What is collateral?

Are the collateral papers taken under the custody or just they take a copy as proof?

At the time of the loan sanctioning, you need to submit the photocopy whereas at the time of disbursement you need to submit the original papers. The papers will be with the bank until the loan is repaid.
Here is a video which you might find useful, it talks about the disbursement process from nationalized banks like SBI which primarily do the loan with collateral:

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