The document discusses various types of loans and lending principles. It describes secured and unsecured loans, open-ended and close-ended loans, and various forms of advances like cash credits, overdrafts, and bills discounted. The lending process involves filling a loan application, submitting documents, sanctioning the loan, executing an agreement, and arranging security. Basic lending principles for banks are safety, liquidity, profitability, and risk diversification.

1. BY: ARSHAD
AKHIL
DINESH
JASWANTH
LOANS , ADVANCES AND BASIC
PRINCIPLES OF LENDING

2. LOANS
 The extension of money from one party to another wit
h the agreement that the money will be repaid with
interest. Nearly all loans (except for some
informal ones) are made at interest, meaning borrowe
rs pay a certain percentage of the principal amount to
the lender as
compensation for borrowing. Most loans also have a
maturity
date, by which time the borrower must have repaid th
e loan.
 A loan may be guaranteed by collateral, meaning that
the lender either keeps an asset belonging to the borro
wer until the loan is
repaid or has the right to seize such an asset in the eve
nt of default. Often, loans are obtained to purchase a
major asset, such as a
house. These loans are generally guaranteed by the as
set they are used to buy. Lending is a foundational co
mponent of capitalism.

3. 3

4. • Secured :- A secured loan is a loan in which the borrower pledges some asset
(e.g. a car or property) as collateral.
A mortgage loan is a very common type of money, used by many individuals to
purchase things. In this arrangement, the money is used to purchase the property.
The financial institution, however, is given security — a lien on the title to the
house — until the mortgage is paid off in full. If the borrower defaults on the loan,
the bank would have the legal right to repossess the house and sell it, to recover
sums owing to it.
•Unsecured :- Unsecured loans are monetary loans that are not secured against
the borrower's assets. These may be available from financial institutions under
many different guises or marketing packages:
credit card debt
personal loans
bank overdrafts
credit facilities or lines of credit
corporate bonds (may be secured or unsecured)
peer-to-peer lending

5. • Open-ended loans :- These are loans that you can borrow over and over.
Credit cards and lines of credit are the most common types of open-ended loans.
With both of these loans, you have a credit limit that you can purchase against.
Each time you make a purchase, your available credit decreases.
As you make payments, your available increases allowing you to use the same credit
over and over.
• Close-ended loans :- These loans cannot be borrowed once they’ve been
repaid.
As you make payments on closed-ended loans, the balance of the loan goes down.
However, you don’t have any available credit you can use on closed-ended loans.
Instead, if you need to borrow more money, you’d have to apply for another loan.
Common types of closed-ended loans include mortgage loans, auto loans, and
student loans.

6.  (I) FILLING UP OF LOAN APPLICATION FORM
 (II) SUBMISSION OF FORM ALONG WITH DOCUMENTS
 (III) SANCTIONING OF LOAN
 (IV) EXECUTING THE AGREEMENT
 (V) ARRANGEMENT OF SECURITY FOR LOAN
Procedure for granting loans and
advances:

7. The advances can be classified two categories
• Loans, cash credits and overdrafts.
• Bills discounted and purchased.
Forms of Advances

8. This account is the primary method in which banks
lend money against the security of commodities
and debt. It runs like a current account except that
the money that can be withdrawn from this
account is not restricted to the amount deposited
in the account.
Cash credits

9. Overdrafts
The word overdraft means the act of overdrawing
from a bank account. In other words, the account
holder withdraws more money from a bank
account than has been deposited in it..
Bills discounted and purchased
Bank takes the bill drawn by borrower on
his(borrower's) customer and pay him
immediately deducting some amount as
discount/commission

10. BASIC PRINCIPLES OF LENDING
SAFETY
LIQUIDITY
PROFITABILITY
RISK DIVERSIFICATION

11.  Safety:- Banks need to ensure that advances are safe and money lent
out by them will come back. Since the repayment of loans depends on
the borrowers' capacity to pay, the banker must be satisfied before
lending that the business for which money is sought is a sound one.
 Liquidity:- To maintain liquidity, banks have to ensure that money
lent out by them is not locked up for long time by designing the loan
maturity period appropriately.
 Profitability:- To remain viable, a bank must earn adequate profit
on its investment. This calls for adequate margin between deposit rates
and lending rates. In this respect, appropriate fixing of interest rates on
both advances and deposits is critical.
 Risk Diversification:- To mitigate risk, banks should lend to a
diversified customer base. Diversification should be in terms of
geographic location, nature of business etc.