'A bank is a place that will lend you money if you can prove that you do not need it.'

Justify the above statement in relation to the banks' requirements to ensure the security of the funds they lend.



Answer to be written in exam

  1. Every loan agreement specifies an interest rate that the borrower must pay to the lender along with the repayment of the principal amount.
  2. In addition, lenders may demand collateral (security) against loans to ensure the security of the money they lend.
  3. Collateral is an asset that the borrower owns and uses it as a guarantee to a lender until the loan is repaid. For example real estate, vehicle, livestock, and deposits with banks and uses this as a guarantee to a lender until the loan is repaid.
  4. If the borrower fails to repay the loan , the lende r has the right to sell the asset or collatera l to obtain payment.
  5. Interest rate, collateral, documentation requirement, time period, and mode of repayment together comprise the terms of credit which can vary from loan to loan.

Thus, Banks lend money to a person who is financially strong so it does not become a liability to the bank. 

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Davneet Singh has done his B.Tech from Indian Institute of Technology, Kanpur. He has been teaching from the past 13 years. He provides courses for Maths, Science, Social Science, Physics, Chemistry, Computer Science at Teachoo.