In the article we consider the concept, classification and types of bank credit. What it is? The Civil Code of the Russian Federation at the moment gives a definition of two close concepts - credit and loan. These concepts are, of course, interconnected and similar, but there are significant differences between them.
Definition Features
A loan is the transfer of cash or other material assets from one side to the other. A loan, in turn, acts as a special case of a loan agreement and provides for the following characteristic features:
- If the loan agreement does not provide for other conditions, then the loan can not be given free of charge, without charging interest for use.
- The loan involves the transfer to the borrower of only cash for temporary use. Other material values are not issued on credit.
- A creditor can only be an official banking institution that has the right to conduct financial activities.
Credit Background
Based on the last paragraph, we can conclude that credit is only bank. In turn, bank lending can be defined as the entirety of the relationship between the borrower and the banking organization as a lender. The prerequisites for such a relationship in this case are:
- The borrower ensures the transfer of a certain amount for use for certain purposes. However, there are unsecured loans.
- Timely return of funds provided.
- Payment by the borrower of interest on the loan in accordance with the agreement.
Bank loan classification
Banking structures give customers the opportunity to choose from a large number of loan products. There are several classifications of bank loans. Consider one of them, depending on the signs of lending:
- The main groups of borrowers. In this case, distinguish loans to organizations and enterprises, individuals and banks. More often than not, 68.7% of the total amount of loans comes from enterprises and organizations, about 20% is issued to individuals and about 12% comes from lending to banks.
- The term of use of the loan. Urgent loans and call loans (on demand) are allocated here. At the same time, urgent ones are divided into short-term, that is, up to 12 months, medium-term (up to three years) and long-term, outstanding for a period of more than three years.
- Loan amount. On this basis, small, medium and large loans are allocated.
- Security. They are divided into blank or unsecured and collateral, insured and guaranteed loans.
- The method of issuing a loan. In this case, we are talking about compensation loans, which are transferred to the borrower's account in order to recover costs from his own funds, as well as payment loans that are sent for payment according to documents.
- Repayment method. Loans are allocated that are repaid in installments, and those that are repaid at a time.
Types of loans
A common classification of bank loan forms does not exist for all countries. This fact is due to the fact that the level of development of the banking sector is different for each country, as well as the ways of providing funds to the borrower. Above, we described the classification according to the main features. However, there is a more detailed classification of loans, which is most often found in economic literature. It involves the allocation of the following features:
- Purpose of the loan.
- Area of use of credit funds.
- The term for which a loan is issued.
- Security.
- The way credit is repaid.
- Type of interest rate.
- Loan amount.
The concept of bank loans and their classification are of interest to many.
By appointment
By purpose, the following types of loans are allocated:
- Agricultural.
- Industrial.
- Investment.
- Shopping.
- Mortgage.
- Consumer.
Consider the main types of bank loans and their classification.
Agricultural loans are granted to peasant farms or farmers in order to assist in the development of agricultural activities, namely harvesting and cultivating the land.
Industrial loans are issued for the development of production activities, as well as for the purchase of equipment and materials.
A consumer loan is issued to individuals in case of urgent need, for example, to repair or purchase household appliances, etc.
Mortgage lending caters to real estate. It applies to the acquisition or restoration of housing.
By scope of use
Depending on the scope of use, loans are allocated to provide fixed or working capital. The latter are divided into loans in the sphere of circulation and production. For the Russian economy, loans in the sphere of circulation are most characteristic.
Depending on the terms of use, urgent loans and demand loans are allocated. What other classification criteria for bank loans are?
To ensure
Security provides blank and secured loans. Blank or unsecured loans are issued only to borrowers who have established themselves as reliable payers. They do not require additional collateral or insurance. Secured loans, in turn, represent the most common form of lending in Russia. They are divided, depending on the form of security, into guaranteed, insured and collateral. This separation is more theoretical in nature. In practice, everything is somewhat different, and loans in the Russian banking sector are divided into unsecured, insufficiently secured and secured. The classification of bank loans is not limited to this.
By repayment method
Depending on the method by which the loan is repaid, installment loans and lump-sum funds are allocated. A traditional form of repayment of short-term loans is a one-time repayment. This is most convenient from a legal point of view and does not require a complex loan processing procedure. In installments, loans are provided for repayment of more than two payments, extended for the entire duration of the contract. The loan repayment terms are negotiated upon conclusion of an agreement with the bank and directly depend on the loan term, inflation, facility, etc. Consider the classification of bank loans by interest.
At interest rate
Depending on the type of interest rate, fixed and floating interest on the loan are allocated. A fixed interest rate assumes a tariff set for the entire loan period without the right to make changes. The borrower undertakes to return the funds to the bank in accordance with the concluded agreement and at the established interest rate. This type of lending is characteristic of the Russian banking sector.
Floating lending rate involves a review of the previously established interest rate. Moreover, the interest rate consists of two parts, namely: the main one, which varies depending on market trends, and the premium, which is fixed.
By loan size
Small, medium and large loans are allocated depending on the size of the loan. There is no single classification for this characteristic. Loan sizes vary depending on the situation in a market economy. Large in Russia is considered a loan, the size of which exceeds 5% of the total capital of a banking organization.
Types of Credit Risks
The risk in the credit sector is the probability of loss of material plan by a banking organization. The reason for such losses may be a change in the market value of financial instruments. Changes in the foreign exchange market can also cause banking risk.
There is a generally accepted classification of bank loans by risk level. So, depending on the source of formation, the following risks are highlighted.
External risk
The probability of losses is due to the borrower's insolvency or default. This happens under the influence of macroeconomic factors that affect the client. Such risks do not apply to banking or to a specific borrower, here a significant influence is exerted externally by the economy, politics or society. A similar situation may be, for example, the introduction of martial law, a revolution, a change in the political regime of the country, embargo, privatization, the imposition of sanctions on imports or exports, the economic crisis, natural disaster, etc.
Internal risk
Such risks arise as a result of the default or insolvency of the borrower in the event of negative internal factors. In this case, the risk was directly affected by the activities of the client. Such a situation can lead to an irrational distribution of expenses, a drop in the organization’s reputation, an ineffective payment policy, etc.
By risk
Depending on the degree of risk, the following types are distinguished:
- Valid. Assumes losses up to 25%.
- Medium or high, losses for which can be up to half the amount.
- Tall. Losses for this type of risk can reach up to 75%.
- Critical. It is considered unacceptable, since losses on it can be up to 100%.
The principles of bank lending and the classification of bank loans are closely related.
Lending principles
Like any other type of financial relationship, credit is based on certain principles that ensure the smooth operation of the entire banking mechanism. The lending sector provides six basic principles, which include:
- Urgency. This is an important condition for the provision of cash on credit. In this case, the loan term is specified in the contract and must be strictly observed by the borrower when repaying funds. The principle of urgency determines the repayment of the loan.
- Returnability. It is the basis of any loan issued. If the borrower had not undertaken the obligation to repay the funds, the credit system itself would have lost its essence.
- Security. This is also a kind of guarantee of repayment, since in case of refusal of the borrower to assume the obligation to repay the loan, the bank is guaranteed to receive collateral, insurance or continues the process of collection from guarantors.
- Paid. It is also the basis of credit relations. This principle involves the return of not only the money taken, but also interest on the use of the loan.
- Differentiation. It involves an individual approach to each individual client. This is due not only to different conditions of customers, but also to government policy in relation to the credit sector.
- Target nature. This is the inclusion in the loan agreement of the purpose for which the loan is taken.
We examined the classification of bank loans.