Questions:

1. Give the definition of a bank.

2. What are the most important functions of

central/commercial bank?

3. What are the reasons for using a bank account?

4. What accounts can you open in a bank? What is the difference between them?

5. What credit services do banks offer to their clients?

6. What other bank services do you know?

LOANS

Financial institutions, such as commercial banks, are profit-making organizations that receive deposits from individuals and busi­nesses in the form of current (US - checking) and deposit (US - sav­ings) accounts and use some of these funds to make loans. Therefore, the bank's most important domestic and international activity is the extension of credit in the form of loans, overdrafts, mortgages, lines of credit.

Loan is money lent to a customer (borrower) to use temporarily and is made for interest, which varies with the risk involved.

Banks make loans only for worthwhile purposes; financing trade, expanding business, and so on. They want to manage their funds ef­fectively, that is why banks base their lending proposition on the creditworthiness of the recipient, carefully screen loan applicants to be sure that the loan plus interest will be paid back on time.

Loans are classified according to:

1. Purpose of use (commercial/business loans for businesses: per­sonal loans which are made to individuals, but not for buying cars or houses: auto loans, but not in Ukraine yet; and home mortgage loans);

2. Time period of use (short-term or long-term loans depending on whether they are to be repaid within one year or over a longer pe­riod of time);

3. Types and amount of collateral required (an unsecured loan, that is not backed by any collateral and is given to only highly regarded customers of the bank, and a secured loan, that is backed by something valuable such as property. If the borrower fails to pay the loan, the lender may take possession of the collateral. That takes some of the risk out of lending money. Banks use different types of collateral: pledging, that is using accounts receivable as security; inventory financing that is inventory (such as raw mate­rials, products) is used as collateral for a loan. Other property can also be used as collateral, including buildings, equipment, or other things of value: stocks, bonds, etc.

Commercial/business loans are characterized as short-term or long-term. To obtain urgently needed cash businesses borrow on a short-term basis paying lower interest to the lender. If you develop a good relationship with a bank, it will open a line of credit for you. A line of credit means the bank will lend the business a given amount of unsecured short-term-funds, provided the bank has the funds available. Some firms will even apply for a revolving credit agreement that is a line of credit that is guaranteed. However, the bank usually charges a fee for guaranteeing the loan. A line of credit or revolving credit agreements are good ways of obtaining funds for unexpected cash needs that arise. Long-term loans are often more expensive than short-term loans because larger amounts of capital are borrowed and the re­payment date is less secure. Most long-term loans require some form of collateral, including real estate, machinery, equipment, or stock. The interest rate for such loans is based on factors such as whether or not there is adequate collateral, the firm's credit rating, and the gen­eral level of market interest rates.

Mortgage is a legal device that gives a creditor, known as the mortgagee, an interest in property owned by a debtor, known as the mortgagor. The primary purpose of a mortgage is to provide collateral, in the form of property, to secure the repayment of a loan. A mortgage enables a person to buy property without having the funds to pay for it outright. Thus, many more people can enjoy the benefits of owning land and homes. Mortgages ordinarily have two components: the mort­gage itself, containing a description of the property and a statement that it is pledged in security of the loan; and a bond or note stating that the mortgagor is personally responsible for repaying the loan. If the mortgagor violates the terms of the note (by failing to repay the debt on time, for example), the mortgagee has the right, subject to certain conditions, to foreclose - to take over the property or to sell it and re­tain the amount of money due on the debt.

At the loan department of a bank you investigate credit proposi­tions, agree or do not agree to all of the terms and conditions. After the bank and the borrower reach an agreement, the banker arranges for the borrower to sign the necessary documents and then disburses the funds to him.