Loan Types: Secured, Unsecured, Retail and Corporate

A loan is secured when a named asset stands behind it and unsecured when nothing does. A loan is retail when a household or a business too small to be run as a company is borrowing, and corporate when a company is. The two splits are independent, so every loan is one of each. The first split changes what the lender can reach if the loan is not repaid.

Notice how narrow the first split is. Secured does not say the loan is safer, cheaper, larger or easier. Secured says one thing only: what the lender can reach. Almost every confusion on this subject comes from stretching one small factual word into a verdict on the whole arrangement, and the stretching happens without anybody noticing it happen.

What are the two questions that describe every loan?

Two, and they are answered separately. The first asks what stands behind the loan: a specific named asset, or nothing specific at all. The second asks who is doing the borrowing. A household, or a business small enough to be handled like one, falls under retail lendingLending whose borrower is a household, or a business small enough to be handled like one. The test that sorts a borrower into that group is covered separately.. A company falls under corporate lending. Neither question answers the other.

The two questions are answered independently. The honest picture is therefore four boxes rather than four points on one scale. Most descriptions list secured, unsecured, retail and corporate in a single row, as though a loan slid along one line from one end to the other. It does not. A loan sits in exactly one of four boxes, and describing it takes both coordinates. Saying a loan is retail tells somebody half of what they need. Saying it is secured tells them the other half. Neither half alone describes anything.

There is an everyday version of this that costs nothing to picture. A room described as upstairs has been placed in the house. Nothing has been said about whether the door locks. Somebody who hears upstairs and concludes locked has folded two independent facts into one, and if they then act on it, they act on a fact nobody ever gave them. Loans are described this way constantly.

Secured Loan: what exactly makes a loan secured?

A loan is secured when one specific asset is named in the agreement and attached to the loan by a chargeThe recorded attachment of a lender's claim to one specific asset, so that the claim points at a named thing rather than only at a person.. The charge is entered in a register of chargesThe record in which a charge over an asset is entered, so that anybody checking the asset can see what is already attached to it., and anybody looking at the asset can then see what is attached to it. If the loan is not repaid, the lender has a route to that named asset rather than only a claim against the person or the company that borrowed.

Secured describes the lender's position, not the borrower's, and it is the single most misread word in lending. The word is not doing anything sly. The word says exactly what it means, and it means it about one party. A charge is entered in favour of somebody, and the somebody is the lender. Nothing about the arrangement makes the borrower's position more secure than it was the day before, and one part of it, the free use of the asset, is now less free than it was.

Here is the everyday version. A landlord holding a spare key to a flat is in a different position from a landlord holding no key. The tenancy has not become safer for the tenant. Nothing about the rent, the term or the notice has changed. One party now has a route into the flat that did not exist before, and the tenant agreed to that route in advance. Read the word secured with the key in mind and it stops sliding around.

Two details matter and both are easy to miss. The first is that the charge is a thing that gets created. The charge did not exist before the loan. The loan brings it into being, so it has a date, a register entry and, eventually, a removal. The second is that the register entry can be checked. Where a charge over an asset is recorded is a matter of record, and the central registry of charges at cersai.org.in is the body that keeps that record for the assets it covers. The Reserve Bank of India sets what may be entered there.

Unsecured Loan: what is the lender holding instead?

A loan is unsecured when no specific asset is attached to it at all. Nothing is named in the agreement as standing behind the loan, nothing is entered in any register, and there is no particular thing the lender can point at. The lender holds a claim against the borrower instead: a claim that is general rather than attached to a named object.

Unsecured does not mean that nothing follows if the loan is not repaid. Unsecured means the lender's claim is general rather than pointed at one thing. That distinction is worth slowing down on, because the alternative reading is the second half of the same error the word secured causes. A general claim is still a claim. The claim is still recorded, still enforceable, and a stated procedure still begins when repayment stops. The missing piece is a named asset in the middle of it, not the consequence.

The everyday version again. Somebody who has borrowed from a cooperative society against nothing in particular has not borrowed from a party with no way of following it up. The society has a claim on them, in general, as a person who agreed to repay. Somebody who borrowed against a named vehicle has a party with a claim on them AND a party with a route to the vehicle. Two different pictures, and only one of them has a thing in it.

Law and the Reserve Bank of India at rbi.org.in set what that route consists of on either kind of loan. The stages, the notices, the time each stage takes and what may be done at each one are the Reserve Bank of India's to set, and they are revised on its schedule. A copy of them written out elsewhere would not be merely out of date the day they moved. A copy would be flatly incorrect, and would still read like something settled.

Secured vs Unsecured Loan: how do the two compare, criterion by criterion?

Five criteria, applied in the same order to both. Running them is a different exercise from repeating the two definitions next to each other. Run in order they are: whether a named asset is attached; whether a charge is registered anywhere and where; what the lender can reach if the loan is not repaid; what the lender has to hold against the exposure; and what the borrower gives up at the moment the loan is taken.

The first three separate the two cleanly and are predictable. On a secured loan one asset is named and a charge is entered in a register; on an unsecured loan neither happens and there is no entry to find. The reach differs in kind: a route to a named thing, plus whatever else the agreement allows, against a general claim and no named thing at all.

The fourth criterion is the one people expect to separate them and it does not do so nearly as cleanly as they expect. A lender's holding against a loan that has stopped performing is a matter of a rule, not of a word, and the Reserve Bank of India sets the rule. The criterion is named below and its value belongs to the authority that sets it.

The fifth criterion is the only one on the list written from where the borrower stands, and it is the one this comparison usually drops. On a secured loan, the borrower gives something up on the day: free use of the named asset, from the moment the charge is entered until the moment it is released. Not the asset, and not the use of it in the ordinary sense, but the freedom to deal with it as though nothing were attached. On an unsecured loan nothing specific is given up on the day at all. Every version of this comparison that runs only the first four criteria has described a transaction with one party in it.

Why do the two splits stay independent of each other?

Because the two questions are settled by different people about different things. Who is borrowing is a fact about the borrower, fixed before any negotiation begins. The security behind the loan is a term of the agreement, settled in the negotiation itself. Nothing in the first constrains the second, and all four boxes get filled every day.

One amount, lent four ways. Rs 51,00,000/- below is an arithmetic illustration and nothing more. An invented borrower behind it would read exactly like a reported one, so no borrower stands behind it at all. The amount is held constant. The comparison across the four rows then falls on the boxes rather than the sizes.

All four rows are ordinary, and not one of them is a special case. A phrase such as retail loan therefore carries only half of what it takes to describe a loan. Notice also what the middle column does to the table: the amount never moves. Four genuinely different arrangements sit behind one identical figure, and any process that sorted these four rows by size would have sorted them by the one column that carries no information at all.

What has each side actually promised?

A loan is a promise running in two directions, and both directions have to be written out. The borrower has promised to repay a stated amount on stated dates. The lender has promised to make a stated amount available on stated terms. So far this is what everybody expects.

The one both sides forget sits on the secured loan only. The lender has also promised to release the charge over the asset once the loan is repaid, and the releaseThe step in which a lender removes its charge over an asset once the loan has been repaid, and has the removal recorded where the charge was entered. is an obligation rather than a courtesy. A repaid loan whose charge is still sitting in a register is a loan that is only half finished, and the half that is missing is the lender's half. The steps needed to complete it, and the deadline for them, belong to the Reserve Bank of India at rbi.org.in.

One fact settled elsewhere makes the two-directional shape concrete. The loan is recorded as an asset by the lender and as a liability by the borrower, the same Rs 51,00,000/- on both sides, so the pair nets to zero across the two records and neither entry can exist without the other. The netting is a fact about claims rather than about loan types, and it holds identically in all four boxes.

Turned around, the arrangement brings a different authority into view. Money a household places with a lender, rather than borrows from one, has something standing behind it. The reach of that protection belongs to one body only, the Deposit Insurance and Credit Guarantee Corporation, whose current wording sits at dicgc.org.in.

What does the security do once a loan stops being repaid?

Three things happen, and they happen the same way on both kinds of loan. Interest stops being recognised as income by the lender. An amount is set asideThe amount a lender holds against a loan that has stopped performing. How much, and from when, is set by the Reserve Bank of India. against the loan. And a stated procedure begins. Not one of those three waits to find out whether an asset stands behind the loan.

The security changes what comes next, not whether anything stopped. On a secured loan the procedure that begins includes a route to a named asset. On an unsecured loan it does not, and the claim stays general throughout. The difference is real and it matters a great deal to the lender, but it arrives at step four, after three steps that were identical.

One set of reported figures shows the same point in numbers. Suvarna Commercial Bank Limited reports gross advancesEverything a lender has out on loan, counted before a single rupee is set aside against any of it. of Rs 1,44,000 crore, of which Rs 6,480 crore is gross non-performing. Divide the smaller by the larger and 4.50 per cent falls out, struck on gross advances, and that base has to travel with the number every time it is quoted. Its provision coverageThe share of the non-performing amount that a lender has already set aside against it. The Reserve Bank of India sets what that share must be. is 70.0 per cent, so Rs 4,536 crore is held against those loans and Rs 1,944 crore is not.

Look at what does not appear in that arithmetic: no asset, anywhere. The 70.0 per cent is struck on the Rs 6,480 crore of loans, not on the value of anything standing behind them. The 4.50 per cent is struck on the Rs 1,44,000 crore of gross advances, not on a pool of security. Security enters afterwards, in the route, and the route is the Reserve Bank of India's to set. The meaning of these two measures, and how each is built, is covered separately and drawn on here rather than rebuilt.

One absence has to be named rather than filled in. The reported figures do not split either amount between secured and unsecured loans, and nothing divides what Suvarna Commercial Bank Limited has lent into segments. A split invented to fill that gap would read exactly like a split reported, and a reader would have no way to tell them apart.

What does security not do?

Four things, and every one of them is assumed somewhere. Security does not make the loan smaller: the Rs 51,00,000/- in the table above is the same figure in all four rows. Security does not make repayment easier: the dates and the amounts are what the agreement says, and nothing about a charge softens them. Security does not automatically limit the lender to the named asset and nothing else. Whether a lender may also pursue a general claim is settled by the agreement rather than by the word. And security does not guarantee that a lender will reach the amount it lent.

The last of the four deserves its own sentence. An asset's worth on the day it is reached is a separate question from its valuation on the day the loan was made, and the word secured says nothing about the gap between those two numbers. How much of an asset's value a lender funds in the first place is measured by loan to valueA measure of how much of an asset's value a lender has funded. The working is set out separately., which is worked properly under loan to value.

The word describes an arrangement between a lender and an asset, and reading it as a description of the borrower's position is the error that costs money. Once the word is pointed at the right party, none of the four assumptions above survive contact with it.

Who sets the rules named throughout?

Nine requirements have been named above, each one left blank. The pattern across the nine matters more than any single row. Each decides something that happens in a real loan. Each belongs to the Reserve Bank of India. And each gets revised on that body's timetable.

Here they are together: what may be taken as security and how the charge over it goes onto a register; the point at which a loan stops counting as performing, together with what has to be put against it then; the procedure to be followed before and during any action on security; the notice owed to a borrower at every stage of that procedure; what fair practice a lender owes the borrower it is dealing with; the conditions under which a loan may be restructuredA change to the terms of an existing loan, made on stated conditions. The Reserve Bank of India sets those conditions.; the exposure limits that cap what may sit against any single borrower and any single group; the way a loan's interest rate has to be benchmarked; and the identity requirements to be cleared before a loan account can be opened.

The empty version is still right after the requirement moves. A card whose rows are drawn empty with the authority printed in each blank therefore serves a reader better than the same card completed from recollection. Completed from memory, those rows would look settled while quietly ageing, with no way of telling which of the nine had gone off.