Importance of Security For Bank Loans

 Banks offers money and supports public in terms of money for various purposes, like buying any amenities, property, construction of home, education loan, personal loan, or for the purchase of consumer goods like a TV, Air conditioner, music system etc. These valuable banks also finance small and large businesses or manufacturing and Services unit. Apart from all these, they also extend personal loans to members of the public.

The services related to financing are most commonly provided by the banks. It is the one of the safest financial service providers in which defaults in taking loan may occur for only reason that is in case of floods or a Tsunami that may wipe out the assets of the borrower, apart from rendering him or her incapable of restarting his business immediately. The most serious risk to Banks in the lending process is the risk of non payment of the loan by the borrower.

Bank industry can be collapsed if non of the borrowers of banks are unable to repay their respective loans taken by them. The current spate of bank failures in all over the world is in good part, on account of borrower defaults. Whereas in real life every borrower repays the loan availed by him or her from the bank and this thing doesn’t happen.

Many times borrowers. Both individuals and institutions, fails to keep up their repayment commitments this will affect the well being of the lending bank. There may be many times a genuine reasons why borrowers become defaulters.

Banks invariably have in place, norms and procedures that they follow before parting with money to a borrower. Banks examine and evaluate credit proposals, as to their viability and feasibility, both technically and financially, before taking a decision to grant a loan. Each loan is appraised individually to ascertain the soundness of the proposal and only then a decision will be made to give the borrower the desired loan he or she wants.

Obtaining of security for loans is one of the safeguards that Banks exercise to secure their interests. Banks always safeguard their interests at the time of loan extension by them by taking each and every precautions observed from the activity of the borrower.

Definition of Security of loans

Security , in relation to a loan extended by a Bank to a borrower, means, an asset, of any kind or description, having certain qualities, monetary value, that can be possessed by the Bank, in the event of default, and applied toward repayment of the loan.

Bank will only extend the loan when the borrower would naturally like to ensure to pay the loan with interest thereon. Bank would always want to secure the loan and it’s done by the way of creating a charge against the asset financed by the Bank. The type of charge created depends on the nature of loan, and the security. Basically, there are two types of securities available to Banks to secure a loan – Primary security and Collateral security.

For example, where a Bank finances the purchase of a home, the home is the primary security. In the same way, a car purchased with the help of a Bank loan, is the primary security for that loan. Bank creates a charge against this primary security, to secure its loan. This charge gives the Bank the legal authority to dispose off the asset, and apply the proceeds and to the loan amount in default.

Additionally, loans can also be secured with the help of personal security of the borrower. Obtaining personal security of the borrower enables the Bank to proceed against the borrower and his personal estate, to recover the loan.

Leave a Comment