DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : Sreenivasa Rao B.
Designation : Lecturer in CCP
Branch :Commercial and Computer Practice
Institute : S.U.V.R&S.R GPW,Ethamukkala
Semester : VI semester
Subject Name : Banking II
Subject Code : CCP 604 (B)
Major Topic : Loans and Advances – Short term & Long
term
Duration : 50+50 minutes [100 minutes]
Sub Topic : Long term and short term loans and
Advances.
CCP604(B).8 TO 9 1
Teaching Aids : PPTs
Objectives :

On completion of this period you would be

able to

 Define long, medium and short term advances.

 Explain the factors affecting the need for medium,

long, and short term loans.

CCP604(B).8 TO 9 2
Recap

So far we have discussed

 The principles of understanding the lending policy of
a bank
 Different styles of credit extended by a banker
 Merits and demerits of loans and advances

CCP604(B).8 TO 9 3
Medium and long term , loans are
usually called ‘Term Loans’.

 MEDIUM TERM LOANS:

 Meaning : Medium term loans are granted

for a period not exceeding five years is known
as medium term loans .

CCP604(B).8 TO 9 4
Purpose of medium term loans

Medium term finance is required to meet expenses on

Modernization of plant and machinery,

Heavy advertisement campaign.
Adoption of new methods of production or distribution.
Renovation of building.

CCP604(B).8 TO 9 5
Factors affecting the need for medium term
finance in case of business organizations.
 The need for medium term finance generally arises
on account of changes in technology or increasing
competition.

CCP604(B).8 TO 9 6
 Long term loans

Meaning : Loans given for a period of five years and

above come under the category of long
term loans.

CCP604(B).8 TO 9 7
Purpose of long term loan:
 Long term finance is required to acquire fixed
assets like land, building, plant, machinery,
furniture etc.,

 To finance permanent working capital (i.e. part

of working capital which is permanently required
to hold a minimum level of current assets
irrespective of the level of operations).

CCP604(B).8 TO 9 8
Factors affecting the amount of long
term finance required in case of
business organizations:
 Nature of business
 Size of business
 Nature of products
 Method of productions
 Diversity of production lines
 Extent of use of outside parts

CCP604(B).8 TO 9 9
 Nature of Business:
 The nature of the business generally
determines the amount of long term finance.
Some of the examples are given below :

Requirement of
Nature of business
long term finance
1. Public utilities [e.g. electricity Large
generation and supply, water
supply]
2. Hotels, restaurants and eating
Large
houses.
3. Heavy engineering industries like
automobiles , iron & steel Large
CCP604(B).8 TO 9 10
Size of Business:
 The size of business also affects the amount of
long term finance. Size may be measured in terms
of the scale of operations. Larger the scale of
operations, larger will be the requirements of long
term fund, smaller the scale of operations, smaller
will be the requirements of long term funds. For
example:

CCP604(B).8 TO 9 11
 Requirement
Size of Business of long term
finance
1. Large scale manufacturing Large
enterprises
2. Small scale manufacturing Small
enterprises
3. Large scale trading enterprises
Large
4. Small scale trading enterprises
Small

CCP604(B).8 TO 9 12
Nature of Products:
 The nature of product manufactured by the
enterprises also affects the amount of long term
finance. For example:

Requirement of long
Nature of Product
term finance
1. Consumer goods Small

2 Capital goods Large

CCP604(B).8 TO 9 13
Method of Production:
 The method of production used by the enterprise
also affects the amount of long term finance . For
example:

Requirement of
Method of Production
long term finance
1. Long & Complex Large

3. Short & Small Small

CCP604(B).8 TO 9 14
Diversity of Production Lines:
 The diversity of production lines also affects the
amount of long term finance. For example:

Requirement of long
Number of Production
term finance
1. Multi-Products Large

3. Single Product Small

CCP604(B).8 TO 9 15
Extent of Use of Outside Parts:
 The extent of use of parts manufactured by outside
parties also affects the requirements of funds . For
example:

Requirement
Extent of use of Outside
of long term
Parts
finance
1. Nil i.g. each part is
manufactured by the
enterprise itself. Small

3. More use of parts Large

manufactured by outside
parties. CCP604(B).8 TO 9 16
Short Term Loans

MEANING :

A loan which is given for a period of not

exceeding one year is known as short term loan.

CCP604(B).8 TO 9 17
Purpose of short term loans are
required for business organizations:

Short term loans are required to meet day to day

operating expenses;
For holding stocks of raw-materials, spare parts,
consumable work in progress and finished goods;
To grant credit to its customers for marketing and
competitive reasons.

CCP604(B).8 TO 9 18
Summary

 Not exceeding one year -- Short term

loans.
 Above one year or -- Medium
term below five years loans
 Above 5 years -- Long term
loans

CCP604(B).8 TO 9 19
Summary …… contd….

 Short term loans are given mainly for the working

capital.
 Medium term loans are granted for modernization
of plant and machinery, renovation of building
etc.,
 Long term loans are granted for meeting capital
expenditures like purchase of machinery,
construction of factory buildings etc,
CCP604(B).8 TO 9 20
Quiz

1. A short term loan is given for a period of not

exceeding:

a) ONE YEAR

b) ABOVE ONE YEAR

c) THREE YEARS

d) ONE AND HALF YEAR

CCP604(B).8 TO 9 21
Quiz
2. For what purpose short term loans are required:

a) Day to day operating expenses

b) For purchasing fixed assets

c) For purchasing machinery

d) For purchasing lands

CCP604(B).8 TO 9 22
Quiz

3. Manufacturing of multi-products requires ______

finance.:

a. large

b. small

c. medium

d. None of the above

CCP604(B).8 TO 9
ANSWER : a 23
 Quiz

1. Size of business measured in term of the :

a) Scale of operations

b) Huge capital

c) Big buildings

d) More number of workers

CCP604(B).8 TO 9 24
Frequently Asked Questions

1. Define the meaning of :

A) short term,

B) medium term and

C) long term loans

CCP604(B).8 TO 9 25