Banking Awareness’ is the series which is updated daily, and is intended to help you with your preparation for various bank exams. The following article is about ‘Banking Products in India – Lending Options’.
Banking products do not only include the deposit accounts. While these are basically money deposited by customers, other banking products include the borrowing options. These include various types of loans, credit cards, debit cards, ATM cards, personal banking, and so on.
The idea behind these banking products is to attract more and more customers. Customers make a beeline to the banks which offer lucrative options to borrow money. The banks accept deposits from customers who need money and disburse it those who need it. It repays the deposits with interests while it charges loan fees from the borrowers.
The difference between the rate of interest given to the depositors and charged from the borrowers is known as spread. The basis of banking business is to tweak the spread and mobilize liquid cash wherever needed.
Banking Awareness: Popular Lending Products of Banks
There are different kinds of lending options offered by the Indian banks. These include:
Cash Credits: These types of loans more-or-less function like the current accounts where the cash credit owners can withdraw certain amount as loans for meeting their personal or business commitments. The banks provide the money against certain securities, such as shares, movable and immovable assets, and so on. In case of a current account, the depositor can withdraw certain amount that is available in the account and not beyond that. However, in cash credits, money more than what is available in the account can be withdrawn. There is a limit up to which money can be withdrawn.
Overdraft: When money in the bank account is less than the amount needed by the account holder, there is an option to withdraw excess amount. This is done against securities no doubt. However, unlike cash credits where the net value of the securities is considered, the ‘worth’ or potential is considered in an overdraft. So, mostly it deals with mutual funds, shares, and debentures.
Term Loans: These are just the reverse of fixed deposits. While banks accept money from customers in fixed deposits, they lend a lump sum amount to customers in Term Loans. The borrower takes the total money as loan and repays it to the bank in small installments. The installment amount is fixed. This type of loan is provided to businesses which need money to buy machines or construct the necessary infrastructure.
Bill Discounting: The bank initially pays the due bills of the client. Usually, the bills are raised by the client’s customer. The client then slowly repays the dues. The idea is to make business dealings as hassle-free as possible and allow the banks to do their bit in place of money.
Credit Cards: Banks are also credit card providers. Here, the credit card holders can shop online or otherwise on credit through the credit card. The cards can also be used for cash withdrawals or balance transfers. The credit card holders can buy commodities on credit up to a certain level – credit limit.
Debit Cards: Although often used in place of credit cards, debit cards don’t allow buying on credits. The customer can use the money he or she already has in the bank account.
ATM Cards: ATM cards are quite similar to debit cards where users can use the card at the automated teller machines (ATM) and withdraw money they have in the bank account.
Banking Awareness: A Major Element in Retail Banking Business
In retail banking, loans take up a major share of the portfolio. At least 25 percent of the total loans constitute those which are offered by banks in the retail banking business. Banks also provide loans for different purposes. For instance, personal loans are used for meeting personal commitments. Business loans are used to meet the business needs, say, buying equipment or setting up merchandise in a retail shop.
Home loans are also quite popular in India. There are tax benefits from home loans. The loan is used to set up a home – say, buy an apartment for dwelling purposes. Apart from personal loans, there are loans which cater to specific purchases, such as car loans or education loans. The education loans can fund the tuition fee of a course or reimburse expenses incurred on books.
There are also bank loans against assets (such as property or other immovable assets). The banks keep the assets as a security. This condition is not similar to mortgaging the asset.
Apart from deposits and lending options, banking products also include investment products. Read more about these products in the next article.