OC Full Form

In today’s time, everyone wishes to buy the house of their dreams and to make that dream come true; it is difficult to make all the payments at once. So, financial institutions like Banks and NBFCs give us the facility of home loans. But, have you ever thought about a word that you encountered a lot when applying for a home loan: OC? The full form of OC is Over-Collateralisation. 

Let’s dive right into OC's full form and everything you need to get familiar with OC without further ado.

Understanding Over-Collateralization (OC)

You must be thinking about why you must know about the full form of OC or must be well-versed in the topic. Over-Collateralization is important whenever you choose to apply for a home loan or any personal loan, as you’ll need to pledge collateral to the amount of the loan with the bank as a security so that in case of default, they can recover the amount by that collateral-asset.  

Need for Over-Collateralisation

Why does there need to know the full form of OC or about it? It is very important in terms of giving a boost to the borrower’s profile. The following points showcase the importance of Over-Collateralisation: 

Over-Collateralisation can be employed if you want a better loan tenure. Banks also prefer those candidates as it will allow you to get a long repayment tenure.

1. It works as a security with the bank as they can use the collateral asset as a recovery subject against the same loan amount.
2. It gives an instant kick to the Credit rating of the borrower.

How Over Collateralization is Beneficial

It is a very commonly asked question as to why banks consider Over-Collateralisation beneficial during loan issuance. Let us understand it in more detail with an easy example.

Suppose you plan to take a loan of around INR 70 lakh and want to buy an apartment worth INR 1 Crore. After completing the purchase with the loan amount, you can repay the loan instalments for 1 year, leaving you with no penny to repay it. And if, say, the remaining amount of the loan after recurring EMI by default is INR 1 Crore, and the current rate of your apartment is INR 1.1 Crore. Then, in that case, the bank will recover the loan amount of INR 1 Crore from the collateral asset and return the excess amount to you. 

This way, you and the bank will be at the hands of profit.

After the Sanction of the Loan, What Steps can the Lenders take to Determine the Nature of Assets?

When you get a loan, all other responsibilities lie in the bank, like recovery of the full amount. So, if the bank takes an asset of yours as an Over-Collateralisation product, then the proper quality check also lies with the bank. Only the recovery of the loan amount does not matter to the bank, but also the asset should be well-maintained. So, to save them(the bank) from any future hustle, they take these steps periodically:-

1. The property kept as collateral/security is inspected regularly, especially when the collateral is like a mortgage or property, where the primary ownership of collateral lies with the bank, and you’ll be in possession of collateral only.
2. If the collateral is in the form of debentures and shares, the asset’s value is supervised weekly to complete a review against the value movement. In a case when the value goes below the eminent liability, you then have to remit the difference between the two values to avoid any erosion.
3. As a taxpayer, you must pay taxes on your property, and if you own any vehicle, you must pay for its insurance. Banks will make it definite to get a copy of the tax receipt and insurance policy at regular intervals until the full amount of the loan is recovered.
4. Banks ask you to submit the paid receipts if you have taken the insurance policies as security premiums. Banks consider it as valid as policies are enforceable until you have not fully repaid the loan amount.

If a Customer has High Credit Ratings, is it possible that Banks Provide them with Personal Loans Easily Without Acquiring Security?

As financial institutions, banks do not easily provide unsecured loans to customers by only referring to credit scores. Before issuing any loan to you, they’ll do a complete background check to check your credit history and if you can repay the loan amount you have asked the bank for. They have completely different criteria to issue an unsecured loan, including credit score and other factors, as they do not have any other remedy than to go for legal proceedings against you if you turn out to be a defaulter or go for non-repayment of the loan amount. We all know it is a very tedious process. They take a lot of time which actually involves the banks in unnecessary disputes, and in turn, banks refrain from issuing unsecured loans.

Conclusion

Now, at this point, you have gained a better understanding of OC Full form and its importance. You can now approach the bank very efficiently in terms of attaining any home loan or personal loan.