Commercial Banks

A commercial bank is a type of financial intermediary and a type of bank. An institution which accepts deposits, makes business loans, and offers related services. Commercial banks also allow for a variety of deposit accounts, such as checking, savings, and time deposit. These institutions are run to make a profit and are owned by a group of individuals.

•Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods.
•Banks extend loans to firms of all sizes and in many ways, like, cash credits, overdrafts, term loans, purchasing/discounting of bills, and issue letter of credit.
•The rate of interest charged by banks depends on various factors such as the characteristics of the firm and the level of interest rates in the economy.
•The loan is repaid either in lump sum or in installments.

•Bank credit is not a permanent source of funds. Though banks have started extending loans for longer periods, generally such loans are used for medium to short periods.
The borrower is required to provide some security or create a charge on the assets of the firm before a loan is sanctioned by a commercial bank

Merits

-Information supplied to the bank by the borrowers is kept confidential therefore maintaining secrecy of business.
-It is an easier source of funds as formalities such as issue of prospectus and underwriting are not required for raising loans from a bank.
-Since the loan amount from a bank can increased according to business needs and can be repaid in advance when funds are not needed it is considered as a flexible source of finance.
Timely assistance provided by Banks to businesses by providing  funds as and when needed.

Demerits

-Extension or renewal of funds is uncertain and difficult as they are generally available for short periods.
-The procedure of obtaining funds is slightly difficult as banks make detailed investigation of the company’s affairs, financial structure, etc. and may also ask for security of assets and personal sureties..
-In some cases, difficult terms and conditions are imposed by banks, for the grant of a loan. For example, restrictions may be imposed on the sale of mortgaged goods, thus making normal business operations difficult. 

Financial Institutions

•Both Central and State Government have established a number of financial institutions all over the country to provide financing to businesses.
•They provide both owned capital and loan capital for long and medium term requirements and supplement the traditional financial agencies like commercial banks. These are called “development banks” as these institutions aim to promote the industrial development of a country.
•In addition to providing financial assistance, these institutions also conduct market surveys, provide technical assistance and managerial services to people who run the enterprises.


Merits

- Unlike commercial banks, financial institutions provide long term finance.

-   These institutions also provide financial,   managerial, and technical advice and consultancy to    business firms, besides providing funds.

-Goodwill of the borrowing company increases in the capital market by obtaining a loan(s) from a financial institution(s).  Consequently, it is easier for such a company to raise funds from other sources as well.
-It does not prove to be much of a burden on the business,  as repayment of a loan can be made in easy installments.

Demerits

-Rigid criteria is followed for grant of loans by financial institutions. The procedure becomes time consuming and expensive due to too many formalities.
-Restrictions are imposed on the powers of the borrowing company by the financial institutions such as a restriction on dividend payments.
-Financial institutions may restrict the powers of the company by having their nominees on the Board of Directors of the borrowing company.





Última modificación: martes, 14 de agosto de 2018, 08:30