What are the Types of Bank Credits

Bank Credit is the aggregated amount financial institutions (i.e. bank) are willing and able to offer as loan or advance to an individual or organization.

Bank credit can be classified into many section on various basis.

On the Basis of Purpose of the Credit

Ruse and Hudgins have divided loans into seven broad categories, delineated by their purposes:

  1. Real estate loans are secured by real property – land, buildings, and other structures – and include short-term loans for construction and land development and longer-term loans to finance the purchase of farmland, homes, apartments, commercial structures, and foreign properties.
  2. Financial institution loans include credit to banks, insurance companies, finance companies, and other financial institutions.
  3. Agricultural loans are extended to farms and ranches to assist in planting and harvesting crops and supporting the feeding and care of livestock.
  4. Commercial and industrial loans are granted to businesses to cover purchasing inventories, paying taxes, and meeting payrolls.
  5. Loans to individuals include credit to finance the purchase of automobiles, mobile homes, appliances, and other retail goods, to repair and modernize homes, and to cover the cost of medical care and other personal expenses, and are either extended directly to individuals or indirectly through retail dealers.
  6. Miscellaneous loans include all loans not listed above, including securities’ loans.
  7. Lease financing receivables, where the lender buys equipment or vehicles and leases them to its customers.

On the Basis of Duration of the Credit

Depending on the duration for which loans are given loans can be classified into three categories:

  1. Short-term credits are scheduled to be repaid within one year. Businesses take short-term loans to meet working capital needs.Short-term loans are usually given against inventory and accounts receivable. These loans can also be unsecured, such as line of credit, revolving credit.
  2. Mid-term credits are repaid over a period ranging from one year to five year.Banks customarily grant such loans against immovable properties. Interest rates on mid-term loans are higher than on short-term loans.
  3. Long-term credits are the loans whose repayment period extends beyond five year.Long-term loans are used for constructing plants and factories, construction of house, purchase of land, equipment, and machineries. Immovable properties are used as securities for such loans.

On the Basis of Nature of the Credit

  1. Funded credits or non-documentary credits are given out of the bank’s own funds to individuals and organizations through current accounts or loan accounts. Funded credits include loan, cash credit, and hank overdraft.
  2. Son-funded credits or documentary credits are given through issuing various documents, this form of credit banks provide the credit by not extending cash but by lending their reputation and good names,Examples of non-funded credit include letter of credit (LC), bank guarantee etc.

These are the common types of bank credits.