Question

Discuss the differences between primary source and secondary source of repayment for commercial clients of commercial banks? (20 marks

Answer 1

Difference between Primary source and Secondary source of repayment for commercial clients of commercial banks is explained as follow :-

Primary Source of Repayment: -

• Primary source of repayment of loan means that the source of the repayment should be directly linked with the purpose for which the loan was taken.
• Such as, Overdraft facility availed to facilitate routine business activities or for Working capital should be repaid from the commercial trade or from proceed of the sale of goods;
• Similarly, the commercial loan availed before the allotment of the Shares or securities shall be repaid from the money received from the allotment of the said shares or securities;
• Moreover, any bridge loan prior to the sale of any asset should be repaid out of the proceed of such assets sold.

Secondary source of Repayment: -

• When the commercial loan can not be repaid from the proceeds of the activities for which the loan is taken, then the loan has to be repaid using any other source I.e. Secondary source.
• On many instances beyond the control of the borrower, even though there might be certain first source of repayment, there is always a possibility that the loan cannot be repaid from the first source.
• This may happen due to liquidity crunches, continuously decreasing demand in the market, poor economy, etc which the commercial client cannot control.
• Best example of this scenario is – Commercial client taking Overdraft facility or working capital loan against pledge of the Inventory. In this case if the client cannot repay the overdraft or working capital loan then the pledged inventory is ceased and loan is recovered, which comprise secondary source of repayment.