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What is meant by a Commercial Bank ? Explain how Commercial banks provide credit facilities through the methods given below :

(i) Cash Credit 

(ii) Loan 

(iii) Overdraft Facility

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A commercial bank in an institution that accepts deposits of money from the public, withdrawal by cheque, and uses the money so collected for lending to the household, the firm and the government. 

Commercial banks provide credit facilities through the following methods :

(i) Cash Credit : In cash credit, the bank advances a ‘cash loan’ a specified limit to the customer, against a bond or any other security. A borrower is required to open a current account and bank allows the borrower to withdraw upto the full amount of the loan. The interest is charged only on the amount actually utilized by the borrower and not on the loan sanctioned.

(ii) Loans : A loan is a specified amount sanctioned to the credit of a borrower for a fixed period. However, before sanctioning the loan, the bank is required to ascertain and satisfy itself about the ability of the borrower to repay according to the soundness of his scheme or business, and the genuineness of his purpose. Invariably, a loan is granted against some kind of security of assets or personal security of the borrower and the interest is charged on the full amount sanctioned as loan, irrespective of the fact, whether full amount or part of it has been used. In case of loans, the borrower is provided with the facility to repay the loan in installments or as a lump-sum.

(iii) Overdraft Facility : The overdraft facility is allowed to the depositor maintaining a current account with the bank only. According to this facility, a borrower is allowed to withdraw more amount than what he has deposited. The excess amount so withdrawn has to be repaid to the bank in a short period and that too with interest. The rate of interest is usually charged more than that charged, in case of loans. However, the overdraft facility is given only against security of some assets or on personal security of the customer.

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