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Type Of Loans
  • 1. Non-fund based lending versus fund based lending

    In Non-fund based lending, bank does not make any funds outlay but only gives assurance. The “letter of credit” and “bank guarantees” fall into the category of non-funding loans. The non-funding loan can be converted to a fund-based advance if the client fails to fulfil the term of contract with the counterparty. In banking language, the non-funding  advances are called Contingent Liability of the banks. The Fund based lending is direct form of loans on which actual cash is given to the borrower by the bank. Such loan is backed by primary and / or a collateral security.

    2. Secured Loans and Unsecured Loans

    In the secured loans, the borrower has to pledge some assets (such as property) as collateral. Most common secured loan is Mortgage loan in which people mortgage their property or asset to get loans. Other example is Gold Loan, Car Loan, Housing loan etc. In unsecured loans, the borrowers assets are not pledged as collateral. Examples of such loans are personal loans, education loans, credit cards etc. They are given out on the basis of credit worthiness of the borrowers. We note here that the interest rates on unsecured loans is higher than the secured loans. This is mainly because the options for recourse for lender in case of unsecured loans are limited.

    3. Term Loans versus Demand Loans

    The commercial banks provide loans of both short term (short term credit), Medium and long term. Short term loans are those loans whose tenure is less than one year. Medium term tenure is between 1 to 3 years and long term is above 3 years. However, In case of agriculture loans, there are three types of loans viz. Short term (tenure <15 months), medium term (tenure 15 months to 5 years) and long terms (tenure > 5 years). The demand loans are the loans which can be recalled by bank on demand at any time.

    4. Personal loans versus commercial loans

    If the debtor is an individual person (consumer) or a business; it is called personal loan or consumer loan. Common examples of personal loans are mortgage loans, car loans, credit cards, educational loan etc. The credit worthiness (or credit score) of the debtor is major criteria for banks to impart such loan facility. Commercial loans include commercial mortgages and corporate bonds. The credit rating of commercial organizations is one criterion for availing such loans.

    5. Working Capital Finance versus Project finance

    If the loan amount is used for operating purposes of the business, and its utilization results in the creation of the current assets; it is called Working Capital finance. To provide such loans, the lending banks carry out detailed analysis of the borrowers’ working capital requirements and then fix the credit limits. Normally, this loan is a secured loan and the working capital finance is primarily secured by the inventories and receivables of the business. The common examples of Working capital finance include Cash Credit Facility and Bill Discounting. On the other hand, project finance mainly refers to extending the medium-term and long-term rupee and foreign currency loans to the manufacturing and infrastructure sectors. Various tools of project finance include Share capital, Term loan, Debenture capital etc.

    Priority Sector Lending

    The overall objective of priority sector lending program is to ensure that adequate institutional credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability.

    MSME Credit

     Banks grant a substantial amount of loans to the micro, small and medium enterprises (SMEs) as a part of Priority sector. Banks usually follow the cluster based approach while sanctioning such loans. This sector plays very important role in the economy and given its importance, RBI has taken several measures to increase flow of institutional credit to this segment. The Small Industries Development Bank of India (SIDBI) also facilitates the flow of credit to MSME sector at reasonable rates.

    Rural and Agricultural Loans

    Banks extend term loans to farmers for their agricultural inputs. Regional Rural Banks and Lead Bank Scheme have played important role in this.

    Retail Loans

    The banks offer an array of various retail loan products such as home loans, automobile loans, personal loans (such as loans for marriage, medical expenses etc. ), credit cards, consumer loans (for TV sets, personal computers etc) and loans against time deposits and loans against shares. All of them come under the umbrella of retail loans. The target market for retails loans are the consumers in the middle and high income segment, salaried or self employed. Banks participate in the credit scoring programme to judge the credit worthiness of individuals. While granting such loans, banks use reports from agencies such as the Credit Information Bureau (India) Limited (CIBIL).

The common loan types available in India:

  1. Home loan: Everyone dreams of having their own home. But buying a property requires lot of money and is not possible for people of lower class to collect that much money at once. Banks are now providing home loans which can be helpful to you in buying a property.Home loans can be of many types:
  • Loan for Land Purchase
  • Loans for repairing and extension of your home
  • Loan for building a home

These different types of home loans can be useful to you in buying a property or a home of your own.

  1. Personal Loan: Personal loans are meant to meet the personal needs of an individual. People can use this money for anything they want. They can but some expensive gadgets or can also keep this money for going on a holiday with family. The rate of interest of this type of loan although is comparatively higher but it still feels great to have the money in advance.
  2. Vehicle loan: Vehicle loan or to be more specific car loans fulfills your dream of having a car or a bike. This loan is offered by almost all the banks in India. This loan is a secured loan hence if the installments are not paid on time the lender has the right to take back the vehicle. If you get the loan on time the installments should also be paid regularly.
  3. Education Loan: Banks also provide education loans to their customers. These loans provide better study opportunities for the students who are financially backward. Students who want to pursue higher studies from a reputed institution can apply for loan in any bank in India. Once the students get placed, they themselves can pay back the money from their payment. Hence, now students who are poor can also opt for higher degrees.
  4. Gold Loan: Among all types of loans in India, the easiest and fastest one to get is a gold loan. Earlier when gold rates were increasing at an exponential rate, this loan was the most popular. Although now, when the rates are decreasing the gold loan companies are facing huge losses.
  5. Agricultural Loans: India is a land of farmers. Most of the people in India till date are dependent on agriculture. Therefore, it is very important to pay attention to the farmers also. There are different types of loans offered by banks for the farmers which can help them in their agriculture practices. They can buy the seeds, insecticides, tractors and other equipment needed for agriculture from the money they get from the loan and can pay the money back once their crops are sold.
  6. Loan against Insurance policies: If you own an insurance policy you can apply for loan. The policies which have completed its 3 years are only eligible for loan. The insurer can himself provide you loan on that policy you don’t need to go after banks for a loan. But you can also choose banks for giving you loan. You can pledge the documents of your policy with the bank for a loan.
  7. Loan against bank FDs: If you have a Fixed Deposit in bank you can also apply for loan against Fixed Deposit. If your FD is of around 100,000 you can apply for loan of around 80,000. The rate of interest you pay for this amount is a bit higher than the interest paid by the bank for the fixed deposit. Still it is the best way to have a loan.
  8. Over Draft: Over Draft is a procedure of requesting for loans from banks. This means the customers withdraws more money than he has deposited from any particular bank.
  9. Cash Credit: Cash credit is the payment done by the bank to the customers in advance. This facility allows the borrowers to borrow a certain amount of money from bank. Few securities and are provided by the borrower to the bank. This can be renewed every year. And the borrowers can complete their pending work by the money they get from the banks.
  10. Loans against shares or mutual funds: Most of the people also present their shares and mutual funds to the banks for having loan. The banks provide loans of amount lesser that the total amount in the share. Lesser amount is given by the lender as loan since the rate of interest can also be added once the borrower is unable to pay back.
Loans although are beneficial but if you have to pay more than 70% of your salary as an installment of loan you may face financial problems. Therefore, if you are taking loan against mutual funds or shares you should be smart enough to utilize the money in the best way and be able to pay back the amount within the given time.

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