Question

Why do banks or financial institutions specialize in making specific types of loans?....Please explain.

Answer 1

Interest received on Loans disbursed are the main source of Income of Banks or Financial Institution. The more they give loan, the more will be their Income. To maximize the number of loan disbursal in market they need more and more customers applying loan. To attract wide range of people applying for loans, Banks/Financial Institution need to provide solution as per the requirement of the people in economy.

The need of loan is different for different group of people. Similarly the willingness to pay a percentaage range of people are also different. People can be grouped as per their requirement of money, purpose, size, period etc. People need money to start / expand their business, purchasing homes, car/vehicle, machineries, education of their children, personal reasons like marriage, travel etc, Then some are secured loans, some are non-secured. Some people want in millions, some want in thousands. So, their is a wide range of need, types of people, period of repayment, with or without security.

Therefore, to provide solution to entire range of people, their requirement, willingness/capability to pay interest, banks/financial institution specialize in making specific types of loans. The terms and conditions are necessary to be specialized as per the requirement, quantity of loan, purpose of loan, repayment capacity of applicant, period of the loan repyament, income of the cutomer. for eg. People will not pay more interest on secured loans. Business loans can have more rate of interest than home loans. Repayment Period of home loans are more and the property is hypothecated by bank so it has lower interest for long run. Personal loans are normally unsecured so the banks' risk is high hence, rate of interest is also kept high.

So, the banks/Financial institution design their financial products in such a way that the every sector of economy can have their solution without effecting Govt. law /Policy and at the same time safeguard the money of bank from being bad debt. That is the reason they specialize in different loans like Personal Loan, Vehicle Loan, Home loans, Education Loans, Business Loans for SME and large companies, Loan for marriage, Loan for Aggriculture, Loan against property, Bonds & Shares etc.