Nature and Security of Loans

To ensure the safety of funds lent, the first and most important factor considered by a bank is the capacity of borrowers to repay the amount of loan, The bank therefore, relies primarily on the character, capacity and financial soundness of the borrower. But the bank can hardly afford to take any risk in this regard and hence it also has the security of tangible assets owned by the borrower. In case the borrower fails to repay the loan, the bank can recover the amount by attaching the assets. It can sell the assets offered as security and realize the amount. Thus from the view point of security of loans, we can divide the loans into two categories: (a) secured, and (b) unsecured.

Unsecured loans 

Unsecured Loans are those loans which are not covered by the security of tangible assets. Such loans are granted to firms/institutions against the personal security of the owner, manager or director. On the other hand,

Secured loans 

Secured loans are those which are granted against the security of tangible assets, like stock in trade and immovable property. Thus, while granting loan against the security of some assets, a charge is created over the assets of the borrower in favour of the bank. This enables the bank to recover the dues from the customer out of the sale proceeds of the assets in case the borrower fails to repay the loan.

There are various types of securities which may be offered against loans granted, but all of those are not acceptable to the banks. The types of securities generally accepted by the bank are the following:

• Tangible assets such as plant and machinery, motor-van, etc. 
• Documents of title to goods, like Railway Receipt (R/R), Bills of exchange, etc. 
• Financial Securities (Shares and Debentures) 
• Life-Insurance Policy 
• Real estates (Land, building, etc). 
• Fixed Deposit Receipt (FDR) 
• Gold ornaments, Jewellery etc.