LOAN CATEGORIES

Types of Loan

Secured loan

This is a loan which has been secured by some asset or

property. So the borrower will pledge his assets against the
loan. In case the borrower defaults on his loan, the bank will
become the owner of such asset. It can sell the asset and
recover the amount owed to them.

Unsecured loan

This is quite opposite of secured loan , an unsecured loan is one in which the borrower does not keep any
of his assets as collateral. These loans are always riskier from the bank’s point of view, but they are an
essential tool for the bank.
Types of Loan
Commercial loan

These are generally taken by business and companies for

capital requirements or funding of operational costs.
Commercial loans generally tend to be secured by some
collateral assets. The amount of loan is also generally higher
than personal loans.

Demand loan

These are typically short-term loans. They do not have a fixed term. This means that they are payable ,
whenever the lender demands, the borrower has to repay. A demand loan also will not have a fixed
rate of interest.
PRINCIPLES OF LENDING
 Principles of Lending
Lending of funds means providing funds to the customers from the deposits held in a bank.

There are certain principles associated with lending which are mentioned below :-

Stability - Commercial banks must invest only in securities that can provide sufficient stability. This
is one of the important principles that must be followed by the bank to avoid losses .

Liquidity - Bank grants advance loans on securities that can be easily converted and marketed into cash
within short notice. This is what liquidity means and is an important principle of bank lending.

Profitability - The amount that is being invested must generate profits and hence profitability is referred to
as one of the important principles of lending. The interest rate of the loan decides the earning capacity of
securities.
Principles of Lending
Safety -

● Safety refers to the fact that the borrower should be able to repay the loan.
● Also, the repayment is based on the character of the borrower, his/ her capacity and the nature of
the security associated with the loan.
● Hence, the lender from the bank must maintain the principle of safety and look into the financial
stability of the person.

Diversity -
● Any commercial bank must follow the principles of diversity while lending.
● The bank must be careful that the investment of the surplus funds is diversified and not limited.
● Also, the bank tries to maximize diversity to minimize the risk concerning the investment portfolio