Topic - Loan activities of banks

·         Banks keep only a small proportion of their deposits with themselves, as a provision to pay the depositors who might come to withdraw from the bank on any given days.
  • ·         Banks use a major portion of the deposits to extend loan (credit).
  • ·         Banks mediate between those people who have surplus funds (depositors) and those people who are in the need of those funds (borrowers).
  • ·         Banks charge a higher rate of interest on the loan than what they offer on deposits.
  • ·         The difference between what is charged from borrowers and what is paid to the depositors is their main source of income.


Two Different Credit Situations
  • ·         Credit (loan) refers to an agreement in which the lender supplies the borrower with money, goods or services in return for the promise of future payment.
  • ·         In some situations credit plays an important and a vital role but in some situations it makes the situation of the borrower worst than before (debt trap).


Debt trap
At times repayment of the loan becomes difficult and credit instead of improving the earnings, pushes the borrower into a situation from which recovery is very difficult and painful. This situation is called debt trap.


Terms of credit
  • ·         Interest Rate
  • ·         Collateral
  • ·         Documentation
  • ·         Mode of Repayment

The terms of credit vary substantially from one credit arrangement to another.
Collateral
  • Collateral is an asset that the borrower own ( such as land, building, vehicle, live stocks, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
  • If the borrower fails to pay the loan, the lender has the right to sell the asset or collateral to obtain payments.
  • Property such as land titles, deposits with banks, live stocks are some common examples of collateral.