Classification of Loans and Advances, Types of Loans and Advances

Classification of Loans and Advances: It includes both demand and term loans, direct loans, and advances given to all types of customers mainly to businessmen and investors against personal security or goods of movable or immovable in nature. The loan amount is paid in cash or by credit to the customer account which the customer can draw at any time. The interest is charged for the full amount whether he withdraws the money from his account or not.

Short-term loans are granted to meet the working capital requirements whereas long-term loans are granted to meet capital expenditure. Previously interest on loans was also regulated by RBI. Currently, banks can determine the rate themselves. Each bank is, however, required to fix a minimum rate known as the Prime Lending Rate (PLR).

Classification of Loans and Advances

Loans and advances given by bankers can be classified broadly into the following categories:

1) Personal Security of the Debtor :

Advances which are given on the personal security of the debtor, and for which no tangible or collateral security is taken; this type of advance is given either when the amount of the advance is very small, or when the borrower is known to the Banker and the Banker has complete confidence in him (Clean Advance).

2) Tangible or Collateral Security :

Advances that are covered by tangible or collateral security. In this section of the study, we are concerned with this type of advance and with different types of securities that a Banker may accept for such advances (Secured Advance)

3) Personal Security :

Advances which are given against the personal security of the debtor but for which the Banker also holds in addition the guarantee of one or more sureties. This type of advance is often given by the Banker to persons who are not known to them but whose surety is known to the Banker. Bankers also often take the personal guarantee of the Directors of a company to whom they agree to advance a clean or unsecured loan.

4) Fixed Deposit Receipts :

Loans are also given against the security of Fixed Deposit receipts.

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