Lending

Banks have to pay interest on the deposits at agreed rates of interest. In addition, they have to meet their operational expenses. Therefore, banks have to invest/lend the monies and earn interest. Lending money by way of loans and advances of various kinds is, thus, an important traditional function of a bank, The funds mobilised from deposits are deployed by a bank as loans and advances to earn profits by way of interest spreads, i.e. the differential between the average interest rates on loans and on deposits. The interest income from loans and advances forms a major chunk of a bank’s operating profit.Banks lend in the form of Cash Credits, Overdrafts, Demand Loans and Term Loans. Based on the borrower profile, loans can be classified as Corporate Loans, SME advances, Agricultural Loans, Retail Loans, Foreign Currency Loans, Educational Loans, Vehicle Loans etc.Loans are also classified on the basis of security. Security could be in the form of Surety, Pledge of Securities (LIC policies, Deposit receipts, shares and debentures), Mortgage of property, etc. A loan account with security is known as secured loan whereas, a loan without security is known as clean loan (clean advance).