Schedule 9 : Advances
A(i). Bill Discounted and Purchased :
It is an instrument in writing containing an unconditional undertaking signed by the maker to pay a certain sum of money to the bearer. The banks also give advances to their customers by discounting their bills. While discounting a bill, the bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customers’ account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment. Net amount after deducting the amount of discount is credited to the account of customer. The bank may discount the bill with or without any security from the debtor in addition to one or more persons already liable on the bill.
(ii). Cash Credits, Overdrafts and Loan Repayable on Demand
(iii). Term Loans :
(Cash Credits, Overdrafts and Demand Loan all are similar in nature as they all are payable on demand & all of them are short term as well)
Cash Credits: A cash credit is an arrangement by which a banker allows his customer to borrow money upto a certain limit. Cash Credit arrangements are usually made against the security of commodities/inventories, current assets hypothecated or pledged with the bank. In case of a cash credit facility the borrower need not borrow at once the whole of the amount he is likely to require, but draw, such amounts as and when required. She/he can put back any surplus amount which he may find with him for the time being. Interest on cash credit account has to be paid monthly on the amount actually drawn at any time and not on the full amount of the credit/limit sanctioned allowed.
Overdrafts: The customer may be allowed to overdraw his/her current account with or without security, if He/she requires temporary accommodation. These arrangements like cash credit is advantageous from the customers’ point of view, as he is required to pay interest on the actual amount used by him/her.
Demand Loans: A demand loan is a loan that a lender can require to be repaid in full at any time. This condition is understood by the lender and the borrower from the outset. A loan is a kind of advance made with or without security. In the case of loan the bank makes a lump sum payment to the borrower or credits his deposit account with the money advanced. Repayments may be made in installments or at the expiry of the maximum permissible period of advance (Usually upto 1 Year). A loan once paid in full or in part cannot be drawn again by the borrower unless the banker sanction a fresh or top up loan.
Term Loan : A term loan provides borrowers with a lump sum of cash upfront in on specific borrowing terms. Term loans are normally meant for established small businesses with sound financial statements. In exchange for a specified amount of cash, the borrower agrees to a certain repayment schedule with a fixed or floating interest rates.
(B) (i) Secured by Tangible Assets : All advances or part of advances which are secured by tangible assets may be shown under this head. (II). Covered by Bank/Government Guarantee : Advances in India and outside India, to the extent they are covered by the guarantees of the Indian and Foreign Governments and Foreign Banks DICGC, ECGC, Indian and Foreign Banks, are to be included. (iii). Unsecured : All advances not classified under (i) and (ii) will be included here. Total of A shall be tallied with total of B.
(C). (i). Advances in India (Priority Sectors; Public Sector; Banks and Others) : Advances should be broadly classified into ‘Advances in India’ and ‘Advances outside India’. Advances in India will be further classified on sectorial basis as indicated. Advances to sectors, which for the time being are classified as priority sectors according to the instructions of the RBI are classified under the head ‘Priority Sector’. Such Items should be excluded from head ‘Public Sector’, ‘Banks’ and ‘Others’. Advances made to Central / State Government and other Government Undertakings including Government Companies and Corporations which are, according to the status to be treated public sector companies are to be included in the category ‘Public Sector’.
All advances to the banking sector including Cooperative Banks will come under the head ‘Banks. All remaining advances will be included under the head ‘Others’ typically this category will include non-priority advances to the private, joint and cooperative sector.
Notes :General :
A. The gross amount of advances including refinance and rediscounts but excluding provisions made to the satisfaction of auditors should be shown as advances.
B. Term Loans are loans which are not repayable on demand.
C. Consortium advances would be shown net of share from other participating banks/institutions.
Principal Accounting Policy with respect to Advances : Advance due from sick nationalized under nursing programme and in respect of various sticky, suit filed and decreed accounts may be considered good on the basis of :-
A. Available estimated value of existing and prospective primary and collateral securities including personal worth of borrowers and guarantors.
B. Claim Lodged to be lodged under various credit guarantee schemes
C. Pending settlement of claims by government
Provisions to the satisfaction of the auditors are required to be made and deducted from advances. Tax relief available when the advances are written off is to be accounted for in the year of written off.
Disclosures:
A. Provisions in respect of doubtful advances are to be deducted from advances to the extant necessary and the excess to be included under “Other Liabilities and Provisions”.
B. Provisions are to be made on gross basis. tax relief, which will be available when the advance is written off, may be accounted for in the year of written off.
Restrictions on loan and Advances (Section 20 Banking Regulation Act, 1949):
Notwithstanding anything to the contrary contained in section 77 of the Companies Act, 1956 (1 of 1956), no banking company shall,—
A. grant any loans or advances on the security of its own shares, or—
B. enter into any commitment for granting any loan or advance to or on behalf of—
i any of its directors,
ii any firm in which any of its directors is interested as partner, manager, employee or guarantor, or
iii any company [not being a subsidiary of the banking company or a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or a Government company] of which [or the subsidiary or the holding company of which] any of the directors of the banking company is a director, managing agent, manager, employee or guarantor or in which he holds substantial interest, or
iv any individual in respect of whom any of its directors is a partner or guarantor.
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