Loans, Advances and Principles of Lending
Loans, Advances and Principles of Lending
This domain tests credit appraisal, security creation, sanction and disbursement, and asset classification. Expect questions on the 5 Cs, drawing power, NPA norms and recovery laws.
Core rules
- Principles: safety, liquidity, profitability, purpose, security and diversification; the 5 Cs are character, capacity, capital, collateral and conditions.
- Fund-based limits: cash credit, overdraft, demand loan, term loan and bill discounting. Non-fund-based: letter of credit and bank guarantee.
- Security: primary security is the asset financed; collateral is additional. Pledge requires delivery of goods; hypothecation does not; mortgage is a charge on immovable property.
- Drawing power: for cash credit, the amount the borrower may actually draw, usually a margin-adjusted share of paid stock and book debts.
- NPA: a loan becomes non-performing when interest or principal is overdue for more than 90 days. Classification: substandard, doubtful, loss.
- Recovery: SARFAESI Act, 2002; Debt Recovery Tribunals; Insolvency and Bankruptcy Code, 2016.
- Priority sector: 40% of adjusted net bank credit for domestic scheduled commercial banks; agriculture 18%; weaker sections 12%; micro enterprises 7.5%.
Worked example
A trader is sanctioned a ₹20 lakh cash credit limit against stock. The bank sets a 25% margin. Paid stock is ₹16 lakh and acceptable book debts are ₹4 lakh. Drawing power = 75% of (16 + 4) = ₹15 lakh. The borrower cannot draw the full ₹20 lakh sanction; the limit is a ceiling, while drawing power is the current availability. If stock falls, drawing power falls even without a change in sanction.
Traps
- Sanction limit and drawing power are not the same.
- Hypothecation is not pledge; possession does not pass.
- NPA is 90 days overdue, not 90 days from sanction.
- Cash credit funds working capital; a term loan funds capital expenditure.
- Priority sector targets are percentages of ANBC, not of total assets.