What Are The Precautions The Bank Should Take When Advancing The Cash Finance?

The primary function of the bank is to make short term commercial loans. As cash finance is a short term advance, therefore banks prefer to invest their funds in this loan which is self-liquidating. The bank however should take the following precautions in advancing cash finance. Before advancing loans against the good or documents of title of goods, the banker must thoroughly satisfy himself about the honesty, trustworthiness and experience of the borrower in the trade. In the words of John Paget provided the baker is dealing with honest and responsible persons documents of title to goods are convenient securities for advances. The banker must be familiar with the fluctuations of the prices in the commodities against which he is to advance loans or has advanced loans earlier. The up-to-date knowledge of the different markets enables the banker to regulate the margin for loans against produce goods.

The banker should advance loans against those commodities which are of seasonal nature and are readily saleable in the market. The banker must take every care in property storing the goods pledged with the bank. Deterioration and pilferage in the commodities reduces the security of the bank. In order to secure the loan the banker should take possession actual or constructive of the goods. He should also have a direct contract with the owner or the agent who is in possession of commodities.