Banks lend money to the public for various purposes like the purchase or construction of a home, to consume goods like home appliances such as TVs, fridges, air conditioner and many more; and they also finance enterprises both manufacturing and services. Moreover, they also grant loans to ordinary people.
The financing that the Banks provide has a lot of risks attached. A loan default may occur for several reasons, one of them could be environmental disasters like tornadoes, tsunami or even floods, which are beyond the control of the borrowers. That’s a terrible thing for the borrowers because it may prevent them from restoring their businesses or even wipe out their assets. This is risky not just for them but for the Banks also because the borrowers wouldn’t be able to do the payments in time. The Banks put themselves in hurry by doing this because, for example, imagine the case that none of the borrowers repay the loans, the Banking industry would probably face collapse, in extremely odd conditions.
The most common reason for Bank failures in America and in other places too is because of borrower defaults. The ideal situation would be that the borrowers repay the loans on time, but what happens in real life is that they don’t always do their payments according to contract, that’s the case for both institutions and individuals, and that has terrible consequences in the well being of the Banks.
Such is the case that Banks have set strict norms and procedures before lending money to a borrower. Each proposal is examined in detail before taking the decision to actually grant the loan, they look at the credit proposal and think about its viability. One of the ways that Banks have found to protect their interests is security; this is one of the safeguards that they use in the lending process, along with other precautions.
Banks reduce the possibility of default by securing its loans, and even if default occurs, the loss will be less than otherwise.