In the banking and finance sector, “advances” refer to short-term loans or credit facilities provided by banks to customers for a specific purpose and duration. Advances play a crucial role in supporting businesses, trade, agriculture, and individual financial needs. Unlike long-term loans, advances are usually granted for a period of less than one year and are governed by various laws and regulatory guidelines.
Meaning of Advances in Banking
- Advances are credit facilities or funds provided by banks to borrowers that are repayable within a short-term period, typically less than 12 months.
- They are generally granted for working capital needs, day-to-day operations, or urgent financial requirements.
- Advances are a part of the bank’s assets and are expected to be repaid within a predetermined time frame.
Legal Framework Governing Advances
- The Banking Regulation Act, 1949 empowers banks to issue loans and advances.
- Governed by the Reserve Bank of India (RBI) through guidelines on lending norms, priority sector lending, and prudential norms.
- Indian Contract Act, 1872 governs the legal aspects of loan agreements, securities, guarantees, and enforceability.
- SARFAESI Act, 2002 may apply in case of default where secured assets are involved.
Key Features of Bank Advances
- Short-term in nature, usually up to 12 months.
- Offered to individuals, firms, companies, and institutions.
- Require repayment within a fixed period.
- May be secured or unsecured depending on the nature of the borrower and creditworthiness.
- Interest is charged based on the amount advanced and duration.
Types of Bank Advances
1. Cash Credit
- Credit facility provided against the pledge or hypothecation of stock or inventory.
- Borrower can withdraw funds as needed, up to the sanctioned limit.
2. Overdraft
- Facility that allows customers to withdraw more than what is available in their current account.
- Useful for businesses for handling liquidity mismatches.
3. Bill Discounting
- Advance given against bills of exchange before maturity.
- Bank pays the amount after deducting a discount (interest).
4. Demand Loans
- Entire loan amount is paid in one go and repayable on demand by the bank.
5. Short-term Loans
- Loans provided for a fixed duration and for specific purposes, such as seasonal finance, bridge finance, etc.
Difference Between Loan and Advance
| Feature | Loan | Advance |
|---|---|---|
| Tenure | Usually long-term | Short-term (less than 1 year) |
| Purpose | Asset creation, personal use | Working capital, operational use |
| Repayment | Installments | Lump sum or flexible |
| Interest Rates | Fixed or floating | Usually higher due to short term |
Legal Responsibilities of Borrowers
- Repay the amount advanced within the agreed period.
- Maintain the security or collateral if the advance is secured.
- Adhere to terms of the loan agreement governed by contract law.
- In case of default, banks may enforce rights under SARFAESI Act or file suits in Debt Recovery Tribunals (DRTs).
Regulatory Role of RBI
- RBI monitors bank advances through:
- Credit Risk Assessment Guidelines
- Exposure Norms
- Priority Sector Lending Targets
- Non-Performing Asset (NPA) Classification
- RBI mandates provisioning norms and reporting obligations for advances.
Importance of Advances in Banking
- Contribute to the profitability of banks.
- Facilitate economic growth by supporting businesses and trade.
- Help in financial inclusion through micro-credit and rural advances.
- Play a role in liquidity management in the banking system.
Related Legal Cases
Central Bank of India v. Ravindra (2002)
- Clarified principles on interest on advances, compound interest, and penal interest.
State Bank of India v. Gracure Pharmaceuticals (2014)
- Emphasized that banks must act within the terms of loan and advance agreements and RBI guidelines.