Loan Activity of Banks and Cooperative Societies

Loan Explained

  • 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.

Collateral

  • 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.
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