Tuesday, 30 August 2016

All you should know about loan classification

Classification of Loans
 Loan is no more a facility that only a small group of people avail of; they have become much more common now and aid a great deal in financial inclusion.  Loans are taken for various personal and commercial purposes. There are education loans, home loans, business loans, seed capital loan, loan against property and so on. However do you know that loans can be classified into various categories based on different factors? They can be differentiated on the basis of their duration, purpose, collateral backing, repayment status and so on. Here we discuss few such classifications.
Secured and Unsecured Loans:
Secured and unsecured loans maybe distinguished on the basis whether any collateral is attached with the loan or not. Secured loans are those loans which are given against a pledged asset like home loan (against the property for it is taken), car loan, loan against gold, loan against deposits. While unsecured loans have no collateral against them, examples of such loans include education loan, personal loan and credit card borrowing. Secured loans are safer for the lender as the lender as an asset as a safety net if the borrower defaults. This makes them less expensive when compared to unsecured loans. Interest rates for unsecured loans are higher.
Commercial and Non-Commercial Loans:
When a loan is given to a non-individual or a legal entity for business purposes then it is known as a commercial loan. These loans are given for purposes like buying machinery, inventory or equipment. Non-commercial loans are given to individuals; these are loans like car, home, personal etc. For commercial loans the creditworthiness of the organization is assessed while for a non-commercial loan the credit rating of the individual is important.
Demand Loan and Term Loans:
This loan classification is based on the loan tenure. There are term loans and then there are demand loans. In case of demand loans the lender can ask the borrower to return at any time, as the name specifies; on demand. These loans are generally taken for working capital requirements like buying raw material or paying short term liabilities etc. Term loans are for a fixed period, there can be short term loans (less than a year), medium term (one to three years) and long term loans (more than three years).
Priority Sector Lending:
As the name specifies these are advances for specific sectors which require focus or special attention owing to various reasons. Banks may not find it lucrative to lend to these sectors but the government would like to encourage lending to these sectors as these sectors may be important for the economy and the overall development and prosperity of the country. Agricultural loans, loans to Small and Medium Enterprises (SMEs) fall in this category. Loans to such sectors may be given at special interest rates or under special terms.
Classification of Loans as per their Repayment Status:
This is a classification of loans that you can find in your Credit Report and is based on the
repayment status of your loan.
  • STD is for Standard; these are loans for which the payment is made within a 90 day period.
  • NPA are Non Performing Asset and is used for those loans that have been overdue beyond a period 90 days.
  • SUB denotes Sub Standard Account; NPA for over a year are put in this category.
  • SMA denotes Special Mention Account. This category that is used to report a standard account falling to the sub standard category.
  • Doubtful is a loan that has been in the SUB status for more than one year.
  • Loss; an account which is uncollected and is confirmed as a loss.
Irrespective of how a loan is classified; the basic rules for them remains the same. The must be taken with utmost care and should be repayment in full without any delays or defaults.

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