Bank takes surplus funds from its customers in its own custody and again temporarily provide or transfer these funds for a specific duration in exchange of some interest or profit as loan.
Timothy W Koch defined loan as,
Formal agreement between a bank and borrower to provide a fixed amount of credit for specified period.
We can easily say that as profit oriented business organization, if a bank gives its resources temporarily under certain conditions, it will be called loan.
Bank gives loan for profit earning purposes. To fulfill this purpose, bank loans must have some important characteristics.
Bank loan has some characteristics. They are given below:
There are two parties involved in the loan transactions. One is the bank and other is the loan applicant.
The applicant will apply for loans to the bank and bank will accept the application. Bank can reject the application if found financially not viable.
2. Amount of Loan
Loan amount may vary-small, medium or large. There might be difference between the applied amount and the sanctioned amount on the basis of the quality and capacity of the borrower and purpose for which applied.
3. Ultimate Decision
Banks’ decision is final in case of loan application. That is bank can fully sanction, partially sanction or may totally reject the loan application after considering the goodvvill of the clients, its own fund and other issues related with creditworthiness.
4. Mode of Loan
Generally loans are given in cash. But in exceptional cases, the same may be provided in kind, such as raw materials, machineries and other inputs etc.
5. Nature of Distribution
Generally banks disburse loan in installment basis. But when bank is convinced, it may disburse the whole amount of sanctioned amount at a time.
6. Process of Disbursement
Banks often disburse their loan against the existing current account of the client. If the client is new, bank asks the person to open a current account. Then bank provides the sanctioned loan through that account.
Generally loans are provided against collateral. But sometime small amount of loans can be sanctioned on the basis of personal guarantee.
8. Loan Price
Banks never sanction loan without interest. But interest rate can vary on the basis of types of loan or track records of the clients.
9. Periodicity’ of Bank Loan
Depending on types’ of loan, goodwill of the clients and purpose, periodicity of the loans can vary. Loan may be sanctioned for immediate use, short term, and mid-term or long term basis.
10. Repayment of Loan
Loans are repaid on installment basis or it may be a one-shot arrangement. In preparing loan repayment schedule, banks generally, focus on the possible cash flow stream of the clients’ projects.
At a glance, these are the characteristics of bank loans generally that are seen in case of every’ commercial banks.