Fund position of the lending bank get
Types Of Fund Based Lending;
Purchase of bill of exchange
• A loan is a kind of advance made with or without
• It is given for a fixed period at an agreed rate of
• Repayment may be installment or at expiry of certain
• Loan may be demand loan or a term loan
• Demand loan is payable on demand, it is short term
loan to meet the working capital requirement of
• Term loan is medium and long term loan.
• Medium term loan repayable within 1 to 5 years.
• Long term loan repayable after 5 years.
• It is popular method bank lending in India.
• Under the cash credit system a limit called the credit
limit is specified by the bank.
• A borrower is entitled to borrow the up to the limit, it is
granted against security of tangible and guarantee.
• The borrower can withdraw money any number of time
up to the limit.
• Bank charge the interest on the actual amount
withdrawn and period of such amount is withdrawn.
• The cash credit facility is granted against the pledge or
hypothecation of stock or marketable instrument ,or
• Cash credit is most favorable mode of borrowing by
commercial and industrial enterprise in India.
The bank allow the customers to overdraw its
current deposit account within a specific limit.
Interest is charged only on the amount of drawn
and not on the whole amount sanctioned.
The bank obtain written request from the customer
He should also settle the terms and condition and
rate of interest chargeable.
It is usual to obtain a promissory note from the
customer to cover the overdraft.
Bills Purchase and Discounted
Discounting bills refers to an act of selling of a bill
to obtain payment for before its maturity.
The bank provides the customer with facility of
purchasing their bills receivables.
The bank permit the customer to discount his bills
receivables and have value of the bills credited to
The bank charges discounting charges on the face
value of the bills
The bill of exchange time may be 3 to 6 months
Non-Fund Based Lending
The lending bank does not commit any physical
outflow of funds
The non fund based lending can be made by the
banks in two forms.
Letter Of Credit(Domestic& Foreign)
A bank guarantee is a promise from a bank or other
lending institution that if a particular borrower defaults on
a loan, the bank will cover the loss. Note that a bank
guarantee is not the same as a letter of credit.
How it works/Example:
Let's assume Company XYZ is a small, relatively
unknown restaurant company that would like to purchase
$3 million of kitchen equipment.
The equipment vendor may require Company XYZ to
provide a bank guarantee in order to feel more confident
that it will receive payment for the equipment it ships to
To obtain this bank guarantee, Company XYZ
requests one from its preferred lender (usually
the bank with which it keeps
its cash accounts). The lender provides
the guarantee in writing, which is then passed
on to Company XYZ and its vendor. Company
XYZ's lender essentially becomes a co-signer
on the purchase contract with the vendor
Letter Of Credit(Domestic&Foreign)
A letter of credit is a written undertaking issued by the
buyer(opener) bank(opening bank) to the seller
(beneficiary) to reimburse the cost of goods and services
supplied to the buyer against production document
stipulated therein within a specific time, at a specific place
and up to the specific amount to a specified bank
(reimbursing bank) provided the documents submitted are
in strict conformity with the term and condition of LC
Buyer , seller and issuing banks are in the same
country, such credit are domestic LC
In the foreign LC the buyer will be in one country, the
seller will be in another country and the amount will be
denominated in a foreign currency, i.e., either in the
seller currency or a third country ..currency
Asset Based Lending
"asset-based lending" and "asset financing"
refer to the same thing. Asset-based lending
generally refers to a business using its assets
as collateral for a loan. If the loan is not repaid
and falls into default, the lender may seize and
sell the collateral to pay off the loan amount.
Defined by the International Project Finance
Association (IPFA) as the following:
The financing of long-term infrastructure,
industrial projects and public services based upon a
non-recourse or limited recourse financial structure
where project debt and equity used to finance the
project are paid back from the cash flow generated
by the project.
Securitization means the conversion of existing or future
cash in-flows of a person into tradable security Which then
may be sold in the market.
The cash in-flow from financial assets such as mortgage
loans ,automobiles loans, trade receivables , fare collection
become the security against which borrowing raised.
According to Oxford Dictionary, “Securitization means to
convert an asset (specifically loan) into marketable securities
for the purpose of raising cash or funds”.
Thus the process of securitization involves pooling of
asset and selling these to investors through a specialized
intermediary created for the purpose. .
Examples Of Securitization Debt,
City Bank carved out car loan portfolios to ICICI Bank
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