Reading: Banks and Financial Institutions
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 bankMerits
-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.
Остання зміна: вівторок 14 серпня 2018 08:30 AM