Commercial banks are the financial institutions that accept deposits, offers loans and other small investment. Commercial banks make a profit by offering loans and the interest earned from such loans. Examples of commercial banks are HDFC, ICICI, State Bank, etc.
The banks earn profit through such lending. Lending or financing is the process in which the amount of property is offered to the person, after keeping some security, with the expectation that after the expiry of the certified time the amount will be repaid to the bank.
The lending is generally giving loans to the public. There are types of loans offered by commercial banks.
1. Home loans include the construction of the home, renovation, buying of property, land, stamp duty home, etc.
2. Personal Loans can be given to the individual based on the business, profession or salary of the individual. The loan can be utilized for any purpose. No collateral security is required for such types.
3. Business loans are loans for either existing business or for the new ventures. Bank while giving the loans to new ventures inquire about the proper plans of the business, background; assets; liabilities other relevant information of the individual. The other facilities which are provided are like
- Term Loan
- Bank overdraft facilities
- Bill Discounting
- Letter of credit for international business
4. Education Loan is one of the best ways to reduce the illiteracy and motivate the students to fulfill their dreams by sanctions education loans. The terms of education loan vary from banks to banks. But, RBI has fixed some guidelines like for studying in India 10 lakh is fixed as the average amount and for studying abroad, 20 lakh is the average amount. The repayment of the tenure varies from 10 to 15 years.
5. Gold Loan is one of the types in which banks impart loans to its client only after keeping the gold as the security. 80-90% of the value of the gold is given as the loan amount. One can repay the gold loan at any time. Depending upon the bank its tenure can vary from a day to two years.
6. Vehicle/Car Loan Compared to other loans it’s one of the easier ways to get loan. The individual has to keep the paper of the vehicle with some other formalities and within six working days, the loan gets clearance.
The lending process of the bank has to be systematic and with proper procedures. The commercial banks offer short term and long term loans for growth, commercial, personal uses. There are six steps involved in the lending process
1. Finding prospective loan customers
2. Bank verify the details of the customers and the sincerity of the purpose for which the loan is to be granted
3. Making site visits and evaluating all the accounts and other financial details of the customer.
4. Making the credit record
5. All the paper works which include all the details of the loan, security, time, interest rate which both the party has to sign.
6. To keep the compliance with the loan agreement and the needs of the customer.
“The views of the authors are personal“
Frequently Asked Questions
How does the bank identify the creditworthiness of the company?
Bank identifies the creditworthiness of the company on the basis of cash flow and assets of the company. A bank looks into deep all the financial statement and who strong the opposite party is in terms of financial capacity on the basis of the bank how much loan must be sanctioned.
What is EMI?
EMI is the equated monthly installments. A fixed payment amount is made by the borrower to a lender at the date specified to be paid every month.
What is the difference between the EMI and the interest?
EMI is the amount of the Principal money to be paid every month whereas interest is the rate of the Principal money to be paid every month. Interest is the addition to the principal amount.