Question

QUESTION 4

To which C of the five C’s of credit does commercial loan support relate most closely?

		Character
		Capacity
		Collateral
		Conditions

Answer 1

The answer of the above question is COLLATERAL.

Collateral covers a multitude of sins. If you have a low credit score, you might normally be declined a loan, but with collateral your lender might be more likely to take that risk because the lender can take ownership of the asset pledged and thus reduce the risk it takes on by loaning to you.

Conventional wisdom holds that collateral in the form of physical assets is useful in securing loans and reducing loan losses. The traditional view is that most lenders require collateral for loans and that land is the preferred form. In the absence of clear land titles or other forms of collateral or collateral substitutes.

it is expected that there will be a contraction in the supply of credit thereby reducing access to finance for rural borrowers (Binswanger and Mcintire, 1987). Recent theoretical literature and limited empirical evidence, however, suggests that collateral performs a much more complicated role in lending, that it's use involves costs, that it interacts with several other loan terms and conditions that substitute for it, and that it does not always improve access to credit. Furthermore, the use of several collateral substitutes has been observed to improve access to loans.

The prevalence of collateral as an integral part of credit contracts in many countries demonstrates its important role in financial markets. Collateral is perceived to perform several functions and ensures that the interests of borrowers and lenders are more closely matched so that transactions can be consummated even in environments characterized by high risks in lending and high borrowing costs. This section examines the role of collateral/collateral substitutes in improving borrower access to loans.

Banks look for several criteria in evaluating collateral. First, the appraised value. The appraised value has to, at the least, cover the amount of the loan. Additionally, if lenders have to take your collateral they will seek to liquidate it as soon as possible. So Commercial loan does support relate most closely as Collateral.