The Role of Secured Loans

by Mortgage January. 03,2023
The Role of Secured Loans

In the process of establishing and developing China's market economy, it is of great importance for banks to carry out secured lending activities. The role of security is primarily reflected in the following four aspects.


1. Coordinating and stabilizing the order of movement of commodities, so that the smooth functioning of the national economy

With the progress of society and the development of science and technology, the degree of commercialization, marketing and monetization of the Chinese economy was rapidly increased. To this extent, the market mechanism and the competition mechanism play an increasingly important role in the development of the commodity economy. This has improved the allocation of social resources and the effectiveness of socio-economic operations, while, on the other hand, it has led to the exacerbation of certain economic imbalances. In the condition of the market economy, the non-payment of a particular debt will affect not only the normal functioning of the production and operation of a business or bank, but also on the maintenance of the rights and debt relations of other creditors. In order to avoid this situation, it is objectively necessary to establish a relationship between the creditors and the debt of the implementation mechanism and the guarantee system. The loan guarantee is such a mechanism, it is the loan company and the loan bank between the specific debt and debt relationship. It avoids or reduces the negative effects on banks and other economic activities due to the inability of borrowing firms to repay the principal and interest on loans, thereby promoting coordinated stability in the order of commodity flows and the smooth functioning of the national economy.


2. Reducing the risk of bank loans and improving the efficiency of the use of credit funds

In the state of the commodity economy, there are many factors that affect the economic activity of nature and society, and many are unpredictable and inaccessible. In specific economic activities, there are often companies that borrow loans and are unable to maintain normal production and operating activities for a variety of reasons, resulting in the loss of bank credit assets.


In order to avoid the harm that borrowing companies can cause by not being able to pay their debts, in addition to making loans, through prudent credit, forecasting and analysis to avoid risk, another effective way is to establish a risk management mechanism, through risk transfer, jointly support and limit the risks of reducing and eliminating losses. The loan guarantee is a method of managing credit asset risk, which can reduce the fear of the default bank of the borrowing business, so that the repayment of the loan has a double guarantee, the loan company will not repay the risk transfer, gave it to a third party. The smooth recovery of bank loans is conducive to banks to expand the delivery of loans, give full play to the use of credit funds, so that the opening of secured loans is conducive to reducing the risk of bank loans, improving the efficiency of the use of bank credit funds.