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Banks like to be able to see where the funds are likely to come from such that the borrower is able to use to make the required loan payments. Short term, self-liquidating loans do this since the borrowed funds are used to purchase assets that generate the needed funds.
Suppose From out of a Bank Loan for a period of5 years ==50 Taxi Cars are purchased and the borrower himself runs a Rent a car business. The Assets created out of the Bank Loan are cars which are rent out on a periodic basis say, monthly and the operating income generated out of it net of expenses can be used to liquidate the entire loan without additionally resorting to other incomes by the borrower. The Assets can also be attached to the bank by creating an hyphenation leaving the possession of the asset to the borrower. Here Double benefit is generated by the bank-a charge on the asset and also a good performing asset with no much risk as to the repayment. As these loans are short term and risk is being nullified and liquidated over payment of regular installments with super charges in a short period and being a highly secured loan.----this is an example of Self Liquidating Loan.
(Self Liquidating Loan: A type of short- or intermediate-term credit that is repaid with money generated by the assets it is used to purchase. The repayment schedule and maturity of a self-liquidating loan are designed to coincide with the timing of the assets' income generation. These loans are intended to finance purchases that will quickly and reliably generate cash)
I think
* - Less risk
* - Increase money circulation, thereby increasing interest
* - Inflation fears
Some of the banks, which do not have a large capital base or large number of longer maturing deposits, like to deploy a substantial portion of funds in short-term, self-liquidating loans to businesses. This takes care of their ALM needs.
The main purpose of the bank provides the short term lending is to maintain the Regulatory Liquidity Asset Ratio and3 days stress test. This is the responsibility of the ALM (asset liability management) desk in Treasury (Global markets) to ensure return the short term fixed deposits on its maturities. Also to take benefit of changes in transfer pricing rates.
Minimalize the risk and quick cash out for positioning.
Agreed with the answer
VENKITARAMAN KRISHNA MOORTHY VRINDAVAN
