Lecture Retail and merchant banking – Lecture 20

Revise Lecture 20


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Loans and Advances


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Lending money is one of the two major
activities of any bank.
The bank acts as an intermediary between
the people who have the money to lend
and those need money to carry out
business transactions.


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A loan is granted for a specific time period.
Generally, commercial banks provide
short-term loans. But term loans, i.e. loans

for more than a year, may also be granted.
The borrower may be given the entire
amount in lump sum or in installments.


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Q: Some of the securities against which the
banks lend are?


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1.

Commodities

2.

Debts

3.

Financial instruments

4.

Real estate

5.

Automobiles

6.

Consumer durable goods

7.

Documents of title


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Q: Classification of Loans are?


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Classification of Loans
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Bank loans can be classified as follows
according to the activity being financed;

1.

Priority sector lending

2.

Commercial lending

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Classification of Loans
Priority sector lending:
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The Government of Pakistan, through the
instrument of SBP, mandates certain types
of lending on the banks operating in
Pakistan irrespective of their origin.
SBP sets targets in terms of percentage
(of total money lent by the banks) to be
lent to certain sectors which, in its


Loans and Advances
Classification of Loans
Priority sector lending:
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This type of lending is called priority sector
lending.
Financing of small industry, small
business, agricultural activities and export

activities fall under this category.
This is also called directed credit in the
Pakistan banking system.


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Classification of Loans
Commercial lending:
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Commercial lending is the mainstay of
Pakistan banking, its bread and butter
activity.
Historically, this activity had been
relegated to a secondary position as
banks were driven by the desire to excel


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Classification of Loans
Commercial lending:
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Today, many banks focus on commercial
lending for improving their bottom lines.
Fresh and innovative products are being

launched to facilitate the corporate
customer who forms the core of this
business. There is big competition among
banks to secure bigger share of this


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Classification of Loans
Commercial lending:
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At present, commercial loans are available
for practically any kind of activity and also
for both long and short tenures.
Based on customer profile, these loans
are of two types;

1.

Corporate loans

2.

Retail loans


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Advances


Loans and Advances
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An advance is a credit facility provided by
the bank to its customers.
It differs from a loan in the sense that the
latter may be granted for a longer period,
but the former are normally granted for a
short period of time.


Q: Bank grant short-term financial
assistance by way of?


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Bank grant short-term financial assistance
by way of;

1.

Cash credit

2.

Overdraft

3.

Discounting of bills


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Cash Credit
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Cash credit is an arrangement whereby
the bank allows the borrower to draw
amount up to a specified limit.
The amount is credited to the account of
the customer. The customer can withdraw
this amount as when he requires. The
interest is charged on the amount actually
withdrawn.


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Cash Credit

Cash credit is granted as per the terms
and conditions agreed upon with the
customers. This type of financing is similar
to a line of credit.
1.

Advances against the Security of Goods

2.

Advances against Life Insurance Policies

3.

Advances against Stock Market
Securities


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Cash Credit
4. Advances against Fixed Deposit Receipts
5. Advances against Book debts
6. Advances against Real Estates
7. Advances against Supply Bills


Lecture 21


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Overdraft


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Overdraft
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Overdraft also is a credit facility granted by
bank.
A customer who has a current account
with the bank is allowed to withdraw more
than the amount of credit balance in it.
It is a temporary arrangement


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Overdraft
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Overdraft facility with a specified limit may
be allowed either on the security of assets

or on personal security, or both.
If there is a prior agreement with the
account provider for an overdraft
protection plan and the amount overdrawn
is within this authorized overdraft, interest
is normally charged at the agreed rate.


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Overdraft
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If the balance exceeds the agreed terms,
fees may be charged and higher interest
rate apply.
Overdraft is an efficient form of borrowing
as the customer pays interest only for the
time he uses the money. It gives him
flexibility.