A collateral is a property, such as securities, items of value, pledged by a borrower to protect the interests of the lender. A lender can seize the collateral from a borrower if the latter fails to repay a loan according to the agreed terms. A collateral acts as a guarantee that the lender receives the amount lent even if the borrower does not repay the loan as agreed. For example, when contracting a mortgage, the bank asks the customer to provide their house as collateral. If the customer fails to meet the repayment terms of their mortgage, the bank has the right to take ownership of the house. The bank can then sell the house in order to recoup the money that it lent to the customer.

Collateral management is the method of granting, verifying and managing collateral transactions in order to reduce credit risk in unsecured financial transactions. It is an essential and integral part of any financial institution's risk and regulatory compliance framework.

There is a wide range of possible collaterals used to hedge credit exposure with various degrees of risk:

  • Cash Collateral: Fixed Deposit, Stocks, etc.
  • Real estate: Property, Land
  • Other: metals, commodities, etc.

Managing Collaterals

Perform the following steps to manage collaterals in FintechOS Loan Management:

  1. Add new guarantee types, if your financial institutions wishes to work with guarantee types other than the default ones. If not, skip to Registering Collaterals.

  2. Create collateral types based on the newly added guarantee types, if applicable. If not, skip to Registering Collaterals.

  3. Register a collateral before using it within a contract. Registration is performed based on a collateral type.

The first two steps are usually performed during Loan Management configuration, while the 3rd step is performed each time you must register an asset as a collateral, to be later on used to cover a contract.

You must first register a collateral so that you can use it as a guarantee for covering a secured loan contract.