Credit Risk is always associated whenever the bank is giving advances; therefore, security against advances is imperative to diminish risk. A significant income source for Indian banks is lending, advances, or loans means the rate of income from lending or advances is greater than the rate of income from other investments, indicating that a bank’s strength mainly depends on the quality of its lending advances. Banks have a distinctive arrangement of advances, as mentioned below,
Secured Advances
An advance made on the security of assets where the security market value is not less than the financed amount of advances; such advances are known as Secured Advances.
Various charges like – Pledge, Hypothecation, Mortgage, Assignment, and Lien of assets are created against advances to increase security.
Based on IRAC norms – Asset Classification, the bank has to do less provisioning for the secured advance than for Unsecured Advances, which improves the bank’s profitability; therefore, Banks try to make secured advances as secured advances security reduces bank risk.
Banks have distinctive secured advances as,
Advances secured by Tangible Asset
Housing loans, mortgage loans, vehicle loans, etc., in which tangible security has been taken to ensure the finance, are come under this category – Advances secured by Tangible Asset.
Advances Covered by Bank/ Government Guarantee
The assignment of Government securities, life insurance policies, or the pledge of fixed deposit or shares, etc. in which Bank/ Government provided security has been taken to secure the finance, are come under this category – Advances Covered by Bank/ Government Guarantee.
Unsecured Advances
An advance made without any security is known as Unsecured Advance. Banks depend on borrowers’ reputation and credit standing when providing such advances and borrowers’ assurance to repay. Pradhan Mantri Mudra Yojna, Overdraft without any security, education loans without security or personal loan, etc., are examples of Unsecured Advances.
Partly secured advances are one of the types of unsecured advances. A passage made with security from the borrowers that do not fully cover the finance amount of advances is partly secured. Partly secured advances are made by bank borrowers having a good reputation and credit standing, but the borrower has insufficient assets to offer as security. A cash Credit account to corporate is one example of Unsecured Advances.