Definition: “A bank collects money from those who have it to spare or who are saving it out of their incomes & it lends this money to those who reqiure it.” — Crowther
A commercial bank is a financial institution authorised to provide a variety of financial services, including consumer and business loans, savings accounts etc. Earlier commercial banks were limited to accepting deposits of money or valuables for safekeeping and verifying coinage or exchanging one jurisdiction coins for another. By the 17th century, most of the essentials of modem banking, including foreign exchange, the payment of interest, and the granting of loans, were in place.
The three ways in which a commercial bank advances loan to public are:
1. Cash Credit: A cash credit is an arrangement whereby the bank agrees to lend money to the borrower up to a certain limit. The bank puts this amount of money to the credit of the borrower. The borrower draws the money as and when he needs. Interest is charged only on the amount actually. Cash credit is generally granted on a bond of credit or certain other securities. This is a very popular method of lending in our country.
2. Loans: A specified amount sanctioned by a bank to the customer is called a “loan”. It is granted for a fixed period, say six months, or a year. The specified amount is put on the credit of the borrower’s account. He can withdraw this amount in lump sum or can draw cheques against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilize it. The rate of interest is lower on loans in comparison to cash credit. The loan is generally granted’against the security of property or personal security.
3. Bank 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 withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. The customer is permitted to withdraw the amount as and when he/she needs it and repays it through deposits in his account as and when it is convenient to him/her. Overdraft facility is generally granted by bank on the basis of a written request by the customer.
