Banking company is a company that deals in cash, money and credit. It accepts deposits and extends loans and advances to the needy persons.


“Banking refers to the acceptance for the purpose of lending or investment of deposits of money from the public repayable of demand, order or otherwise and withdrawal by cheque, draft, order or otherwise.”

According to Section 6 of Banking Company Regulation Act, 1949, a banking company may deal in following forms of business:

  • Borrowing and lending of money
  • Drawing, making, accepting, endorsing, buying and selling of bills of exchange, hundies, promissory notes, debentures and other alike securities.
  • Contracting for public and private loans
  • Acting as an agent for government or local authority
  • Undertaking and executing of trusts
  • Acquisition, construction, maintenance and alteration of any building or works
  • Carrying on and transacting every kind of guarantee and indemnity business.

The Advances in banking company are:

  • Cash credit,
  • Overdraft,
  • Loans,
  • Demand loan vs term loan,
  • Secured vs unsecured loan,
  • Participation loan or consortium loan,
  • Purchasing and discounting bills.

Cash Credit

Cash Credit is an arrangement by which the customer is allowed to borrow money up to a certain limit known as the ‘cash credit limit’. Usually, the borrower is required to provide security in the form of pledge or hypothecation of tangible securities. Sometimes, this facility is also provided against personal security.

This is a permanent arrangement and the customer need not draw the sanctioned amount at once but draw the amount as and when required. Cash credit provides an elastic form of borrowing since the limit fluctuates according to the needs of the business. Cash credits are the most favorable mode of financing by large commercial and industrial concerns.


Overdraft is an arrangement between a banker and his customer by which the latter is allowed to withdraw over and above his credit balance in the current account up to an agreed limit. This is only a temporary accommodation usually granted against security. The borrower is permitted to draw and repay any number of times, provided the total amount overdrawn does not exceed the agreed limit. The interest is charged only for the amount drawn and not for the whole amount sanctioned.



“Loan is a formal agreement between a bank and borrower to provide a fixed amount of credit for a specified period”.

The banker advances a lump sum for a certain period at an agreed rate of interest- The entire amount is paid on an occasion either in cash or by credit in his current account which he can draw at any time. The interest is charged for the full amount sanctioned whether he withdraws the money from his account or not.

The loans may be repaid in installments or at the expiry of a certain period. The loan may be made with or without security.

A loan once repaid in full or in part cannot be withdrawn again by the customer. In case a borrower wants a further loan, he has to arrange for a fresh loan.

Demand Loan and Term Loan

The loan may be a demand loan or a term loan.

A demand loan is payable on demand. It is for a short period and usually granted to meet the working capital needs of the borrower.

Term loans may be medium-term or long-term. Medium-term loans are granted for a period ranging from one year to five years for the purpose of vehicles, tools, and equipment.

Long-term loans are granted for capital expenditures such as the purchase of land, construction of factory building, purchase of new machinery and modernization of plant.

Secured and Unsecured Loan

According to section 5(e) of The Banking Regulation Act, 1949, “Secured loan or advance means such a loan or advance as made against the security assets, market value of which is not at any means less than the amount of such loan or advance and unsecured loan or advance is that loan or advance or part of it does not require sanctioning against the security”.

Participation Loan and Consortium Loan

Where one single loan is granted by more than one financing agency, it is termed as a participation or consortium loan.

Such participation becomes necessary where either the risk involved is too large for one or more of the participating institutions to take individually or there are administrative or other difficulties in servicing and follow up of the loan.

Purchasing and Discounting Bills


Bills of exchange is “an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument”.

Banks grant advances to their customers by discounting bills of exchange.

The net amount, after deducting the amount of interest/discount from the amount of the installment, is credited in the account of the customer.

In this form of lending, the interest is received by the banker in advance.

Banks sometimes purchase the bills instead of discounting them.

Bills which are accompanied by documents or title to goods such as bills of lading or railway receipt are purchased by the bankers.

In such cases, the banker grants a loan in the form of overdraft or cash credit against the security of the bills.

The term ‘bill purchased’ seems to imply that the bank becomes the purchaser or owner of such bills. But in almost all cases the bank holds the bill only as a security for the advance.

Also study: Also study: Also study: Also study: 
Meaning of companyTypes of companiesOne person companyPublic VS Private Company
Sweat Equity SharesStock vs SharesReserve Capital Vs Reserve CapitalDifferent types of preference shares
Equity vs Preference sharesSlip System of PostingRedemption of preference sharesBuy Back of shares
DebenturesIssue of debenturesRedemption of DebenturesSources of redemption of debentures
Balance Sheet as per Companies Act 2013Divisible ProfitsAmalgamationPurchase consideration
Alteration of share capitalInternal ReconstructionProvision of banking regulation act 1949Asset classification of banking company
Non-performing assetsAdvances in banking companyLife Insurance AccountingValuation balance sheet
Financial statements of life insurance companiesFinal accounts of general insurance companies


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