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Commercial Banks

Commercial banks play a vital role as they provide funds for different purposes with varying time slots. Banks do extend loans to all types of organisations by providing them cash/letter of credits, overdrafts, term loans, purchase/discounting of bills, etc.,
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Companies issuing different Debentures

Mahindra and Mahindra was the first company in India to issue convertible Zero Interest Debentures in January 1990. Recently, the board of Titan Industries has approved the issue of partly convertible debentures on a rights basis to raise around Rs. 126.83 crore. The issue will comprise 21 lakh partly convertible debentures of Rs. 600 each in the ratio of one partly convertible debenture for every 20 equity shares held in the company to the shareholders.

The rate of interest levied by banks depends on many factors viz., the characteristics of the firm and the level of interest rates in the economy. The loan can be repaid either in lump sum or in equated installments. Bank credit cannot serve as a permanent source of funds. Though banks have started extending loans for longer periods, normally such loans are used for medium to short periods. The borrower has to produce security or create a charge on the assets of the business firm before a loan is sanctioned by a commercial bank.

The advantages of raising funds from a commercial bank are as follows:
  1. It is the Banks that provide timely assistance to business by providing funds as and when required
  2. Secrecy of business is also maintained as the information supplied to the bank by the borrowers is kept confidential;
  3. Procedures such as issuance of prospectus and underwriting are not mandatory for raising loans from a bank. Hence it is an easier source of funds;
  4. Loan from a bank is a flexible source of finance as the loan amount can be increased according to business requirements and can be repaid in advance when funds are not utilized.
The major limitations of commercial banks as a source of finance are as follows:
Box D

Types of Debentures

  1. Secured and Unsecured: Secured debentures are such which create a charge on the assets of the company, thereby mortgaging the assets of the company. Unsecured debentures on the other hand do not carry any charge or security on the assets of the company.
  2. Registered and Bearer: Registered debentures are those which are duly recorded in the register of debenture holders maintained by the company. These can be transferred only through a regular instrument of transfer. In contrast, the debentures which are transferable by mere delivery are called bearer debentures.
  3. Convertible and Non-Convertible: Convertible debentures are those debentures that can be converted into equity shares after the expiry of a specified period. On the other hand, non-convertible debentures are those which cannot be converted into equity shares.
  4. First and Second: Debentures that are repaid before other debentures are repaid are known as first debentures. The second debentures are those which are paid after the first debentures have been paid back.
  1. Funds are usually available only for short periods and extension or renewal of the same is uncertain and complex;
  2. Banks proceed with detailed investigation into the company's affairs, financial structure etc., and may also insist on security for assets and personal sureties. This adds to the difficulty in obtaining funds from them.
  3. In some instances, intricate terms and conditions are imposed by banks that are difficult to follow For example, restrictions may be imposed on the sale of mortgaged goods leading to difficulty in normal business functions.

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