Loans and advances – Broadly speaking, banks have two major groups of customers base on the debtor creditor relationship.
The first group is the depositors, the depositors are those customers who keep money with a bank on the basis that they are either repayable on demand or after a period of notice.
The money so deposited is treated as a loan to the bank. The bank is therefore a debtor while the depositor is the creditor. We have already discussed how banks keeps account of deposits in the preceding section.
The next group of customers is borrowers. Borrowers are those customers who borrow money from the bank in various forms. Such customers borrow for various reasons and purpose. And for various periods of maturity.
Loans And Advances For Customers
When a customer borrows from a bank, the debtor creditor relationship is reversed. The bank then becomes the creditor while the customer becomes the debtor. Despite this reversed position, it is till expected of the bank, as a creditor to keep a correct account it loans and advances to the customers. This is the type of accounts we are discussing in this section.
The terms loan and advances is used to cover all forms of bank lending. However, advances are more commonly used for short term lending. In accounting for loans and advances, banks maintain two basic accounts. These accounts are loans account and over draft account. The major features of each of these two types of account will be discussed in subsequent updates.
Time Deposits Account And Fix Deposit Account
Deposit into a fixed deposit account are usually made once and must be left in the account for stipulated period. However, a bank can design a special type of fixed deposit in which can be used to encourage savers to deposit an agreed amount of money on a daily, weekly or monthly basis.
This is in no way like loans and advances, this regular deposit are targeted at saving up to an amount that would be large enough to carry out specifics spending at the end of the specific period. Only deposit are made into such accounts, no withdrawals is allowed until the end of the period. This type of fixed deposit is used to encourage thrift among savers.
Reed pointed out that many of the people he knows would possibly not have the capacity to accept or the will to save if banking services of this magnitude was provided for them. It helped to cultivate financial discipline in the account holders.