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Loan and Discount Functions

Loans and discounts in banking mean the same thing - amounts extended to those needing capital. The difference is that loans involve collecting interest at maturity, while discounts involve deducting interest in advance. Loans and deposits are complementary - the amount a bank can loan depends on the deposits it attracts. Earning capacity increases with larger available funds to loan, which only happens when the public has confidence depositing in the bank. There are various types of loans based on purpose, maturity, security, payment method, release structure, and source of funds. Commercial, agricultural, industrial, and personal loans differ in their intended use of funds. Maturity varies from short to long term. Security can involve collateral or be

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585 views2 pages

Loan and Discount Functions

Loans and discounts in banking mean the same thing - amounts extended to those needing capital. The difference is that loans involve collecting interest at maturity, while discounts involve deducting interest in advance. Loans and deposits are complementary - the amount a bank can loan depends on the deposits it attracts. Earning capacity increases with larger available funds to loan, which only happens when the public has confidence depositing in the bank. There are various types of loans based on purpose, maturity, security, payment method, release structure, and source of funds. Commercial, agricultural, industrial, and personal loans differ in their intended use of funds. Maturity varies from short to long term. Security can involve collateral or be

Uploaded by

Megan Adeline Hale
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Loan and Discount Functions

Loans VS Discounts

Loans and a discounts, in banking terms, mean the same thing. These are amounts extended to
persons needing capital or for some other purpose. The difference lies in the fact that loans are
advances on which interest is collected at maturity. Such loans, however, are treated as discounts when
the interest is deducted in advance.

The term “discount” signifies a the accounting term that interest is paid in advance although not
yet earned. Hence, it is entered in the bank’s book of accounts a as unearned interest income.

Relations of Loans to Deposit

Loans and a deposits complement each other, as the amount of loans a bank could extend will
depend largely on its ability to attract and retain large deposits. The earning capacity of a bank will be
enhanced when it has a large available loanable fund. This could, in turn, only happen a when the bank
enjoys the public’s confidence so a much so that big amounts of deposits find their way into the bank’s
vaults and eventually into loans and investments.

Types of Loans

1. As to purpose

Loans may a either be commercial, agricultural, industrial, personal, and other similar
classifications which will indicate for what purpose the funds will employed. So that if there is a program
of selective credit a controls and there are priorities established on the loans to be granted, then it
would be easy for banks to program their loanable a funds. If the proceeds are diverted by the borrower
other than the purpose applied for, the bank reserves the right to accelerate a the loan’s maturity and
call for its payment at once.

 Commercial- a type of financing for businesses to increase the working capital, acquire
new machinery, build a new infrastructure, meet operational a cost and many more.

 Agricultural- availed by a farmer to a provide the capacity to purchase a new farm or


expand current operations.

 Industrial- Expanding the firm's infrastructure. Installing new equipment and machinery.
 Personal- a loan to an individual for his or her own use and is typically used to purchase
a car, renovate the home, pay for a a vacation, to finance a wedding, to cover funeral
costs or deal with an unexpected event.

2. As to maturity

Loans may be short term, which would mean that they are payable within one year. They could
also be intermediate term, which means that they are payable over one year but not exceeding five
years. Long term loans would be those that a are payable for five years or more. Call or demand loans
are those which are payable upon call or demand of the lending Institution.

3. As to security

Loans are either secured or unsecured. When a mortgage conveying title to property is used to
guarantee the payment of a loan, it is known to be a secured loan. When no such security or collateral is
given by the borrower but rather the loan is granted due to the person’s good character, the loan is
known to be an unsecure or clean loan. This latter type may in some cases require a co-maker. But, the
main consideration for the a granting of the loan would be on the character of the principal debtor and
the guarantor. Although a loan is secured, it may also need co-makers.

4. As to method of payment

Loans may either be self-liquidating or non-self-liquidating. The first term means that the
repayment of the loan will come from the a proceeds of resale or from the income derived from the use
of capital goods bought from the loan proceeds. On the other hand, the loan is non-self-liquidating
when the repayment comes directly from the income of the borrower. A commercial loan would be self-
liquidating because the proceeds a would be utilized to purchase inventories which are eventually
resold. A personal, loan on the other hand, would be non-self-liquidating because the proceeds would
be used for personal needs rather than business purposes.

5. As to method of release

A loan of aa sizable sum may be released in small amounts as needed. This is known as release
on installment. Or the whole amount is given just once. This isa termed as “lump sum” release.
Sometimes, the a installment release is resorted toa in order to control the use of the proceeds.
Otherwise, the money amight be diverted to something which is not meant for.

6. As to source

To determine where the funds a aborrowed come from, the loans are classified as bank credit,
mercantile a credit, private credit, public credit, and others.

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