Category Archives: Banking Law Including Negotiable Instrument Act


What is Unit banking . Advantages and disadvantages of Unit Banking

he United States of America (U.S.A) is the birthplace of Unit Bank system. In this type of banking system Independent, isolated units perform banking system. It operates in the Limited area and does not open any branches in other places. There are several advantages and disadvantages of the unit banking system.

Advantages of unit banking –

Advantages of the unit banking system are as follows –

1) Easier and effective Management –

In unit Bank System, the management and supervision of Unit Bank is much easier and effective.

2)  Utility for the local development-

In Unit Banking,  the funds of the locality are utilized for the local development and are not transferred to other areas.

3) Tackle the local problems-

Unit banking can tackle the local problems as they are in the position to take initiative to tackle as they have full knowledge of the local problems.

4) fewer chances of fraud-

There are fewer chances of fraud and regularities in the financial management of the unit banks.

5) No inefficient Banks-

There will be no inefficient Banks as weak and inefficient banks are automatically eliminated.


Disadvantages of unit banking –

 

Disadvantages of unit banking are as follows-

1) Lacks benefit of specialization and division of labor – 

The unit banking system lacks the benefit of specialization and division of labor.

2) Destructive competition –

In this type of system, there will be destructive competition as they are independently run by different management.

3) Limited resources –

Limited sources of the unit Bank restrict their ability to face financial crisis.

4)  No banking development in backward areas –

In this type of system, there will be no banking development in backward areas as banking activity is uneconomical and no bank is opened.

5) Expensive transfer of Funds –

In the unit banking system, the transfer of fund is very expensive because unit banks have no branches at other places.

6) Different interest rates – 

In such a system, the interest rate may vary at different places because there is no movement of funds from place to place.

7)  Local pressure –

There will be highly local pressure and interference which disrupt their normal functioning.

8) Diversification of risk – 

In this type of system,  there is little possibility of diversification of risk under the localizable unit banking system.


Meaning of Loan and its types

Meaning of Loan –

Loan is an arrangement of advancing a sum of money on interest for a pre-agreed period sometimes for a particular purpose as well. Usually, there are three types of loan namely – (a) Term loan, (b) Participation loan (c) Personal loan. Section 5(a) of the Banking Regulation Act, 1949 Speaks about Secured Loan.

Types of Loan

There are three types of Loan 1) Term Loan 2) Participation Loan 3) Personal Loan, which are discussed follows –

1) Term Loan –

 

The first type of loan is Term Loan. Term loan is one which is sanctioned usually to Industrial undertaking for a fixed Period. Term loan can be divided into three categories-   short-term loan (up to 3 years),  medium-term ( 5 to 7 years) long-term loan (10 to 20 Years)

Example – Loan to a Small business to buy fixed assets.

Before Sanctioning Term Loan the banker examines the assets liabilities of the applicant; The earned profit and earning capacity; the nature scope and working of the undertaking; the financial position of the undertaking; and the purpose and period of loan applied for in order to safeguard its own interest.

Main features of term loan- 

  • This types of loan are sanctioned for a fixed period.
  • Short term loans or sanctioned for minimum 3 years
  • Medium-term loans are sanctioned for 5 years to 7 years
  • Long-term loans or sanctioned for 10 years to 20 years
  • Periodical installments are usually the mode of repayment; and
  • Bankers may avail the refinance facilities given by Industrial Development Bank of India for all terms loans sanctioned to industrial undertakings

2) Participation Loan – 


        Participation Loan is a loan by lending institutions. It arises when one lending institution is incapable or unwilling to shoulder the risk of a loan through an industrial undertaking. In another word, participation loans are loans made by multiple lenders to a single borrower.
In The United States of America this types of loans are very popular on the other hand India it is not, though it is gaining monument. Big and small bankers and other Financial Institutions, Co-operative Bank etc come together and participate in advancing loans to all those who are in need of loan for development purposes and who can play a key role in harnessing the country’s resources in the economic development of the nation
     

3) Personal Loan –


Personal loan is one which is sanctioned on personal security to individuals. this types of loan are intended to help the people of fixed income to raise their living standard…

Examples-

Loan for house construction

Loan for house repairing

Loan for goods of comforts, for example, Bike, Cars, T.V, Washing machine,  Refrigerators etc

This types of loan usually sanction or a period of 2 years. Personal loans are relatively unsafe.