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Banking > Lendings > Domestic Lendings

Domestic Lendings

Traditionally, bank finance to trade/industry has been considered as an important source of finance. The bank as a purveyor of credit, plays an important role in the economy. The role of the banker as a financier has undergone a sea change over the years.

What is the necessity for a borrower to approach the Bank? To understand this, one has to understand the requirements of short-term finance for conducting the day to day business. This type of finance is required to fund the current assets in the business. The current assets in any business have two basic characteristics. These are:
(i) short life span and
(ii) swift transformation into other forms of current assets.

The short life span refers to the time required in the activities of purchase and storage of raw material, conversion into finished products, sale and collection of receivables, which is further converted into the form of cash.

The operating cycle of a firm, begins from the obtention of raw material (or payment of advance for the same) and ends with conversion of receivables (or sometimes finished goods) into cash. This can be represented as under:
O = R + W + F + D - C
O is the operating cycle
R is raw material storage period
W is the duration of work in process
F is finished goods storage period
D is debtors' collection period
C is creditors' payment period

Each stage is influenced by various factors. For example, storage of raw materials depends on regular availability of raw materials, the lead time for procurement, the level of safety stock required, possibility or perception of price fluctuations, economics of bulk purchase etc. The length of work in process depends on the type of business, consistency in capacities at various stages of production etc. The duration of finished goods depends on level of competition, pattern of production and seasonality of demands. The duration of debtors, again depends on competition, discounts offered and efficiency in collection.

The total investment in current assets represents generally the gross current assets. The sources for meeting this normally are accruals, trade credit, working capital advance from bank, long term sources and commercial papers, factoring and forfeiting.

All other sources notwithstanding bank finance is one important component for funding working capital requirements.

Let us now see how the banks look at these requirements of the corporates and the type of facilities offered by the Banks to finance the working capital needs.

This can be done under the following three heads:

METHODS OF LENDING

COMMITTEES

RECENT POSITION