Banks provide loans to the public for various purposes, such as buying or building houses, and purchasing consumer goods such as television and music systems. Banks also provide financing for companies, including manufacturing and services. In addition, they also provide personal loans to individuals.
Such services provided by banks, ie financing, or more common loans, are frauds with several inherent risks. Loan defaults can occur for a variety of reasons, including reasons beyond the borrower's control, for example, in the event that a flood or tsunami may eliminate the borrower's assets, except that it prevents him from restarting business immediately. The most serious risk facing banks during the loan process is the risk that the borrower will not pay the loan. Imagine a bank borrower not repaying the loan they got! This may cause the banking industry to collapse!
To a large extent, due to the default of borrowers, there are many cases of bank failures in the United States and elsewhere. However, in an ideal situation, each borrower will repay his loan from the bank in real life, which will not happen. Many times, borrowers, whether individuals or organizations, have not fulfilled their repayment commitments, affecting the well-being of lending banks. Sometimes, the borrower becomes a defaulter and even has a valid reason.
In this case, Banks will always follow the rules and procedures before they allocate money to the borrower. Before deciding to grant a loan, the bank reviews and evaluates the credit proposals in terms of technology and finance, as well as their responsibilities and feasibility. Each loan is individually evaluated to determine the reasonableness of the proposal before deciding whether to grant the loan. Obtaining a loan guarantee is one of the safeguards that banks take to ensure their interests. In the various preventive measures of bank supervision, in order to protect their interests in the loan process, the guarantee obligation of the loan is provided by them.
Definition of guarantee: A guarantee relating to a loan provided by a bank to a borrower refers to any kind or description of assets of certain quality, including monetary value, which can be held by a bank, an event of default, and used to repay the loan.
After deferring the loan to the borrower, the bank naturally wants to ensure that the loan is repaid and interest is earned. In other words, the bank wants to get a loan. This is done by generating fees for bank-funded assets. The type of charge created depends on the nature and security of the loan.
Basically, banks can use two types of securities to get a loan. They are the primary security and affiliate security.
The main security reflects the assets created directly by bank financing. For example, in the case of a bank buying a house, the house is the main security measure. Similarly, a car purchased with the help of a bank loan is the main guarantee for the loan. The bank will set a fee for this major security to secure its loan. This fee gives the bank legal authority to dispose of the asset and use its proceeds for the amount of the default loan.
Mortgage guarantees reaffirm certain additional guarantees that banks receive for obtaining loans. For example, banks have already funded the purchase of machines for a pharmaceutical company. This mechanism will be the main guarantee for this loan. In addition, the Bank can obtain a mortgage guarantee in the form of a factory owned by the company as an additional guarantee. If the main securities do not have enough value to flow the loan, this will protect the bank's interests. Sometimes, due to unfavourable market conditions, the value of major securities is eroded, leaving banks at a higher risk than originally expected.
In addition, you can rely on the borrower's personal security loan. Obtaining the borrower's personal safety enables the bank to deal with the borrower and his or her personal property in order to recover the loan.
Once the bank obtains the loan with the appropriate guarantee, the probability of default will be reduced, and even in the case of default, the amount of damage that may be suffered will be lower than other circumstances.
Orignal From: The importance of bank loan security
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