QS Study

Characteristics of Bank Loan

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.

Banks can provide a loan in different ways. A loan can be in cash or in non-cash form. If a client takes advantage from a bank by issuing the bank’s goodwill through making a contract, this will be treated as “goodwill loan” of the bank.

Timothy W Koch defined loan as “a formal agreement between a bank and borrower to provide a fixed amount of credit for a specified period.”

From the above discussion, 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.

Characteristics of Bank Loan: Bank loan has some characteristics. They are given below:

Parties: There are two parties involved in the loan transactions. One is the bank and 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.

Amount of Loan: 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 purpose for which applied.

Ultimate Decision: Banks’ decision is final in case of loan application. That is bank can fully sanction, partially sanction or may totally reject the loan application alter considering the goodwill or the clients, its own his and other issues related with creditworthiness.

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.

Nature of Distribution: Generally banks disburse loan in installment basis. But when a bank is convinced, it may disburse the whole amount of sanctioned amount at a time.

Process Disbursement: Banks often disburse their loan against the existing current account for the client. If the client is new, the bank asks the person to open a current account. Then bank provides the sanctioned loan through that account.

Security: Generally loans are provided against collateral. But sometimes a small number of loans can be sanctioned on the basis of personal guarantee.

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.

The periodicity of Bank Loan: Depending on types of loan, goodwill of the clients and purpose, a periodicity of the loans can vary. A loan may be sanctioned for immediate use, short-term, and mid-term or long-term basis.

Repayment of Loan: Loans are repaid on an installment basis or it may be a one-shot arrangement. In preparing a 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.

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