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 a loan.
A loan in a formal agreement between a bank and borrower to provide a fixed amount of credit for a specified period.
We can easily say that as a profit-oriented business organization if a bank gives its resources temporarily under certain conditions, it will be called the loan.
Bank gives loan for profit earning purposes.
To fulfill this purpose, bank loans must have some important characteristics.
10 Characteristics of a bank loan that makes it different from other types of loans are;
- Amount of loan.
- Ultimate decision.
- Mode of the loan.
- Nature of distribution.
- The process of disbursement.
- Loan price.
- Periodicity’ of bank loan.
- Repayment of loan.
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There are two parties involved in the loan transactions. One is the bank and the 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
The loan amount may very-small, medium or large.
There might be the difference between the applied amount and the sanctioned amount on the basis of the quality and capacity of the borrower and the purpose for which applied.
3. Ultimate Decision
Banks’ decision is final in the case of loan application.
That is bank can fully sanction, partially sanction or may totally reject the loan application after considering the goodwill of the clients, its own fund and other issues related with creditworthiness.
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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, machinery, and other inputs etc.
5. Nature of Distribution
Generally, banks disburse loan in installment basis.
But when the 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, the bank asks the person to open a current account.
The bank provides the sanctioned loan through that account.
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Generally, loans are provided against collateral.
But the sometimes 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 the loan, goodwill of the clients and purpose, the periodicity of the loans can vary.
The loan may be sanctioned for immediate use, short-term, and mid-term or long-term basis.
10. Repayment of Loan
Loans are repaid on an installment basis or it may be a one-shot arrangement.
In preparing the 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 bank.