Demand loan is a form of short term fiance provided by the banks to their customers. Unlike term loans where loans are granted on a fixed tenure and that shall be repaid in installments as per terms and conditions of the sanction, the demand loans work on the specific demand of the lender.In the other words, the borrower must repay the loan amount in full with interest when the lender demands it.
The demand loans are basically secured loans granted by the lenders against taking security from the borrower. The security may be in the form of term deposits of the same bank (where duly discharged receipt by the depositor will be held by the bank under lien to the Bank) or Life Insurance policies or Nationsl Savings Certificates or bonds, equity shares etc. duly asigned in the bank’s name. The loan amount considered on present value of the security less margin which will be normally 10% to 25% depending upon the nature of security and in case of equity shares margin amount fixed by the banks will be higher (40% to 50%). The present value of Life insurance policies is assessed on the basis of surrender value of the policies assigned to the bank.
Ordinerily banks do not press for the repayment of a demand loan as long as the loan amount is fully backed by the security. Bank would at regular interval verify and ensure that the value of the security offered less margin is above the loan outstanding. However, in certain cases, where the security offered is getting matured in the near future, or security value is not sufficient to cover the loan amount (with thin margin) bank would ask the borrower to liquidate the loan. If the borrower unable to liquidate the loan, bank would encash the security available with it and adjust the proceeds of such security towards full settlement of the loan.In such cases, any surplus amount available after closure of the loan will be returned back to the borrower.