Loans and Advances

Loans and Advances

Definition of Loans and Advances –

In real life, individual or institutions face some situations when they feel the necessity of collecting, achieving or using something for which they may not have adequate required purchasing power. On the other hand, there are individuals or institutions that have surplus funds after fulfilling both of their recurring and investment requirements. By way of deposit, a bank takes these surplus funds in its own custody. The bank again temporarily transfers these funds for a specific duration in exchange of some interest or profits to those who do not have required purchasing power but have the capacity to utilize borrowed funds for some productive and profitable purposes. Here the term “Provided purchasing power” refers to loan, credit or advance. Generally, these three terms save the similar meaning.

Banks can provide a loan in different ways. A loan can be in cash or in non-cash form. If a client takes advantage from the bank by issuing the bank’s goodwill through making a contract, this will be treated as “goodwill loan” of the bank.

According to the Dictionary of Banking and Finance, “Loans and advances can be defined as the lending of a sum of money by a lender to the borrower to be repaid with a certain amount of interest”

According to Timothy W Koch – “Loan refers a formal agreement between a bank and borrower to provide a fixed amount of credit for a specific time period”.

According to Cambridge learner’s Dictionary – “Loan means a sum of money which is borrowed, often from a bank, and has to be paid back, usually together with an extra amount of money that you have to pay as a specified period.”

Some features of loan and advances are given below:

  • The loan may be made with or without securities.
  • The loan may be repaid in installments or at the expiry of a certain period.
  • The interest is charged for the full amount sanctioned whether client withdrawals the money from his account or not.
  • A loan once repaid in full or in part, cannot be withdrawal again by the customer.

From the above discussion, we can easily say that as a profit-oriented organization, if a bank gives its resources temporarily under certain conditions and for a specific duration, it will be called loan and advance.