3 Factors Limiting the Level of a Bank’s Advances

Commercial banks advances are made in different forms such as cash credit, overdraft, loans, purchasing and Discounting Bills etc.

Many factors influence the level of advances sanctioned by a banker.

1. The size and maturity-wise pattern of deposits

The primary source of bank funds is the deposits made by the depositors.

Their size and maturity-wise pattern has an impact on the level of a bank’s .advances. Hank’s capacity to grant loans and advances increases with an increase in deposit resources.

Moreover, the maturity-wise pattern of such deposits affects the pattern of advances.

In case of demand liabilities, the banker is under an obligation to repay the funds on demand and hence he/she needs larger cash reserve.

Thus not only the amount of loans and advances is to be kept at a lower level but such loans should largely be repayable on call or at short notice.

On the other hand, if a larger portion of a bank’s deposits is in the form of time deposits, not only the quantum of cash reserve maintained by it is reduced but it can lend the funds for relatively longer periods.

2. Credit control by reserve bank

The capacity of banks to provide loans and advances depends on their cash resources (i.e., cash in hand and balances with the central bank). The cash resources increase through

(i) rise in the deposits, or

(ii) by their borrowing from the central bank, or

(iii) by sale of their investments.

Central bank regulates the quantum of cash resources of the banks by exercising the powers conferred upon it. If it feels the necessity of expansion of credit, measures are adopted to increase banks’ cash resources and vice versa.

The bank rate policy and the open market operations policy and the variable reserve requirements are the general or quantitative credit control measures which affect the level of banks’ cash resources.

The selective credit controls affect the level of bank credit against the specified commodities directly and immediately.

3. Seasonal variations in bank credit

An important feature of bank credit in an agricultural country like ours is the seasonal variations in the quantum of credit granted by banks. The year is traditionally divided into two parts – the busy season and the slack season.

The busy season is characterized by higher demand for bank credit largely to finance the marketing and distribution of agricultural crops. The bank credit thus reaches its peak during the busy season.

During the next period of slack season bank credit contracts because of larger flow of funds to the banking system as a result of liquidation of stocks of agricultural produce.

The demand for credit:

The expansion or contraction of credit largely depends on the demand for bank credit by borrowers, which in turn depends on:

  1. The level of production, both agricultural and industrial.
  2. The level of inventories held by business and industrial houses.
  3. The price level of goods and commodities in the country.