Classification Of Loans and Advances: The Essential Guide for Credit Risk Management in India

Classification Of Loans and Advances: This encompasses both demand and term loans, directly extended to various clientele, especially entrepreneurs and investors, against personal assets or movable and immovable goods. The sanctioned loan amount is disbursed in cash or credited to the customer’s account, allowing withdrawal at any time. Interest accrues on the entire sum, regardless of the customer’s withdrawal from the account.

Short-term loans cater to working capital needs, while long-term loans address capital expenditures. Previously, RBI regulated loan interest rates; presently, banks have autonomy to set rates. However, each bank must establish a minimum rate termed as the Prime Lending Rate (PLR).

Classification Of Loans and Advances

Bankers typically categorize loans and advances into the following groups:

Advances on Personal Security of the Debtor:

These advances are granted based on the debtor’s personal security without requiring tangible or collateral security. Such advances are typically for small amounts or when the borrower is familiar to the banker, and the banker has complete trust in them (Clean Advance). Tangible or Collateral Security: These advances are backed by tangible or collateral security. This section explores advances secured by various types of collateral, which a banker may accept for such loans (Secured Advance).

Classification Of Loans and Advances
Classification Of Loans and Advances

Personal Security with Surety:

Advances are given against the debtor’s personal security, additionally guaranteed by one or more sureties. This type of advance is often extended to individuals unknown to the bank but with sureties known to the bank. Banks also commonly secure personal guarantees from directors of a company when providing clean or unsecured loans.

Fixed Deposit Receipts

Loans are also provided against Fixed Deposit receipts as security.

Classification Of Loans and Advances FAQ

What are the different types of advances based on security?

A: Advances can be categorized into clean advances, secured advances, and advances with personal security supported by sureties or guarantees. Clean advances don’t require collateral, secured advances are backed by tangible security, and advances with personal security have additional surety support.

Can you elaborate on clean advances?

Clean advances are granted solely based on the borrower’s personal security, where no tangible collateral is taken. These are typically offered for small amounts or to borrowers well-known and trusted by the banker.

What constitutes secured advances?

Secured advances are backed by tangible or collateral security. This category examines advances supported by various forms of collateral accepted by the banker.

What characterizes advances with personal security and surety?

These advances are supported by the debtor’s personal security with additional guarantees from one or more sureties. It’s common for such advances to be offered to individuals unknown to the bank but endorsed by sureties known to the bank, or backed by the personal guarantees of company directors.

Are loans provided against Fixed Deposit receipts?

Yes, loans are extended against Fixed Deposit receipts, providing security for the loan.

Sanjeet Kumar is a graduate of Journalism, Psychology, and English. Passionate about communication - with words spoken and unspoken, written and unwritten - he looks forward to learning and growing at every opportunity. Pursuing a Post-graduate Diploma in Translation Studies, he aims to do his part in saving the 'lost…

This is a new paragraph added to the author box.

Leave a Comment