- A loan is the 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 entity at 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 cash with 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.