Both loans and investments are examples of the utilization of bank funds. Banks provide credit to the clients and cam interest from it.
On the other hand, if banks have excess loanable funds, they may invest in money market or capital market instruments and earn dividends, interest, or bonus shares.
However, there are some key differences between loans and investments. In the following section, we will try to identify these:
| Points of Differences | Loan | Investment |
|---|---|---|
| Transaction Type | Debit transactions. | Mostly equity transactions. |
| Contacts | Direct. | Indirect and impersonal. |
| Knowledge of Maturity Period | Known to leaders, borrowers, and other interested parties. | Except for debentures, not known in other types of instruments. |
| Term | It may vary from several days to even 40 years. | Depends on the investment policy of the banks. |
| Negotiation | Knowledge of the Maturity Period | No scope for discussion as all the terms and conditions are pre-fixed and not negotiable. |
| Purpose of the raised Funds | Leading banks are expressly informed. | Installment purchasing/investing banks are not aware. |
| Income Source | Only interest and penal interest. | Dividends, bonus shares, right shares, capital appreciation gains, etc. But, for debenture, interest only. |
| Operation Area | Mostly within the command area. | The operation area is wider, both national and international as well. |
| Intensity & Extent of risk | Based on the views of both bank bankers and borrowers. | Risks depend on the types of instruments, but the risk is comparatively lower than the risk of the loan. |
| Volume of fund | Except for industrial loans, most of the tire loans are of smaller volumes. | Mostly volume of funds is large. |
| Shift ability | Shift ability is challenging (except securitization in some cases). | Shift ability is relatively easier and can be done even with some loss on conversion. |
| Termination | Successful termination depends on the willingness of the borrower | Terminated at the willingness of the bank/shareholder or holder of the debentures |