2. Lending & Credit Operations

Q: Banks don’t just hold our money – they also give out loans. How do loans work, and what types of loans do banks provide?

A: Exactly. Lending is the second core function of banks (the first being accepting deposits). If deposits are the input (money coming in), loans are the output (money going out to the economy). Banks lend money to individuals, businesses, and governments for various purposes, and they charge interest on those loans. The interest a bank earns from loans is typically higher than what it pays on deposits, and that spread is a primary source of profit for banks. Now, loans come in many flavors. Here are the major types of loans banks usually provide:

Retail Loans (Loans to Individuals): These are loans given to persons like you and me for personal needs. Common retail loans include:

• Home Loans (Mortgage Loans): To buy a house or flat, or construct one. The property is usually the collateral (more on collateral soon). These are long-term loans (often 10-30 years). The interest rates can be fixed or floating. Because houses are expensive, this is one of the largest loan segments.
• Auto/Car Loans: To buy a car or two-wheeler. The vehicle is the collateral. These are medium-term loans (typically 3-7 years).
• Personal Loans: These are usually unsecured loans (no specific collateral) given for any personal use – could be for a wedding, medical emergency, a vacation, etc. They rely on your income and credit history rather than any security. Tenure is shorter (1-5 years). Interest rates on these are higher since there’s no security.
• Education Loans: For students to finance college/university education. Often they have lower interest and some government interest-subsidy schemes apply. Repayment usually starts after studies (with a moratorium period).
• Credit Card Outstanding/Consumer loans: To If you think of a credit card, it’s like a short-term loan you can keep reusing up to a limit. Also, some banks give consumer durable loans (for buying gadgets, appliances) which might be structured as EMIs. These are all part of retail lending.
• Gold Loans: In India especially, many banks (and specialized finance companies) give loans against gold jewellery. The gold is kept as collateral and a percentage of its value is given as loan.
• Loan against Fixed Deposit / Securities: If you have an FD or shares, banks can give you a loan against those as collateral. It’s a way to get liquidity without breaking the FD or selling shares.

Corporate Loans (Loans to Businesses and Companies): This is a broad category for loans given to firms – ranging from small businesses to large corporates:

• Working Capital Loans: These are short-term funds to meet day-to-day business expenses (like buying inventory, paying salaries). They often take the form of cash credit or overdraft where a company can draw up to a limit from its account, or trade credit facilities like letters of credit, etc. These loans are like a revolving line – as the company gets cash (from sales), it pays down the loan, and can borrow again. Collateral is often the stock (inventory) or receivables of the company. Banks evaluate the business cycle to set limits.
• Term Loans: These are like the corporate version of a fixed tenure loan for a specific purpose – e.g. purchase of machinery, setting up a factory, etc. They have a fixed schedule for repayment over years.
• Project Loans: For big projects (like building a power plant, highway, etc.), banks may give large loans typically in a consortium (multiple banks together due to huge amounts). These loans consider project viability and cash flows.
• Small Business Loans (MSME loans): Banks lend to micro, small, and medium enterprises for various needs – could be working capital or term loans. This segment is critical and often backed by government credit schemes or guarantees because small businesses are engines of the economy.
• Agriculture Loans: India being an agrarian economy, banks also lend to farmers – for buying equipment, seeds, crop loans for the season, tractor loans, etc. These might be directly to farmers or indirectly through rural credit institutions. They often have subsidized interest or priority sector status.
• Other Specialized Loans: There are loans like Export Credit (to finance exporters pending payment from abroad), Infrastructure financing, etc. Even within corporate, some loans can be secured by assets (like a factory mortgage) or unsecured (if the company is top-rated).

Priority Sector Lending: The RBI mandates that a significant portion of bank lending (generally 40% of adjusted net bank credit) must go to certain “priority” areas like agriculture, micro/small enterprises, education, affordable housing, etc. . This isn’t a separate type of loan per se, but a classification. It ensures banks also lend to sectors which are important for inclusive growth but might not be as commercially attractive. So, many of the categories above (agri, MSME, education, low-cost housing loans) fall under priority sector. Banks even have targets within this, like sub-target for agriculture, weaker sections, etc.

That’s a lot of types! You can simplify it in your mind as “retail vs corporate” or “individual vs business” loans. And within each, there are secured vs unsecured loans, short-term vs long-term, etc. But fundamentally, all these loans involve the bank giving money upfront and the borrower promising to return it over time with interest.

A simple analogy: If deposits are the fuel, loans are the engine output – driving economic activity. Home loans create houses, education loans create educated individuals, business loans create jobs and products. Banks diversify across many loan types to spread risk and serve all needs. They’ll typically have a loan portfolio mix (some % retail, some % corporate, etc.) to balance their risk and return.

So, when you hear a bank’s advertisement about different loans – they are catering to these various needs. Each loan type has its own eligibility criteria and terms, but they all follow the same principle: borrow now, pay back later with interest.