Credit and Lending Operations
Lending principles
This domain tests loan appraisal, documentation, and repayment. The 5 Cs are character, capacity, capital, collateral, and conditions. Banks assess repayment from cash flow, not just security. Common facilities include term loans for assets, cash credit and overdrafts for working capital, and bill discounting. Security may be hypothecation (movable assets), mortgage (immovable property), pledge (goods in possession), or guarantee. Priority sector lending targets include 40% of adjusted net bank credit, with sub-targets for agriculture and weaker sections.
Appraisal and documentation
A credit proposal examines borrower background, financial statements, bank statements, industry risk, and repayment schedule. Sanction sets limit, margin, interest, security, and covenants. Documentation includes loan agreement, hypothecation or mortgage deed, guarantee, and insurance. Post-sanction monitoring includes stock statements, inspections, and early-warning signals.
Worked example
A trader needs funds to buy seasonal stock and repay after sales. Reasoning: a cash credit limit is appropriate because the need is revolving working capital; a term loan would suit machinery or premises. The bank checks stock, receivables, and turnover, sets a margin, and takes hypothecation of stock. Repayment is by cash flows into the account, not by equal monthly instalments.
Traps
Do not confuse hypothecation with mortgage. Do not say collateral replaces cash-flow assessment. Do not treat an overdraft as a term loan. Do not ignore margin and priority-sector sub-targets.