Banks lend various credit facilities to individuals and companies. Most popular loans availed by individuals are:
- Education Loans
- Housing Loan
- Car Loan
- Property/Mortgage loan
- Personal Loan
- Credit Card facility
- Agricultural loan
- Gold loan etc
Similarly corporates avail loans for capital expenditure, equipment, working capital purpose, Advertisement & Marketing expenses and others.
Underlying all these loans and lending is a concern for security value. Based on available security, loans can be classified into 3 categories:
- Unsecured loans
- Partially secured loan
- Fully secured loan
Unsecured loans are those loans with no underlying security in the transaction. These loans are sanctioned not for asset generation but for some personal or consumption purpose. Banks feel reluctant to provide unsecured loans. Banks provide unsecured loans only to loyal and old customers with excellent track record and to companies with excellent credit rating. Sometimes government regulations compel banks to lend on unsecured basis which they do reluctantly. Some of the examples for unsecured loans include personal loans, credit cards, education loans.
The “default” ratio is generally high in unsecured lending owing to customers not feeling the pinch in case of payment default. As banks cannot foreclose/sell any of the borrower’s properties the moral hazard attitude of borrowers plays spoilsport.
Partially Secured Loans are those loans where security is available not to the complete extent of the loan. If a loan is given for a value of 100 then security provided by the borrower may have a value lower than 100. Banks usually lend these type of loans if they feel that there is a better chance of recover-ability of the loan and the borrower has better credit worthiness.
Fully Secured Loans are those loans where underlying security covers for the entire loan amount. In case of customer defaulting the payment, banks can sell the underlying or pledged asset and recover the pending dues.