TYPE OF BANK ADVANCES

1
T.Z.A.S.P MANDAL’S
PRAGATI COLLEGE OF ARTS & COMMERCE,
DOMBIVALI (E)
A PROJECT ON
“TYPE OF BANK ADVANCES”
In the Subject Advance Financial Management
SUBMITTED TO
UNIVERSITY OF MUMBAI
For Semester – IV of
Master of Commerce
By
MISS. SAYALI SUBHASH MAHAJAN
ROLL NO. 17
UNDER THE GUIDANCE OF
Prof. Deven A. Kariya
YEAR 2016 – 2017

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DOMBIVALI (E)
This is certify that Miss. SayaliS. Mahajan of M.com, Semester
IV (2016–2017) has successful completed the project on “Type of
Bank Advances” under the guidance of Prof. Deven A. Kariya.
Course Coordinators Principal
Internal Examiner External
Examiner

3
DOMBIVALI (E)
RE-ACCREDITED BY NAAC WITH ‘B+’ GRADE
DECLARATION BY THE STUDENT
I, Miss. SayaliSubhashMahajan student of M.Com Part –
2, Roll Number – 17, hereby declare that the project for the Paper
“Advance Financial Management” titled “Type of Bank
Advances” submitted by me for Semester – IV during the academic
year 2016-2017, is based on actual work carried out by me under
the guidance and supervision of Prof. Deven A. Kariya.
I further state that this work is original & not submitted
anywhere else for any examination.
Signature of the Student
MAHAJAN SAYALI SUBHASH

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DOMBIVALI (E)
RE-ACCREDITED BY NAAC WITH ‘B+’ GRADE
EVALUATION CERTIFICATE
This is certifying the undersigned have accessed and
evaluate the project on “Type of Bank Advances” submitted by
Miss. Sayali Subhash Mahajan student of M.Com Part – 2.
This project is original to the best of our knowledge and has been
accepted for Internal Assessment.
Internal Examiner External Examiner Principal
Prof. Deven A. Kariya Dr.
A.P.Mahajan

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DOMBIVALI (E)
Internal Assessment: Project 40 Marks
Name ofthe Student Class Division RollNo.
FirstName :Sayali
Father’sName :Subhash
SirName :Mahajan
M.com
(Part 2)
Sem.IV
- 17
Subject :Advance Finance Management
Topic for the Project:
“TYPE OF BANK ADVANCES”
DOCUMENTATION Marks
Awarded
Signature
Internal Examiner
(Outof10)
ExternalExaminer
(Outof10)
Presentation
(Outof10)
Viva& Interaction
(Outof10)
TotalMarks (Outof40)

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ACKNOWLEDGEMENT
At the Outset, I would like to Thanks Al mighty GOD
for this shower of blessings. The desire of completing this
dissertation was given by mu guide Prof. Deven A. Kariya. I am
very much thankful to him for the guidance, support and for
sparing his precious time from a busy and hectic schedule.
I am thankful to Dr. A. P. Mahajan, Principal of Pragati
College of Arts & Commerce. My Sincere thanks to our Co-
ordinator Prof. Deven A. Kariya who always motivated
me and provided a helping hand for conceiving higher education.
I would fail in my duty if I don’t thank my parents who
are pillars of my life and my friends who have always supported
and motivated me. Finally, I would express my gratitude to all
those persons who directly and indirectly helped me in completing
my dissertation.
MAHAJAN SAYALI SUBHASH

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Index
SerialNo. Particular Page No.
Chapter1 INTRODUCTION
1.1 Introduction 1
1.2 ObjectiveofFinancialManagement 2
1.3 Importance ofFinancialManagement 5
Chapter2 INTRODUCTION OFBANK
2.1 Introduction 7
Chapter3 TYPESOFBANKADVANCES
3.1 Introduction 15
3.2 Objective 17
3.3 Types ofbank advances 17
3.4 AccountingDeposits 25
Chapter4 OBJECTIVE& LIMITATION 29
Chapter5 CONCLUSION 30
Chapter6 BIGLIOGRAPHY 31

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CHAPTER – 1
INTRODUCTION OF FINANCIAL MANAGEMENT
1.1 Introduction
Finance is called “The science of money”. It studies the principles and the methods of
obtaining control of money from those who have saved it, and of administering it by
those into whose control it passes. Finance is a branch of economics till 1890. Economics
is defined as study of the efficient use of scarce resources. The decisions made by
business firm in production, marketing, finance and personnel matters form the subject
matters of economics. Finance is the process of conversion of accumulated funds to
productive use. It is so intermingled with other economic forces that there is difficulty in
appreciating the role of it plays.
Howard and Uptron in his book introduction to Business Finance defined, “as that
administrative area or set of administrative function in an organization which relate with
the arrangement of cash and credit so that the organization may have the means to carry
out its objectives as satisfactorily as possible”. In simple terms finance is defined as the
activity concerned with the planning, raising, controlling and administering of the funds
used in the business. Thus, finance is the activity concerned with the raising and
administering of funds used in business.
Financial Management is managerial activity which is concerned with the planning and
controlling of the firm’s financial resources. Howard and Uptron define Financial
Management “as an application of general managerial principles to the area of financial
decision-making”. Weston and Brighem define Financial Management “as an area of
financial decision making, harmonizing individual motives and enterprise goal”.
ManagWeston and Brighem define Financial Management “as an area of financial
decision making, harmonizing individual motives and enterprise goal”. Howard and

9
Uptron define Financial Management “as an application of general managerial principles
to the area of financial decision-making”. Weston and Brighem define Financial
Management “as an area of financial decision making, harmonizing individual motives
and enterprise goal”. Howard and Uptron define Financial Management “as an
application of general managerial principles to the area of financial decision-making”.
Weston and Brighem define Financial Management “as an area of financial decision
making, harmonizing individual motives and enterprise goal”.
1.2 Objectives of Financial Management
Efficient financial management requires the existence of some objectives or goals
because judgment as to whether or not a financial decision is efficient must be made in
the light of some objective. Although various objectives are possible but we assume two
objectives of financial management for elaborate discussion. These are:
1. Profit Maximisation:
It has traditionally been argued that the primary objective of a company is to earn profit;
hence the objective of financial management is also profit maximization. This implies
that the finance manager has to make his decisions in a manner so that the profits of the
concern are maximized. Each alternative, therefore, is to be seen as to whether or not it
gives maximum profit.
However, profit maximization cannot be the sole objective of a company. It is at best a
limited objective. If profit is given undue importance, a number of problems can arise.
Some of these have been discussed below:
I. The term profit is vague. It does not clarify what exactly it means. It conveys a
different meaning to different people. For example, profit may be in short term or
long term period; it may be total profit or rate of profit etc.
II. Profit maximization has to be attempted with a realization of risks involved.
There is a direct relationship between risk and profit. Many risky propositions
yield high profit. Higher the risk, higher is the possibility of profits. If profit
maximization is the only goal, then risk factor is altogether ignored. This implies

10
that finance manager will accept highly risky proposals also, if they give high
profits. In practice, however, risk is very important consideration and has to be
balanced with the profit objective.
III. Profit maximization as an objective does not take into account the time pattern of
returns. Proposal A may give a higher amount of profits as compared to proposal
B, yet if the returns of proposal A begin to flow say 10 years later, proposal B
may be preferred which may have lower overall profit but the returns flow is more
early and quick.
IV. Profit maximization as an objective is too narrow. It fails to take into account the
social considerations as also the obligations to various interests of workers,
consumers, society, as well as ethical trade practices. If these factors are ignored,
a company cannot survive for long. Profit maximization at the cost of social and
moral obligations is a short sighted policy.
2. Wealth / Value Maximisation: -
We will first like to define what are Wealth / Value Maximization Model. The
shareholder value maximization model holds that the primary goal of the firm is to
maximize its market value and implies that business decisions should seek to increase the
net present value of the economic profits of the firm. Thus, it can be observed that the
value/wealth maximization decision takes into consideration time value of money and
uncertainty of risk. People buy the shares of a company as an investment withan
expectation to gain from increase in wealth of the company. It means that they expect
these shares to give them some returns. It is the duty of the finance manager to see that
the shareholders get good returns on the shares. Hence, the value of the share should
increase in the share market.
The share value is affected by many things. If a company is able to make good sales and
build a good name for itself, in the industry, the company’s share value goes up. If the
company makes a risky investment, people may lose confidence in the company and the

11
share value will come down. So, this means that the finance manager has the power to
influence decisions regarding finances of the company. The decisions should be such that
the share value does not decrease. Thus, wealth or value maximization is the most
important goal of financial management.
How do we measure the value/wealth of a firm?
According to Van Horne, “Value of a firm is represented by the market price of the
company's common stock. The market price of a firm's stock represents the focal
judgment of all market participants as to what the value of the particular firm is. It takes
into account present and prospective future earnings per share, the timing and risk of
these earnings, the dividend policy of the firm and many other factors that bear upon the
market price of the stock. The market price serves as a performance index or report card
of the firm's progress. It indicates how well management is doing on behalf of
stockholders.”
 Arguments in favour of Wealth Maximization:
(i) Due to wealth maximization, the short term money lenders get their payments in time.
(ii) The long time lenders to get a fixed rate of interest on their investments.
(iii) The employees share in the wealth gets increased.
(iv) The various resources are put to economical and efficient use.
 Argument against Wealth Maximization:
(i) It is socially undesirable.
(ii) It is not a descriptive idea.
(iii) Only stock holder’s wealth maximization does not lead to firm’s wealth
maximization.
(iv) The objective of wealth maximization is endangered when ownership and
management are separated.

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1.3 Importance of Financial Management
Importance of Financial Management cannot be over-emphasized. It is, indeed, the key to
successful business operations. Without proper administration of finance, no business
enterprise can reach its full potentials for growth and success. Money is to an enterprise,
what oil is to an engine. Financial management is all about planning investment, funding
the investment, monitoring expenses against budget and managing gains from the
investments. Financial management means management of all matters related to an
organization’s finances.
The best way to demonstrate the importance of good financial management is to describe
some of the tasks that it involves:-
 Taking care not to over-invest in fixed assets
 Balancing cash-outflow with cash-inflows
 Ensuring that there is a sufficient level of short-term working capital
 Setting sales revenue targets that will deliver growth
 Increasing gross profit by setting the correct pricing for products or services
 Controlling the level of general and administrative expenses by finding more cost-
efficient ways of running the day-to-day business operations, and
 Tax planning that will minimize the taxes a business has to pay.
Let us understand this better by taking an example of a company, Cotton Textiles
Limited. The company earns money by selling textiles. Let us assume that it earns ` 10
Lakhs every month. This is known as revenue. A company has many expenses. Some of
the major expenses of the company can be listed as wages to workers, raw materials for
making the textile, electricity and water bills and purchase and repair of machines that are
used to manufacture the textile. All these expenses are paid out of the revenues. If the
revenues are more than the expenses, then the company will make profit. But, if the
expenses are more than revenues, then it will face losses. If it continues like that,
eventually, it will lose all its assets. In other words it will lose its property and all that it
owns. In that case, even the workers may be asked to leave the company. To avoid this
situation, the company has to manage the cash inflows (cash coming into the company)

13
and outflows (various expenses that the company has to meet). This is one of the tasks
within the ambit of Financial Management.

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CHAPTER – 2
INTRODUCTION OF BANK
2.1 Introduction :
This project is to view the task perform by an auditor while conducting the audit of bank
deposit and loans & advances. It explains the role played by different types of auditor,
effect of Non-Performing Asset on the asset of a bank. The auditor needs to be
familiarizing with the direction of RBI affecting the sanctioning and disbursement of
advances. The auditor has to ensure that documents are executed as per the terms of
sanction. The auditor examine the procedure for review of advances laid down by the
authorities bas been complied with or not. Basel II Recommendations affecting the
capital adequacy norms advocated by the year, which perhaps is the beneficial fall-out
from the tightening of the prudential norms. The auditing not only provide true and fair
value but it also helps us to financial position and internal control system of a bank.
.
It is well known that Banking is such a unique industry that persons from all walks of
involved with Banks in any relation whether as an operational banker, trainer, auditor or
even a support service person such as a security printer and even a hardware and software
supplier make Banking their only sphere of activity for their full life in the constant
endeavor to master in their for this Industry. In India various types of audit are normally

15
carried out in banking companies such audit are statutory audit, revenue/income
expenditure audit, concurrent audit, computer and system audit etc. the above audit is
mainly conducted by the banks own staff or external auditors.
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also
nonbanking institutions that provide certain banking services without meeting the legal
definition of a bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash
management services for customers, reporting the transactions of their accounts and
portfolios, throughout the day. The banking system in India should not only be hassle free
but it should be able to meet the new challenges posed by the technology and any other
external and internal factors. For the past three decades, India’s banking system has
several outstanding achievements to its credit. The Banks are the main participants of the
financial system in India. The Banking sector offers several facilities and opportunities to
their customers. All the banks safeguards the money and valuables and provide loans,
credit, and payment services, such as checking accounts, money orders, and cashier’s
cheques. Banking Sector plays a vital role in the economic development of a nation.
Banking sector perform a variety of function and they are the main source of credit, the
main input for trade and business activity. Credit created by commercial banks is a major
component of money supply in a modern economy. The banks also offer investment and
insurance products. As a variety of models for cooperation and integration among finance
industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks
continue to maintain and perform their primary role—accepting deposits and lending
funds from these deposits.
A Banking sector is a profit seeking organization dealing in money. It is a financial
institution dealing with other people money. It accepts deposits from the public and

16
provides loans and advances. It charges lower rate of interest for the deposits. The
difference between the two is the profit earned by the bank.
Before the establishment of banks, the financial activities were handled by money lenders
and individuals. At that time the interest rates were very high. Again there were no
security of public savings and no uniformity regarding loans. So as to overcome such
problems the organized banking sector was established, which was fully regulated by the
government. The organized banking sector works within the financial system to provide
loans, accept deposits and provide other services to their customers. The following
functions of the bank explain the need of the bank and its importance:
• To provide the security to the savings of customers.
• To control the supply of money and credit.
• To encourage public confidence in the working of the financial system, increase
savings speedily and efficiently.
• To avoid focus of financial powers in the hands of a few individuals and institutions.
• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types
of customers.
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also
nonbanking institutions that provide certain banking services without meeting the legal
definition of a bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers cash
management services for customers, reporting the transactions of their accounts and
portfolios, throughout the day. The banking system in India should not only be hassle free
but it should be able to meet the new challenges posed by the technology and any other
external and internal factors. For the past three decades, India’s banking system has

17
several outstanding achievements to its credit. The Banks are the main participants of the
financial system in India. The Banking sector offers several facilities and opportunities to
their customers. All the banks safeguards the money and valuables and provide loans,
credit, and payment services, such as checking accounts, money orders, and cashier’s
cheques. Banking Sector plays a vital role in the economic development of a nation.
Banking sector perform a variety of function and they are the main source of credit, the
main input for trade and business activity. Credit created by commercial banks is a major
component of money supply in a modern economy. The banks also offer investment and
insurance products. As a variety of models for cooperation and integration among finance
industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks
continue to maintain and perform their primary role—accepting deposits and lending
funds from these deposits.
A Banking sector is a profit seeking organization dealing in money. It is a financial
institution dealing with other people money. It accepts deposits from the public and
provides loans and advances. It charges lower rate of interest for the deposits. The
difference between the two is the profit earned by the bank.
Before the establishment of banks, the financial activities were handled by money lenders
and individuals. At that time the interest rates were very high. Again there were no
security of public savings and no uniformity regarding loans. So as to overcome such
problems the organized banking sector was established, which was fully regulated by the
government. The organized banking sector works within the financial system to provide
loans, accept deposits and provide other services to their customers. The following
functions of the bank explain the need of the bank and its importance:
• To provide the security to the savings of customers.
• To control the supply of money and credit.
• To encourage public confidence in the working of the financial system, increase
savings speedily and efficiently.

18
• To avoid focus of financial powers in the hands of a few individuals and institutions.
• To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types
of customers.
However, the rules and the regulation relating to the conduct of various types of audit or
inspection differ from a bank to bank except the statutory audit for which the RBI
guidelines is applicable for that. In this project I give more important on the concurrent
and computer audit and its internal controls in the banks today’s scenario. Today audit is
form in the various organizations it is basically form for investor because investor
investing decision is depend on that particular concept if auditor has expressing his view
about particular organization is true and fair that investor has get idea about how much
should invest in particular securities or not. In public sector banks multiple firms
including central auditors and branch auditors generally conduct the audit. In case of
private sector banks and foreign banks, a single firm due to centralized database conducts
the audit. Consequently, the responsibilities of auditors in such banks are much wide.
1.2 TYPES OF AUDITS:
It is well known that no any day of the year, there will be at least one auditor working in
the bank branch. The following are the popular types of audits conducted in a bank
branch. The titles may be modified in some banks especially for Internal Audit and
system Audit but the content remains the same.
I. Statutory Audit:
This is an annual audit determined by statute and done normally at the end of the
financial year while some of the larger branches are similarly audited half yearly. A
bank’s statutory audit is essentially a balance sheet audit including the Long Audit Report
though there is no scope restriction of the statutory auditor to perform certain actions of
other auditors as part of his duty or if some findings lead him into the domain of the

19
auditors such as Revenue, inspector and even concurrent. The statutory auditor performs
the following functions.
Verifies the classification of items of the Balance Sheet to assure their correct placement
Basel II accord, which has influenced the prudential norms, has included the statutory
auditor as an active member to assure the proper execution of the prevailing prudential
norms. The direct result of an accurate classification is the appropriateness of income
recognition and thus the effect on the profitability of the Bank.
II. Concurrent Audit:
In the beginning of the 1990’s, the Great Banking Scam or the Harshad Mehta Scam
rocked the nation. This brought into limelight special category of audit called concurrent
audit or continuous audit. This stemmed from the need of filling in the gap between the
annual statutory audits and the intervening period between two inspections, which is a
period sufficiently large to cause damage to the Bank. Now, RBI who insisted that at
least 50% of the business of the Bank should be covered under concurrent controlled the
spotlight of the concurrent audit. While some Banks covered very large branches under
the umbrella of concurrent audit. Some banks took the excurse for improvement by
including weak branches though having low volume of business. Concurrent audit in one
sentence will mean checking yesterday’s transactions today. Let us see the broad areas
covered by the Concurrent Auditor.
A. Revenue Aspects:
1. Interest earned and service charges earned by the Bank
2. Interest Paid
3. All charges paid like cancellation charges, compensation under Court Directive
etc.

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B. Expenditure:
1. Salary payments
2. Branch expenses like printing and stationary, temporary employees etc.
3. Rent of premises etc.
C. Documentation and other aspects of advances department:
1. Documentation correctness of ALL new advances granted during the period
2. Validity of all old advances to ensure that they are not time barred.
3. Currency of insurance cover of stock machinery etc.
4. Whether the inspections of units and stock have been carried out at the pre-set
intervals.
D. Administrative and other aspects:
1. Correctness of attendance and leave records
2. Cash Department working including security aspects with periodic surprise
inspection by the auditor
3. Stock check at regular intervals of all security documents like Blank cheque
books, Demand Drafts, Pay orders, Pass Books etc.
III. RBI Audit:
The Central Bank of the country also sends its own auditors to the Banks for their own
inspection. Their actions cannot be covered in this project because it is more of a
supervisory implementation of a Government Policy existing from time to time. The
primary aim of this audit is as follows.
Overall assessment of the assets and liabilities of the Bank, whether its financial position
is satisfactory, whether it is in position to pay its depositors in full as and when their

21
claims accure, and in the event of loss, whether it has sufficient cushion of owned funds
to safeguard the interests of depositors.
Soundness of Bank’s policies and procedures and effectiveness of the management to
safeguard point No.1 mentioned above as also whether they are on approved lines and in
conformity with socio-economic objectives.
Principal Enactments Governing Bank Audit:
♦ Banking Regulation Act, 1949
♦ State Bank of India Act, 1955
♦ Companies Act, 1956
♦ State Bank of India (Subsidiary Banks) Act, 1959
♦ Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
♦ Regional Rural Banks Act, 1976
♦ Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
♦ Information Technology Act, 2000
♦ Prevention of Money Laundering Act, 2002
♦ Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
♦ Credit Information Companies Regulation Act, 2005
♦ Payment and Settlement Systems Act, 2007

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CHAPTER - 3
TYPE OF BANK ADVANCES
3.1 Introduction :
In the previous lesson you have learnt the meaning and types of deposit accounts
including the procedure of opening and operating bank accounts. We have seen that the
commercial banks accept deposits and also lend money to the people who require it for
various purposes. Lending of funds to traders, businessmen and industrial enterprises is
one of the important activities of commercial banks. The major part of the deposits
received by banks is lent out, and a large part of their income is earned from interest on
such lending. There is a considerable difference between the rate of interest which the
commercial bank grants on deposits, and the rate they charge on loans and advances. It is
this difference which constitutes the main source of bank earnings. Operation and
expansion of business and commercial activities depend a great deal on the availability of
loans/advances from commercial banks. In this lesson, you will learn about the procedure
of getting loans and advance, cash credits, overdrafts, etc from the commercial banks.
(A) TYPES OF ADVANCES:
1. Overdraft ™
2. Cash Credit
3. Term Loan
4. Project Finance
5. Bills Purchased ™
6. Bills Discounted
7. Bank Guarantee
8. Letter of Credit
9. Packing Credit ™
10. Debit/ Credit Cards
11. More such types are mentioned under schedule 9 of Banking Regulation Act.

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(B) PROCESS OF ADVANCES: ™
1. Proposal ™
2. Verification ™
3. Sanction ™
4. Documentation ™
5. Disbursement ™
6. Monitoring ™
7. Review ™
8. Renewal ™
9. Supervision ™
10. Follow up ™
11. End user
(C) COMMON AREAS OF CHECKING IN CASE OF ALL ADVANCES: ™
1. Documentation ™
2. Operations ™
3. Security ™
4. Authority ™
5. Financial viability ™
6. WC calculation ™
7. Branch Managers powers ™
8. In case of security, check whether it is legally enforceable ™
9. In control of the bank ™
10. Recently inspected ™
11. Realistic valuation to cover the value of advances.
(D)COMMON DOCUMENTATION: ™
1. Application Form – Pre sanction Scrutiny & Appraisal Visit ™
2. Demand Promissory Note ™
3. General Lien and set off ™
4. Deed of Hypothecation/ Pledge ™

24
5. Deed of Guarantee ™
6. Audit Financial Statements/ I.T. Return for last three years – Full Details – All
schedules - All Assets ™
7. Resolution in case of Companies/ Partnership Deed Demand licenses or
registration certificates etc. as applicable under any other laws.
(E) OPERATIONAL CHECKS:
Valuation of securities – Diversion of Funds – End use – Existence of Account with other
Banks – Non-review – Nonrenewal.
3.2 Objective :
1. enlist the utility of granting loans and advances by commercial banks;
2. differentiate borrowing rates from lending rates;
3. enumerate the ways of lending money;
4. distinguish between long-term and short-term loans;
5. point out the nature of security provided for loans;
6. outline the procedure for grant of cash credit, overdraft and discounting of bills of
exchange.
3.3 Types of Bank Advances :
(1) Cash Credit :
Cash credit is a flexible system of lending under which the borrower has the option to
withdraw the funds as and when required and to the extent of his needs. Under this
arrangement the banker specifies a limit of loan for the customer (known as cash credit
limit) up to which the customer is allowed to draw. The cash credit limit is based on the
borrower’s need and as agreed with the bank. Against the limit of cash credit, the

25
borrower is permitted to withdraw as and when he needs money subject to the limit
sanctioned. It is normally sanctioned for a period of one year and secured by the security
of some tangible assets or personal guarantee. If the account is running satisfactorily, the
limit of cash credit may be renewed by the bank at the end of year. The interest is
calculated and charged to the customer’s account. Cash credit, is one of the types of bank
lending against security by way of pledge or / hypothecation of goods. ‘Pledge’ means
bailment of goods as security for payment of debt. Its primary purpose is to put the goods
pledged in the possession of the lender. It ensures recovery of loan in case of failure of
the borrower to repay the borrowed amount. In ‘Hypothetication’, goods remain in the
possession of the borrower, who binds himself under the agreement to give possession of
goods to the banker whenever the banker requires him to do so. So hypothetication is a
device to create a charge over the asset under circumstances in which transfer of
possession is either inconvenient or impracticable.
Important Terms of Cash Credit
 Facility provided for working capital requirement.
 Repayable on demand.
 Facility provided against security of stock of goods, standing crops, bills / book
debts representing genuine sales.
 Most common form of collateral security are immovable properties, movable
fixed assets, deposits receipts etc.
(2) Overdraft :
Overdraft facility is more or less similar to ‘cash credit’ facility. Overdraft facility is the
result of an agreement with the bank by which a current account holder is allowed to
draw over and above the credit balance in his/her account. It is a short-period facility.
This facility is made available to current account holders who operate their account
through cheques. The customer is permitted to withdraw the amount of overdraft allowed
as and when he/she needs it and to repay it through deposits in the account as and when it

26
is convenient to him/her. Overdraft facility is generally granted by a bank on the basis of
a written request by the customer. Sometimes the bank also insists on either a promissory
note from the borrower or personal security of the borrower to ensure safety of amount
withdrawn by the customer. The interest rate on overdraft is higher than is charged on
loan. The following are some of the benefits of cash credits and overdraft :-
(i) Cash credit and overdraft allow flexibility of borrowing, which depends upon the
need of the borrower.
(ii) There is no necessity of providing security and documentation again and again for
borrowing funds.
(iii)This mode of borrowing is simple and elastic and meets the short term financial needs
of the business.
Important Terms of Overdraft
 Overdraft facility is granted to Current Account holders.
 No repayment schedule.
 Secured or Clean
(3) Discounting of Bills
Apart from sanctioning loans and advances, discounting of bills of exchange by bank is
another way of making funds available to the customers. Bills of exchange are negotiable
instruments which enable debtors to discharge their obligations to the creditors. Such
Bills of exchange arise out of commercial transactions both in inland trade and foreign
trade. When the seller of goods has to realise his dues from the buyer at a distant place
immediately or after the lapse of the agreed period of time, the bill of exchange facilitates
this task with the help of the banking institution. Banks invest a good percentage of their
funds in discounting bills of exchange. These bills may be payable on demand or after a
stated period. In discounting a bill, the bank pays the amount to the customer in advance,
i.e. before the due date. For this purpose, the bank charges discount on the bill at a
specified rate. The bill so discounted , is retained by the bank till its due date and is

27
presented to the drawee on the date of maturity. In case the bill is dishonoured on due
date the amount due on bill together with interest and other charges is debited by the bank
to the customers account.
An accepted draft or bill of exchange sold for early payment to a bank or credit institution
at less than face value after the bank deducts fees and applicable interest charges. The
bank or credit institution then collects full value on the draft or bill of exchange when
payment comes due.
There are bills drawn on sight basis. ... There are also bills drawn with a credit period
(usance) which are payable after the credit period. Bank lending against such receivables
is called discounting. The banks deduct the interest for the credit period and release the
balance, that is they discount the bill.
(4) Long-term and Short-term Loans
Commercial banks grant loans for different periods-long, short and medium term for
different purposes.
(i) Short-term loans :
Short term loans are granted by banks to meet the working capital needs of business. The
working capital needs refer to financial needs for such purposes as, purchase of raw
materials, payment of wages, electricity bill, taxes etc. Such loans are granted by banks to
its borrowers to be repaid within a short period of time not exceeding 15 months. Short
term loans are normally granted against the security of tangible assets like goods in stock,
shares, debentures, etc. The rate of interest charged on short term loans ranges from 12%
to 18% p.a.

28
(ii) Term Loans :
Medium and long term loans are generally known as ‘term loans’. These loans are
granted for more than 15 months. In case of medium term loan, the period ranges from 15
months to less than 5 years. Medium term loans are generally granted for heavy repairs,
expansion of existing units, modernisation/renovation etc. Such loans are sanctioned
against the security of immovable assets. The normal rate of interest ranges between 12%
to 18% depending upon the period, purpose, nature and amount of the loan. Though
banks may grant long term loans, they avoid granting loan for more than 5 years.
(5) Nature and Security of Loans
To ensure the safety of funds lent, the first and most important factor considered by a
bank is the capacity of borrowers to repay the amount of loan, The bank therefore, relies
primarily on the character, capacity and financial soundness of the borrower. But the
bank can hardly afford to take any risk in this regard and hence it also has the security of
tangible assets owned by the borrower. In case the borrower fails to repay the loan, the
bank can recover the amount by attaching the assets. It can sell the assets offered as
security and realize the amount. Thus from the view point of security of loans, we can
devide the loans into two categories: (a) secured, and (b) unsecured. Unsecured loans are
those loans which are not covered by the security of tangible assets. Such loans are
granted to firms/institutions against the personal security of the owner, manager or
director. On the other hand, Secured loans are those which are granted against the
security of tangible assets, like stock in trade and immovable property. Thus, while
granting loan against the security of some assets, a charge is created over the assets of the
borrower in favour of the bank. This enables the bank to recover the dues from the
customer out of the sale proceeds of the assets in case the borrower fails to repay the
loan. There are various types of securities which may be offered against loans granted,
but all of those are not acceptable to the banks. The types of securities generally accepted
by the bank are the following:

29
 Tangible assets such as plant and machinery, motor-van, etc.
 Documents of title to goods, like Railway Receipt (R/R), Bills of exchange, etc.
 Financial Securities (Shares and Debentures)
 Life-Insurance Policy
 Real estates (Land, building, etc).
 Fixed Deposit Receipt (FDR)
 Gold ornaments, Jewellery etc.
(6) Bank Guarantee
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of
a debtor will be met. In other words, if the debtor fails to settle a debt, the bank covers it.
A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or
draw down loans, and thereby expand business activity.
BREAKING DOWN 'Bank Guarantee'
A bank guarantee is a lending institution’s promise to cover a loss if a
borrower defaults on a loan. The guarantee lets a company buy what it otherwise could
not, helping business growth and promoting entrepreneurial activity. For example,
Company A is a new restaurant wanting to buy $3 million in kitchen equipment. The
equipment vendor requires Company A to provide a bank guarantee to cover payments
before shipping the equipment. Company A requests a guarantee from the lending
institution keeping its The bank essentially the purchase contract with the vendor.
Types of Bank Guarantees
A direct guarantee is typically used in foreign or domestic business and issued directly to
the The guarantee applies when the bank’s providing security is not reliant on the
existence, validity and enforceability of the main obligation. Guarantees are often chosen
for cross-border transactions since the beneficiary asserts claims rapidly due to the

30
general nature of the guarantee. A direct guarantee is easier to adapt to foreign legal
systems and practices due to not having form requirements.
An indirect guarantee is often issued for export business, especially when government
agencies or public entities are beneficiaries. Many countries do not accept foreign banks
and because of legal issues or other form requirements. With an indirect guarantee, a
second bank, typically a foreign bank with a head office in the beneficiary’s country of
domicile, is utilized.
Examples of Bank Guarantees
*A prevents companies from tendering bids and not accepting or executing the awarded
contract.
*A serves as collateral for the buyer’s costs incurred if services or goods are not
provided as agreed in the contract.
*An guarantee acts as collateral for reimbursing advance payment from the buyer if the
seller does not supply the specified goods per the contract.
*A bond serves as collateral ensuring ordered goods are delivered as agreed.
*A payment guarantee assures a seller the is paid on a set date.
*A credit security bond serves as collateral for repaying a loan.
*A rental guarantee serves as collateral for rental agreement payments.
*A confirmed payment order is an irrevocable obligation where the bank pays the
beneficiary a set amount on a given date on the client’s behalf.

31
(7) Non Performing Assets (NPS)
A non performing asset (NPA) is a loan or an advance where;
 Interest and/or installment of principal remain overdue for a period of more than
90days in respect respect of a term loan,
 The account remains ‘out of order’ in respect of an Overdraft/Cash Credit
(OD/CC),
 The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
Banks should, classify an account as NPA only if the interest due and charged during
any quarter is not serviced fully within 90 days from the end of the quarter.
General Non Performing Assets Provisioning Norms
Particulars Percentage
1) Standard Assets 0.40%
2) Sub-Standard Assets 15%
3) Doubtful Assets
A) Secured Assets
i) Secured upto 1 years 25%
ii) Secured upto 1-3 years 40%
iii) 3 and More Years 100%
B) Unsecured Assets
i) Unsecured upto 1 years 100%
ii) Unsecured upto 1-3 years 100%
iii) Unsecured 3 and More Years 100%

32
3.4 Accepting Deposits :-
1. Saving Account Deposits:-
These deposits are held by household. Substantial saving are mobilised by banks through
savings banks deposits. The deposits can be withdrawn by means of cheque. Certain rules
and regulation have to be followed while operating these accounts. A nominal rate of
interest is provided for such deposits. Total number of accounts opened in Central Bank
of India is 57,17,895 in that rural is 44,57,029 and Urban is 12,60,866.In the Axis Bank
saving banks deposits approximate 88,292 (Rs. In crore) in March 2015 and as on March
2014 is ₨.77,776(Rs. In crore) and 31st December 2013 is ₨.69,627(Rs. In crore). The
most leading bank in saving account deposits is State Bank of India the number of saving
bank. Deposits amount in saving account is approximately ₨.485167,93,49 (₨.in
Thousand) and March 2013 Approximately ₨.426383, 11,88(₨. in Thousand). State
Bank of Maharashtra has ₨. 18933496(Amt in thousands) saving accounts deposits as
on March 2012.
2. Currents Account Deposits: -
These deposits are maintained by businessman. These are no restriction on the amount of
deposits or withdrawals. No interest provided for such deposits. In fact banks charge
certain commission for providing facilities. Banks always keep sufficient reserve to meet
the demand of the current account holders. The amount is withdrawable by means of
cheques. ₨. 56,108 and ₨. 48,686 is currents account deposits in the financial year 14-
15 and 13-14 respectively. TJSB Sahakari bank has Current deposits of ₨. 3,12,59,21 as
on March 14 and 2,85,15,83 as on march 13.
3. Fixed Deposits:-
When the deposits are made for a fixed period of times, they are termed as fixed deposits.
The amount can be withdrawn only after the maturity period. The rate of interest offered
for such deposits depends upon the times period. Longer the time period higher would be
the rate of interest and vice versa. Though the fixed deposits cannot be withdrawn before

33
the maturity period, many banks sanction loans against the security of fixed deposits for
which they charge a higher interest rate.
4. Recurring Deposits:-
Under this type, customer deposits a specific amount at regular intervals. It is designed by
banks to help those who want to deposits smaller amount. These deposits are also offered
a good rate of interest like fixed deposits.
5. Call Deposits:-
They refer to the deposits of one bank with that of the other. They can be withdrawn at
any time. Such deposits earn interest. They constitute a small fraction of the deposits of
banks.
II] Loans and Advances:- Various types of Loans and Advance provided by banking
industries they provides;
1. Call loan:-
These loans are the interbank loan. They are repayable at short notice. They are called
loans as they can be called banks at any time. Such loans are given for investment in the
stock market.
2. Short Term Loan:-
Loan Provide for which 1-2 years are termed as short term loan. They are given to
businessmen to satisfy their working capital requirement. State Bank of India has most
short term loans in 2014.
3. Medium Term Loan:-
The loans which are sanctioned for a period 2-5 year are termed as Medium Term Loan.
The rate of interest charged for this is more than short term loan. Such loan are useful to
industrial to introduced innovation in tern of applying new machines and equipment,
introduction of new methods of production etc.

34
4. Long Term Loan:-
Loan which are sectioned for more than five years are known as long term loans. That
rate of interest charged is higher than that of the other loans. Such loan helps business
firms to introduce permanent changes in the methods of productions.
5. Other Facilities:-
Banking Sector provide credit to various sectors of the economy like foreign trade, ext.
the following types of loans are sanctioned by banking sector;
 Cash Credit:- Cash Credit is given to customer on the basic of the security
surrendered and the personal security of the government.
 Direct loans:- On the basic of the security given by the customers direct loan are
sanctioned by banks. While giving the loan cash is not given directly. Instead, the
loan amount is credited in the customer’s accounts.
i) Agency Service:-
Banking Sector as an agent for their customers for a variety of purpose. They are:
1. They collect receipts like cheque, draft, etc. on behalf of the customers. They collect
service charge for providing this service.
2. They makes payments on behalf of the customers. The customers have to give a
standing instruction to the bank to make payments like rent, telephone bills, insurance
premium etc. banks make these payments on a regular basis by charging certain
amount.
3. By charging a nominal, amount they buy and sell securities like share, debentures etc.
for customers.
4. Banking Sector custodian and executor of the will of the customers.
5. They also provide advice to the customers in their portfolio management and manage
their funds and act as the custodian of funds.

35
ii) General Utility Service:-
A Variety of general service are provided by banking sectors.
1. They provide safety lockers to the customers to keep their valuable like’s jewellery,
documents etc.
2. They issue traveler cheques, foreign exchange and letter of credit.
3. They serve as guarantor to creditworthy customers.
4. Underwriting service provided by banking sectors is of great help to business houses.
5. They help to customers transferring fund from one place to another by issuing drafts.

36
CHAPTER – 4
OBJECTIVE AND LIMITATIONS
4.1 Objective of the Study
1. To know the importance of Banking Sector in India.
2. To understand what are the services provided Banking Sector for Customers.
3. To understand what is the Non Performing Assets and what are the reason for
emerging Non Performing Assets.
4. To understand what are the types of NPA.
5. To Evaluate the Central Bank of India Balance sheet and Profit & Loss Account.
6. To study the general reason for assets become NPA.
7. To study what kind of roles NPA playing upon the operation of Banking Sector.
4.2 Limitation of the Study
1. Since my study is based on the secondary data, the practical operations as related to
the Non-Performing Assets are not possible.
2. Since the Requirement of Banking Sector and Provision for Non-Performing Assets is
so wide so it was not possible for me to cover all the points and data related on that.
3. Difficult task and data collection from secondary survey.

37
CHAPTER – 5
CONCLUSION
Banking systems have been with us for as long as people have been using money. Banks
and other financial institutions provide security for individuals, businesses and
governments, alike. Let's recap what has been learned with this project. In general, what
banks do is pretty easy to figure out. For the average person banks accept deposits, make
loans, provide a safe place for money and valuables, and act as payment agents between
merchants and banks.
Banks are quite important to the economy and are involved in such economic activities as
issuing money, settling payments, credit intermediation, maturity transformation and
money creation in the form of fractional reserve banking. To make money, banks use
deposits and whole sale deposits, share equity and fees and interest from debt, loans and
consumer lending, such as credit cards and bank fees.
In addition to fees and loans, banks are also involved in various other types of lending
and operations including, buy/hold securities, non-interest income, insurance and leasing
and payment treasury services.
History has proven banks to be vulnerable to many risks, however, including credit,
liquidity, market, operating, interesting rate and legal risks. Many global crises have been
the result of such vulnerabilities and this has led to the strict regulation of state and
national banks.
However, other financial institutions exist that are not restricted by such regulations.
Such institutions include: savings and loans, credit unions, investment and merchant
banks, shadow banks, Islamic banks and industrial banks.

38
CHAPTER – 6
BIGLIOGRAPHY
Financial Management, Manan Prakashan
www.managementstudyguide.com
www.icai.org.in
www.slidshare.net
www.scribd.com
www.rbic.com
www.caknowledge.in
www.allbankingsolutions.com

TYPE OF BANK ADVANCES

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