It is difficult for an individual to buy a home, making all the payments together. So, home loans are the helping hand that fulfill’s the wish to buy a home. But when you apply for a home loan you must have come across a term OC. Many individuals are unaware of OC full form. The full form of OC is Over-Collateralisation. It simply means that the bank keeps collateral against a loan and its value is more than the lent loan. The banks make the over-collateralization because if the borrower is unable to pay the home loan then the bank can sell the collateral and recover the loan. The purpose of OC is to increase the credit profile of borrowers and reduce the risk of investors.
Need for Over-Collateralisation
- You can use over-collateralization to get a better loan tenure.
- In case of over-collateralization, the bank will give you a long tenure to repay the loan.
- The banks need over-collateralization to bear the risk if the borrower is unable to pay the loan.
- It also increases the credit rating of the borrower or the issuer of debt.
Working of OC
Suppose you have borrowed a loan of INR 50 lacs to buy a house of INR 80 Lacs. The prevailing security for a 50 Lacs loan may be INR 75 Lacs but your bank has kept collateral of INR 80 lacs for the loan. So, in such a situation the bank has over-collateralized your asset by INR 5 Lacs because other banks ask for the security of INR 75 lacs for a loan of 50 Lacs but your bank has collateralized an asset worth INR 80 lacs for the same loan.
How Over Collateralization is Beneficial
Suppose, you have borrowed a loan of INR 70 lacs to buy a home of INR 1 Crore. After, making the loan repayments for 1 year, you were unable to pay a single penny. Then in such a scenario suppose your outstanding loan amount after recurring EMI default is INR 1 Crore and your house value is INR 1.1 crores. Then, the bank will recover INR 1 crore from the collateral and return the remaining amount to the borrower.
Now you know OC full form in finance and how it works. The full form of OC is over-collateralization and it is opted by banks to avoid risks. The value of the loan increases as time passes on and the interest is charged. Therefore, OC helps banks to recover the debts with interest by selling out the collateral securities.