BANKS LOANS AND ADVANCES FINANCING .docx

Loans and advances are two types of financial products commonly used by individuals and businesses to access the funds they need to meet various financial goals. Although both loans and advances serve a similar purpose, there are significant differences between the two that are important to understand before deciding which one to choose.

1. Loans and Advances- Banking Practises
Introduction to Loans and Advances
Loans and advances are two types of financial products commonly used by
individuals and businesses to access the funds they need to meet various financial goals.
Although both loans and advances serve a similar purpose, there are significant differences
between the two that are important to understand before deciding which one to choose.
What are advances?
Advances are a type of credit facility that NBFCs like us offer to their customers. Advances
are similar to loans, but they are short-term in nature. Some common types of advances are:
Cash Credit
Overdrafts
Working Capital Finance
 
What are loans?
Loans are funds offered by various financial institutions to individuals and businesses for
multiple purposes. Loans offer a lump sum amount to the borrower, who agrees to pay back
the money with interest over a certain period. The various types of loans include:
 
Personal Loans
Two-wheeler Loans
Loan Against Property
Business Loans
Seven major differences between loans and advances
1.Purpose
The key difference between loans and advances is their purpose. Loans are typically used for
long-term financing needs, such as purchasing a property or a vehicle. In contrast, advances
are used for short-term financing needs, such as paying for inventory or covering expenses
until the next payment cycle.
2.Types of Advances
Advances can be categorised into various types, such as secured advances, unsecured
advances, demand advances, term advances, and revolving advances. Secured advances
require collateral, while unsecured advances do not any security. Demand advances can be
repaid any time, while term advances have a specific repayment schedule. Revolving
advances can be used repeatedly, such as a line of credit. 
3.Interest Rates
Interest rates are another significant difference between loans and advances. Loans usually
have a lower interest rate than advances because they are long-term and have a fixed
repayment schedule, which reduces the risk for the lender. On the other hand, advances have
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

2. Loans and Advances- Banking Practises
a higher interest rate because they are short-term and often unsecured, which increases the
risk for the lender. The interest rates for loans and advances vary depending on the lender, the
borrower's creditworthiness, and other factors. 
4.Repayment Terms
Repayment terms are another crucial difference between loans and advances. Loans usually
have a fixed repayment schedule, which means the borrower has to make regular payments
over a specific period, such as 5 or 10 years. Advances, on the other hand, are more flexible
and can be repaid at any time. Some advances may have a specific repayment schedule, but
most do not.
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5.Risk
Risk is another significant difference between loans and advances. Loans are usually less
risky for the lender because they are long-term and have a fixed repayment schedule, which
reduces the chance of default. On the other hand, advances are riskier because they are often
unsecured, increasing the likelihood of default. This is why advances often have higher
interest rates than loans.
 
6.Borrower Eligibility
Borrower eligibility is another significant difference between loans and advances. Loans
usually require a good credit score and a steady income to qualify. On the other hand,
advances are often easier to qualify for because they are short-term and have higher interest
rates. However, the eligibility criteria for advances vary depending on the lender and the type
of advance.
 
7.Processing Time
Processing time is another difference between loans and advances. Loans may take longer to
process (in case the applicant may not fulfil the eligibility criteria) as they require specific
documentation and verification. Advances, on the other hand, are often processed quickly
because they require basic documentation and verification. This is because advances are
usually for smaller amounts and have a shorter repayment period.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

3. Loans and Advances- Banking Practises
Types of Loans and Advances
Types of Loans
Loans can be broadly classified into two categories: Unsecured and Secured Loans. Let’s
understand more about them.
Secured Loans: These are the loans in which you must keep your assets, like land,
buildings, gold, or other valuable asset, as security against your loan. In the event of
non-payment of your EMIs, the lender gets the right to seize the collateral asset and
recover the outstanding loan amount. As the asset backs these loans as security, it is
offered at lower interest rates. Car loans, home loans, gold loans, etc., are some
examples of secured loans.
Unsecured Loans: Under unsecured loans, you do not have to keep any asset as
collateral to the lender. Instead, these loans are approved on the basis of
creditworthiness and loan repayment capacity. As these loans are not backed by any
kind of collateral, they pose high risks to the lender; hence, they are offered at high-
interest rates. Personal loans, education loans, marriage loans, etc are some common
unsecured loans.
Types of Advances
Advances can be of multiple types. Here are some of the common types of advances:
Overdraft: Banks allow you to withdraw extra money from your bank account
compared to the actual balance you have in your bank account.
Cash Credit: Cash credit allows you to borrow money from the bank upto to the
value of the asset pledged. It’s a flexible way to access funds when you need them,
and you repay based on your usage.
Payday loans: Payday loans are instant loans, generally offered to salaried
individuals for very short loan tenure. The only requirement to avail of a payday loan
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

4. Loans and Advances- Banking Practises
is that if you must have a job. You can repay the loan as soon as you receive your next
paycheck.
Bill Purchase: Bill purchases are commonly used by business entities, wherein they
can receive funds from the banks in exchange for keeping bills/ invoices as security.
Similarities Between Loans and Advances
Both loans and advances are the financial products that support you financially during
challenging times. Despite being different from each other in terms of nature and
characteristics, they share some common aspects. Here are some of the similarities between
the loans and advances.
Both loans and advances are offered by the banks and the NBFCs.
Both loans and advances are accessible to individuals and businesses.
Loans and advances both can be offered with or without collateral.
The borrower has to repay both loans and advances per the agreed terms between the
lender and borrower.
Default in making repayments to loans and advances can impact the creditworthiness
of individuals or businesses.
Making timely payments for both loans and advances improves credit scores.
Loans and advances by commercial banks
Loans and advances by commercial banks refer to the funds that banks provide to individuals,
businesses, and other entities with the expectation of repayment over a specified period,
usually with interest. These financial products are essential for stimulating economic growth,
enabling consumers to make significant purchases, and allowing businesses to invest in
operations, expansion, and other ventures.
Loans and Advances by commercial banks
1. Personal Loans
Secured Loans:
Description: Loans backed by collateral such as property or vehicles.
Examples: Home loans (mortgages), auto loans.
Characteristics: Generally have lower interest rates due to reduced risk for
the lender. Failure to repay can result in the lender seizing the collateral.
Unsecured Loans:
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

5. Loans and Advances- Banking Practises
Description: Loans not backed by any collateral.
Examples: Personal loans, credit card loans.
Characteristics: Higher interest rates due to higher risk. Approval depends
heavily on the borrower's creditworthiness.
Student Loans:
Description: Loans designed specifically for covering educational expenses.
Characteristics: Often have favourable terms, such as lower interest rates and
deferred repayment until after graduation.
Mortgage Loans:
Description: Loans used to purchase real estate, where the property itself
serves as collateral.
Characteristics: Long-term loans with fixed or adjustable interest rates.
2. Business Loans
Term Loans:
Description: Lump-sum funds provided for a specific purpose, to be repaid
over a set period.
Examples: Loans for capital expenditures, business expansion.
Characteristics: Fixed or variable interest rates, specific repayment
schedules.
Working Capital Loans:
Description: Short-term loans to finance the daily operations of a business.
Characteristics: Helps businesses manage cash flow, usually repaid within a
year.
Equipment Financing:
Description: Loans specifically for purchasing equipment and machinery.
Characteristics: Equipment itself often serves as collateral, repayment terms
aligned with the useful life of the equipment.
Trade Finance:
Description: Financial products that support international trade.
Examples: Letters of credit, trade credits.
Characteristics: Mitigates risks associated with international transactions,
ensuring smooth trade operations.
3. Advances
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

6. Loans and Advances- Banking Practises
Cash Credit:
Description: Short-term loan facility allowing businesses to withdraw funds
against their inventory or receivables.
Characteristics: Interest charged on the amount utilized, rather than the
approved limit.
Overdraft:
Description: Facility allowing account holders to withdraw more than their
account balance up to an agreed limit.
Characteristics: Flexible borrowing, interest charged only on the overdrawn
amount.
Bills Discounting:
Description: Advance provided against bills of exchange or receivables
before they are due.
Characteristics: Helps businesses manage short-term liquidity needs,
discounted based on the creditworthiness of the drawer.
Factors Affecting Loans and Advances
Creditworthiness:
Assessment: Based on credit scores, income levels, debt-to-income ratio, and repayment
history.
Importance: Determines the borrower's ability to repay the loan and impacts loan approval
and terms.
Interest Rates:
Influences: Central bank policies, inflation rates, economic conditions, and the borrower’s
credit risk.
Impact: Affects the cost of borrowing and the overall affordability of the loan.
Collateral:
Role: Provides security to the lender, reducing the risk of lending.
Impact: Can influence the loan amount, interest rate, and approval chances.
Loan Tenure:
Definition: The period over which the loan is to be repaid.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

7. Loans and Advances- Banking Practises
Impact: Longer tenures reduce monthly payments but increase total interest paid, while
shorter tenures have higher monthly payments but lower total interest.
Process of Granting Loans and Advances
1. Application:
Borrower submits a formal loan application, providing details about their financial status,
purpose of the loan, and other necessary documentation.
2. Evaluation:
The bank evaluates the application by assessing the borrower's creditworthiness, financial
statements, collateral, and the purpose of the loan.
3. Approval:
Based on the evaluation, the bank decides whether to approve or reject the loan
application. If approved, the terms and conditions are finalized.
4. Disbursement:
Once approved, the funds are disbursed to the borrower’s account, either in a lump sum or
as per the agreed schedule.
5. Repayment:
The borrower repays the loan through regular installments (EMIs) or as per the agreed
repayment plan, including interest.
Importance of Loans and Advances
1. Economic Growth:
Loans enable businesses to invest in infrastructure, expand operations, and create jobs, thus
driving economic growth.
2. Liquidity:
Provides essential funds for businesses and individuals to meet various financial needs and
manage cash flow.
3. Financial Inclusion:
Loans help in bringing underserved populations into the formal financial system,
promoting inclusive growth.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

8. Loans and Advances- Banking Practises
4. Risk Management:
By diversifying their loan portfolios across various sectors and borrowers, banks can
manage and mitigate financial risks effectively.
Challenges and Risks
Credit Risk:
Description: The risk that borrowers will default on their loan obligations.
Management: Banks use credit scoring models, require collateral, and diversify their
loan portfolios to manage credit risk.
Interest Rate Risk:
Description: The risk that changes in interest rates will affect the profitability of
loans.
Management: Banks may use interest rate swaps and other financial instruments
to hedge against interest rate fluctuations.
Regulatory Compliance:
Description: Ensuring adherence to banking regulations and standards set by
financial authorities.
Impact: Non-compliance can result in legal penalties, financial losses, and
reputational damage.
Economic Downturns:
Description: Periods of economic recession can lead to higher default rates on loans.
Impact: Banks may face increased non-performing assets (NPAs) and reduced
profitability during economic downturns.
Loans and advances are fundamental to the functioning of the economy, providing necessary
funds for personal and business growth. While they present opportunities for economic
development and financial inclusion, they also carry inherent risks that banks must manage
diligently. By maintaining robust risk assessment and management practices, commercial
banks can ensure the stability and health of their loan portfolios, thereby supporting sustained
economic progress.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

9. Loans and Advances- Banking Practises
Lending policies of commercial banks
Lending policies of commercial banks are comprehensive guidelines that govern the
processes, criteria, and strategies banks use to extend credit to borrowers. These policies
ensure that the bank's lending activities are conducted prudently, maintaining a balance
between risk management and profitability. Here's a detailed exploration of the lending
policies of commercial banks:
Key Components of Lending Policies
1. Creditworthiness Assessment:
Credit Score Analysis: Evaluating the borrower’s credit history using credit scores from
agencies such as FICO, Experian, TransUnion, or Equifax.
Financial Statements: Analyzing income statements, balance sheets, and cash flow
statements for businesses, or personal income and expense reports for individuals.
Debt-to-Income Ratio: Ensuring the borrower’s debt levels are manageable relative to their
income.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

10. Loans and Advances- Banking Practises
2. Loan-to-Value Ratio (LTV):
Definition: The ratio of a loan to the value of the collateral.
Purpose: To limit exposure by ensuring loans are backed by sufficient collateral, thereby
reducing risk.
3. Interest Rate Policies:
Fixed vs. Variable Rates: Deciding between fixed interest rates, which remain constant, and
variable rates, which fluctuate based on market conditions.
Rate Determination: Based on the borrower’s creditworthiness, loan type, and prevailing
economic conditions.
4. Collateral Requirements:
Types of Collateral: Accepting various assets such as real estate, vehicles, equipment, or
financial instruments.
Valuation and Appraisal: Conducting thorough valuations to determine the collateral’s
current market value.
5. Loan Tenure:
Short-term vs. Long-term: Determining appropriate loan durations based on the purpose of
the loan and the borrower’s repayment capacity.
Repayment Schedule: Structuring repayment plans that align with the borrower’s cash flow
and income cycles.
6. Documentation and Legal Compliance:
Loan Agreements: Ensuring all loans are documented with legally binding contracts
outlining the terms and conditions.
Regulatory Adherence: Complying with banking regulations and guidelines set by central
banks and financial regulatory authorities.
7. Risk Management:
Credit Risk Assessment: Using models and tools to evaluate the likelihood of borrower
default.
Diversification: Spreading lending across different sectors, geographies, and borrower
profiles to mitigate risk.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

11. Loans and Advances- Banking Practises
Provisioning for Bad Loans: Setting aside reserves to cover potential losses from non-
performing assets (NPAs).
Process of Implementing Lending Policies
1. Loan Application:
- Borrowers submit detailed applications along with required documentation such as
financial statements, credit reports, and collateral details.
2. Credit Analysis:
- Credit officers conduct a thorough analysis of the applicant’s creditworthiness, including
reviewing financial history, credit scores, and collateral.
3. Risk Assessment:
- Banks employ risk assessment models to evaluate the probability of default and the
potential impact on the bank’s financial health.
4. Approval Process:
- Loan applications are reviewed by a credit committee or loan officers. High-value or high-
risk loans may require approval from senior management or a credit committee.
5. Loan Disbursement:
- Upon approval, the loan amount is disbursed to the borrower’s account, either in a lump
sum or as per a predetermined schedule.
6. Monitoring and Review:
- Continuous monitoring of the loan performance, including regular reviews of the
borrower’s financial status and collateral value.
Importance of Lending Policies
1. Risk Mitigation:
- Effective lending policies help banks minimize the risk of default and manage their
exposure to bad loans.
2. Regulatory Compliance:
- Adhering to lending policies ensures that banks comply with legal and regulatory
requirements, avoiding penalties and legal issues.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

12. Loans and Advances- Banking Practises
3. Profitability:
- By carefully managing credit risk and setting appropriate interest rates, banks can
maintain healthy profit margins on their lending activities.
4. Financial Stability:
- Sound lending policies contribute to the overall stability and health of the banking
institution, protecting it from financial crises.
Challenges in Lending Policies
1. Economic Volatility:
- Fluctuating economic conditions can impact borrowers’ ability to repay loans, affecting
the bank’s loan portfolio.
2. Regulatory Changes:
- Constantly evolving regulations require banks to frequently update their lending policies
and practices.
3. Technological Advancements:
- The adoption of new technologies for credit assessment and risk management requires
continuous adaptation and investment.
4. Competition:
- Competitive pressure may push banks to relax their lending standards, potentially
increasing risk.
Security
The term "security" refers to a multitude of different investments, such as stocks, bonds,
investment contracts, notes, and derivatives. For example, a security can represent
ownership in a corporation in the form of stock, a creditor relationship with a governmental
body or corporation in the form of a bond, or rights to ownership in the form of an option.
The Securities Act of 1933 is the first federal legislation to regulate the U.S. stock market,
an authority that was previously regulated at the state level. Under the law, anyone who
wishes to sell investment contracts to the public must publish certain information regarding
the proposed offering, the company making the offering, and the principal figures of that
company.
These requirements are intended to protect the investing public from deceptive or misleading
marketing practices. The company and its leading figures are strictly liable for any
inaccuracy in its financial statements, whether intentional or not. Later legislation created
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

13. Loans and Advances- Banking Practises
the Securities and Exchange Commission (SEC), which is responsible for regulations and
enforcement.
Although the term "securities" is commonly associated with stocks, bonds, and similar
instruments, the U.S. Supreme Court gives the term a much broader interpretation. In the
case of Howey vs. SEC (1946), the court found that the plaintiff's sale of land and
agricultural services constituted an "investment contract"—even though there was no trace
of a stock or bond.
Types of Securities
Securities can be broadly categorized into two distinct types: equity and debt. However,
some hybrid securities combine elements of both equities and debts.
Equity Securities
An equity security represents ownership interest held by shareholders in an entity (a
company, partnership, or trust), realized in the form of shares of capital stock, which
includes shares of both common and preferred stock.
Holders of equity securities are typically not entitled to regular payments—although equity
securities often do pay out dividends—but they are able to profit from capital gains when
they sell the securities (assuming they've increased in value).
Equity securities do entitle the holder to some control of the company on a pro rata basis,
via voting rights. In the case of bankruptcy, they share only in residual interest after all
obligations have been paid out to creditors. They are sometimes offered as payment-in-kind.
Debt Securities
A debt security represents borrowed money that must be repaid, with terms that stipulate the
size of the loan, interest rate, and maturity or renewal date.
Debt securities, which include government and corporate bonds, certificates of deposit
(CDs), and collateralized securities (such as CDOs and CMOs), generally entitle their holder
to the regular payment of interest and repayment of principal (regardless of the issuer's
performance), along with any other stipulated contractual rights (which do not include
voting rights).
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

14. Loans and Advances- Banking Practises
They are typically issued for a fixed term, at the end of which they can be redeemed by the
issuer. Debt securities can be secured (backed by collateral) or unsecured, and, if secured,
may be contractually prioritized over other unsecured, subordinated debt in the case of
bankruptcy. 
Hybrid Securities
Hybrid securities, as the name suggests, combine some of the characteristics of both debt
and equity securities.
Examples of hybrid securities include equity warrants (options issued by the company itself
that give shareholders the right to purchase stock within a certain timeframe and at a specific
price), convertible bonds (bonds that can be converted into shares of common stock in the
issuing company), and preference shares (company stocks whose payments of interest,
dividends, or other returns of capital can be prioritized over those of other stockholders).
Derivative Securities
A derivative is a type of financial contract whose price is determined by the value of some
underlying asset, such as a stock, bond, or commodity. Among the most commonly traded
derivatives are call options, which gain value if the underlying asset appreciates, and put
options, which gain value when the underlying asset loses value.
Asset-Backed Securities
An asset-backed security represents a part of a large basket of similar assets, such as loans,
leases, credit card debts, mortgages, or anything else that generates income. Over time, the
cash flow from these assets is pooled and distributed among the different investors.
concepts of lien, pledge, hypothecation, and advances against
documents of title to goods
In banking and finance, securing loans involves various methods to ensure that the lender has
a form of security or collateral in case the borrower defaults. Here’s an in-depth look at the
concepts of lien, pledge, hypothecation, and advances against documents of title to goods:
1. Lien
Definition:
A lien is the legal right of a lender to keep possession of a borrower's property until the debt
owed by the borrower is repaid. There are two main types of liens:
General Lien: Gives the lender the right to retain any of the borrower's properties in
possession until all debts owed by the borrower to the lender are cleared. For
example, a banker's lien.
Particular Lien: Allows the lender to retain only the specific property for which the
loan was granted until the debt for that particular loan is repaid. For example, a
jeweler's lien on a piece of jewelry left for repair.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

15. Loans and Advances- Banking Practises
Key Features:
- The lender does not have ownership of the property but only a right to retain it.
- The lien is automatically released once the debt is paid off.
2. Pledge
Definition:
A pledge is a form of security where the borrower (pledgor) transfers the possession of goods
or movable assets to the lender (pledgee) as security for a loan. The ownership of the goods
remains with the borrower.
Key Features:
- The lender has the right to sell the pledged goods if the borrower defaults.
- Commonly used for securing short-term loans.
- Example: Pledging shares or gold to obtain a loan from a bank.
Legal Framework:
- Governed by the Indian Contract Act, 1872 in India.
- Requires physical delivery of the goods to the lender.
3. Hypothecation
Definition:
Hypothecation is a security arrangement in which the borrower pledges movable assets as
collateral to secure a loan, but the possession of the asset remains with the borrower. The
lender has the right to seize the assets if the borrower defaults.
Key Features:
- Commonly used for securing loans for inventory, accounts receivable, or vehicles.
- The borrower retains possession and use of the assets.
- The lender may require periodic reports on the status and value of the hypothecated assets.
Legal Framework:
- Often governed by specific clauses in loan agreements.
- No physical transfer of possession is involved.
4. Advance Against Documents of Title to Goods
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

16. Loans and Advances- Banking Practises
Definition:
This refers to a loan provided against documents that serve as proof of ownership or control
over goods, such as bills of lading, warehouse receipts, or delivery orders.
Key Features:
- The documents must legally confer the title to the goods to the holder.
- The lender takes possession of these documents as security for the loan.
- The goods are typically stored in a warehouse or transit.
Examples of Documents of Title:
- Bill of Lading: A document issued by a carrier acknowledging receipt of goods and
promising delivery to a specified party. It is widely used in international trade.
-Warehouse Receipt: A receipt issued by a warehouse listing goods received for storage. It
serves as proof of ownership of the stored goods.
Process:
1. Document Submission: The borrower submits documents of title to the lender.
2. Verification: The lender verifies the authenticity and legality of the documents.
3. Loan Disbursement: Based on the value of the goods and the security provided by the
documents, the lender disburses the loan.
4. Control: The lender holds the documents, which effectively gives them control over the
goods.
5. Repayment: Upon repayment of the loan, the documents are returned to the borrower,
who can then take possession of the goods.
Table summarizing the key differences between lien, pledge, hypothecation, and advance
against documents of title to goods:
Featured
Lien Pledge Hypothecation
Advance Against
Documents of Title to
Goods
Definition
Right to retain
possession of
property until
debt is paid
Transfer of
possession of
goods as
collateral
Movable assets
pledged as collateral
without transferring
possession
Loan against
documents proving
ownership/control over
goods
Ownership Borrower Borrower Borrower Borrower
PossessionLender Lender Borrower
Borrower possesses
goods; lender holds
documents
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

17. Loans and Advances- Banking Practises
Featured
Lien Pledge Hypothecation
Advance Against
Documents of Title to
Goods
Control over
Asset
Retention until
debt is repaid
Control and
sell if
borrower
defaults
Seize and sell if
borrower defaults
Control through
documents; can take
possession and sell
goods
Commonly
Used For
Services
rendered with
pending
payment
Short-term
loans against
movable
assets
Loans against
inventory, accounts
receivable, or
vehicles
Trade finance and
goods in transit
Right on
Default
Retain property
Sell pledged
goods
Seize and sell
hypothecated assets
Take possession and
sell goods
Examples
Banker's lien,
jeweler's lien
Pledging
shares, gold
loans
Vehicle loans,
inventory financing
Bills of lading,
warehouse receipts
Legal
Framework
Often under
common law or
specific
contractual
agreements
Governed by
the Indian
Contract Act,
1872 (India)
Specific clauses in
loan agreements
Uniform Commercial
Code (UCC) in the US;
other trade laws
internationally
Transfer of
Physical
Possession
No Yes No No
Type of
Collateral
Any property
Movable
assets
Movable assets
Title documents for
goods
Release of
Security
Upon debt
repayment
Upon debt
repayment
Upon debt
repayment
Upon debt repayment
Risk
Management
for Lender
Moderate
High control,
lower risk
Moderate
High control, moderate
risk
Mortgage
A mortgage is a loan used to purchase or maintain a home, plot of land, or other real estate.
The borrower agrees to pay the lender over time, typically in a series of regular payments
divided into principal and interest. The property then serves as collateral to secure the loan.
A borrower must apply for a mortgage through their preferred lender and ensure that they
meet several requirements, including minimum credit scores and down payments. Mortgage
applications undergo a rigorous underwriting process before they reach the closing phase.
Mortgage types, such as conventional or fixed-rate loans, vary based on the borrower's
needs.
Different types of mortgages:
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

18. Loans and Advances- Banking Practises
Each of the fixed-rate, adjustable-rate, FHA, VA and jumbo mortgages have their own set of
benefits and ideal borrowers.
Fixed rate Mortgage
30-year fixed rate Mortgage- This type of mortgage meaning, this is a house loan and a
fixed rate of interest for the duration of the debt.
This is ideal for the homebuyers who want a reduced monthly payment by spreading out their
payments over a long period. Because of the predefined rate, the payment is predictable.
15-year fixed-rate mortgage- This type of mortgage meaning, this is a 15-year fixed-rate
mortgage. The interest rate for these mortgages does not change throughout the loan.
This is ideal for home buyers and refinancers who desire to increase equity and pay off their
mortgage faster. Total interest payments are lower because the borrower pays interest for
shorter periods.
Adjustable-rate mortgage- This type of mortgage meaning, it is a house loan and an initial
rate that is fixed for a limited time before adjusting periodically. The 5/1 ARM has an interest
rate that is set for the first five years and then adjusts annually.
This is ideal for home buyers who do not plan to keep the mortgage for a long time or expect
interest rates will fall in the future.
FHA mortgage- A Federal Housing Administration (FHA) mortgage is a housing loan that is
backed by the government. FHA loans are government-backed loans that are intended to
support moderate borrowers in purchasing a home. The down payment starts from as low as
3.5%.
After knowing how it works by FHA mortgage definition, this type of mortgage is ideal for
homeowners with low credit scores and less than a 20% down payment.
VA Mortgage- This type of mortgage meaning, is a type of loan are mortgages that are
backed by the Department of Veterans Affairs and are available to military individuals and
veterans.
These loans are ideal for borrowers that are military-qualified and want to take advantage of a
low-interest rate and no down payment requirement.
Jumbo mortgage- Jumbo mortgage meaning, to mortgages that are more than a fixed
amount.
Ideal for the buyers and owners of premium properties who wish to refinance their jumbo-
size mortgages.
Interest-only mortgage- An interest-only mortgage usually requires only interest payments
to the lender. During the interest-only payment term, the loan balance (or principal) is not
decreased.
Ideal for borrowers has a strong monthly cash flow, an increasing income, a substantial cash
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.

19. Loans and Advances- Banking Practises
reserve, or a monthly income that fluctuates. Those who receive huge annual bonuses can
also utilize them to reduce their primary balance.
Dr.A.Vini Infanta, Assistant Professor, Department of BCom PA, Sri Ramakrishna College of Arts &
Science, Coimbatore-06.