A loan isthe lending of money from one individual, organization or entity to another individual, organization or entity.
A loan is a debt provided by an entity (organization or individual) to another entityat an interest rate, and evidenced by a promissory note which specifies, among other things, the principal amount of money borrowed, the interest rate the lender is charging, and date of repayment.
A loan entails the reallocation of the subject asset(s) for a period of time, between the lender and the borrower.
Loan Activities of Banks
Banks keep a small proportion of their deposits as cashwith themselves to pay the depositors who might come to withdraw money from the bank on any given day
Banks use the major portion of the deposits to extend loans.
In this way, banks mediate between those who have surplus funds (the depositors) those who are in need of these funds (the borrowers).
Banks charge a higher interest rate on loans than what they offer on deposits.
The difference between what is charged from borrowers and what is paid to depositors is their main source of income.
In addition to the interest , lenders may demand collateral (security) against loans.
Collateral is an asset that the borrower owns (such as land, building, vehicle, livestock’s, deposits with banks) and uses this as a guarantee to a lender until the loan is repaid.
If the borrower fails to repay the loan, the lender has the right to sell the asset or collateral to obtain payment.
Property such as land titles, deposits with banks, livestock are some common examples of collateral used for borrowing
Loans From Cooperative
The working of Cooperatives and people take loans from Cooperatives.
Besides banks, the other major source of cheap credit in rural areas is the cooperative societies (or cooperatives).
Members of a cooperative pool their resources for cooperation in certain areas.
There are several types of cooperatives, namely:-
Farmers cooperatives .
Weavers cooperatives .
Industrial workers cooperative
The Cooperative accepts deposits from its members.
Using the deposit as collateral, the Cooperative obtains a large loan from the bank.
The loan amount received from the bank is used as funds to provide loans to the members.
Once the members repay the loans the amount is repaid to the bank and a fresh loan is taken from the bank.
The Cooperative provides loans to its members for the purchase of agricultural implements, loans for cultivation and agricultural trade, fishery loans, loans for construction of houses and for a variety of other expenses.
Self help Group
In recent years, people have tried out some newer ways of providing loans to the poor.
The idea is to organize rural poor, in particular women, into small Self Help Groups (SHGs) and pool (collect) their savings
A typical SHG has 15-20 members, usually belonging to one neighborhood, who meet and save regularly.
Saving per member varies from Rs. 25 to Rs. 100 or more.
Members can take small loans from the group itself to meet their needs.
The group charges interest on these loans but this is still less than what the moneylender charges.
After a year or two, if the group is regular in savings, it becomes eligible for availing loan from the bank.
Loan is sanctioned in the name of the group and is meant to create self-employment opportunities for the members.
SHGs help borrowers overcome the problem of lack of collateral.
They can get timely loans.
SHGs are the building blocks of organization of the rural.