• Section 5(1) (n) of the Banking Regulation Act defines unsecured loan as ‘unsecured loan in advance means a loan or advance not so secured.’
  • The distinguishing feature of this type of loan, according to the definition, is that no tangible security is offered to the bank.
  • Clean advances are granted to customers of integrity with a sound financial backing, high business reputation and capacity to manage the business. In such a case, the general capacity of the customer is security in itself. In case of his default to repay, the banker’s position is unsafe and can rank equal with other unsecured creditors to realize the assets of borrower. So, to safeguard his position, a banker lends on personal security coupled with the guarantee of one or more persons.
  • Confidence in the borrower is the basis of unsecured advances. A banker pins his faith on the ability and willingness of the borrower. It is a sine qua non of good lending that the banker should know his customer well and be able to form a judgment about his integrity which should be undoubted. The confidence is judged by three considerations, character, capacity usually referred to as the three ‘C’s.



  • Character continues the best asset of man. The word character implies Personal qualities like honesty, responsibility, promptness, reputation and Goodwill. A person who poses most of the above qualities is considered as a man of character and a bank can extend credit to him without any reservation. With such man of integrity, repayment of loan will be certain and timely. So, character is of Paramount importance for unsecured loans.



  • The capacity of a borrower refers to his ability to manage the business. Success of the enterprise depends mainly on the initiative, interest, experience and managerial ability of the entrepreneur. So, capacity is the next consideration in granting clean advances.
  • Nationalization of banks has widened meaning of capacity of the borrower. In judging the capacity, greater Reliance is made on the economic viability of the project for which loan is sought. Economic viability means the capacity to manufacture goods at the lowest cost and to leave sufficient profit to meet its commitment of loan. It is also expected that the enterprise should contribute to higher production and sir social objective. Thus, the capacity of a borrower is assessed by his technical competence, experience in that line of business, operational efficiency of the project; it’s earning power and also the productive purpose of the loan.



  • In addition to the character and capacity of a borrower, a banker looks into other aspects that are capital. Bank provides mainly the working capital requirements of the business. A borrower should have sufficient capital to conduct his business and adequate planned and machinery to carry out normal production.

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