Deposits, Loans and Credit
What this domain tests
This section tests the deposit mix, the reserve requirements, the forms of bank credit and the classification of bad loans. Numerical questions on interest and on priority sector targets are common.
Deposits and reserves
- Demand deposits (current, savings) are repayable on demand and form CASA, the cheapest funds. Time deposits (fixed, recurring) carry higher interest and allow premature withdrawal with a penalty.
- CRR is a share of net demand and time liabilities kept as cash with the RBI and earns no interest. SLR is held in approved securities such as government paper and earns interest.
Lending
- Fund-based credit: cash credit, overdraft, term loans, bill discounting. Non-fund-based: letters of credit and bank guarantees.
- Security: pledge (possession with the bank), hypothecation (charge without possession), mortgage (immovable property).
- Appraisal: the 5 Cs - character, capacity, capital, collateral and conditions.
- Priority sector lending: 40% of adjusted net bank credit, including 18% for agriculture, 12% for weaker sections and 7.5% for micro enterprises.
- NPA: a loan is non-performing after 90 days of overdue. SMA-0 covers 1–30 days, SMA-1 31–60 days and SMA-2 61–90 days.
Worked example
A cash credit account with a ₹5 lakh limit is drawn at ₹4 lakh for 20 days at 10% per annum. Interest is calculated on the daily product: ₹4,00,000 × 10/100 × 20/365 ≈ ₹2,192. If the account stays overdrawn beyond 90 days, it becomes an NPA even if interest continues to be serviced partially.
Traps that cost marks
- Stating that CRR earns interest, or that SLR is kept as cash.
- Using 180 days for NPA classification instead of 90.
- Forgetting that priority sector targets are percentages of adjusted net bank credit, not of total assets.
- Treating a bank guarantee as a fund-based facility.