Essential Knowledge for Bank PO Aspirants

Types of Loans and Advances

 Categories of Loans:

1. Retail Loans: Home loans, personal loans, car loans, education loans. (Credit growth in retail loans surged by 19.2% year-on-year as of August 2024, led by personal and housing loans). Loans upto 7.5 cr 
2. Corporate Loans: Term loans, working capital loans.(Agriculture credit disbursement target for FY24: ₹20 lakh crore, with a focus on Kisan Credit Cards)
3. Agricultural Loans: Crop loans, farm mechanization loans.
4. MSME Loans: Disbursement under MUDRA Yojana: ₹23.2 lakh crore since inception (2015).

Types of Advances:

• Fund based loans 
  • Term loans  and working capital (CC)
  • Overdraft (OD)
  • Bills Discounting 

• Non Fund Based facility 
• Letter of Credit (LC)
• Bank Gurantee 

 Growth in Deposits and Credit 

Overall Deposits Growth:

• Grew by 13.5% in FY24, with private banks leading at 20.1% growth.

Credit Growth:

• Total bank credit grew by 15.8% year-on-year, driven by retail and MSME segments

Basic Features of Lending

Retail Loans: Small-ticket size, standardized products, short-term to long-term duration.

Industry Loans: High-value loans, extensive due diligence, longer repayment periods.

Trade Loans: Focus on working capital and trade financing.

Key Considerations:

• Creditworthiness of borrower.
• Loan tenure and repayment terms.
• Risk mitigation via securities.

 Rights of Banks as Lenders

 Key Rights:

1. Right to charge interest as per agreement.
2. Right to demand collateral/security.
3. Right to recover dues in case of default (legal mechanisms).
4. Right to enforce SARFAESI for secured assets.
5. Right to go under arbitration route for recovery 
6. Right to take borrower company to NCLT under IBC in case of default

 Duties of Banks as Lenders

 Fair Practices Code:

1. Transparent communication of terms and conditions.
2. Ensuring borrowers’ rights are protected.
3. No discriminatory practices in lending.
4. Timely processing of loan applications.

Key Responsibilities:

• Follow RBI guidelines on interest rates and recovery.
• Offer solutions for restructuring loans in genuine hardship cases.

CIBIL Score and Credit Rating

 CIBIL Score:

• A 3-digit score (300-900) indicating a borrower’s creditworthiness.
• Factors: Repayment history, credit utilization, credit mix.

Credit Rating:

• Assessment of a borrower’s ability to repay a loan.
• Agencies: CRISIL, ICRA, CARE.

Importance: Higher scores depicts lower risk and  lead to easier loan approval and better interest rates. 

Agriculture Finance and Priority Sector Lending

 Agriculture Finance: Loans for crop production, irrigation, machinery and allied agri.

Priority Sector Lending (PSL):

• Includes agriculture, MSMEs, renewable energy, education.
• Minimum PSL target for banks: 40% of Adjusted Net Bank Credit (ANBC).

Schemes:

• MUDRA: Loans for small businesses (Shishu, Kishore, Tarun categories).
• MSME Loans: Loans for micro, small, and medium enterprises.
• PSL Targets for Sub-Sectors:

1. 1. Agriculture: 18% of ANBC.
   2. Micro Enterprises: 7.5% of ANBC.

Securities accepted to secure a loan 

1. Hypothecation:  SARFAESI Act 2002 defines hypothecation. Asset is offered as security. The Borrower retains possession as well as ownership right and lender has charge over the asset (e.g., vehicle loans ).
2. Mortgage: Defined under Transfer of Property Act 1882 sec 58(a). Legal transfer of an interest in the property to the lender (e.g., home loans etc ).
3. Pledge: Defined under Indian Contract act 1872 section 172. Physical possession (bailment) of movable assets with lender (e.g., gold loans) to secure a debt.
4. Lien: Defined under Indian Contract Act 1872. Legal claim on property or asset as security for a debt.
5. Assignment: Defined under Indian Contract Act 1872 Sec 37: Transfer of an existing proprietory rights from one party in the contract to another. ( loan assignment)  

                    Unsecured Loans 

• Loans not secured by any collateral are termed as unsecured loans. 
• Unsecured loans are given purely on the basis of profile e.g. Personal Loans, auto loans, consumer loans, credit card debts etc. 
• Unsecured loans carry higher risk weight (125%) as risk of default is higher 

                 Credit Information Companies
Repository of loans taken by the borrowers and their payment track record

• Transunion CIBIL
• Equifax
• Experian 
• Crif Highmark

1. All loans information from lenders is mandatorily submitted to these CICs regularly. 

2. Credit Score (300-900)  is generated for every borrower depicting risk factor– Higher the score less risky it is  

NPA and IRAC Norms

• NPA (Non-Performing Asset): A loan where repayment is overdue for 90 days and more.
• IRAC Norms: Asset classification under RBI guidelines.

1. 1. Standard Asset: Performing loans.
   2. Substandard Asset: NPA for <12 months.
   3. Doubtful Asset: NPA for >12 months.
   4. Loss Asset: Unrecoverable loans.

• Gross NPAs (GNPA): Declined to 2.8% in March 2024, the lowest in 12 years.
• Sectoral NPA Data:
  • Retail loans: 1.2%.
  • Agriculture loans: 6.2%.
  • MSME loans: 6.0%

IRAC: Income recognition and Asset Classification : To recoganise income only on receipt basis in NPA accounts  

NPA Recovery/resolution  Mechanisms

• DRT (Debt Recovery Tribunal):
  • Quasi-judicial body for loan recovery.
  • Applicable for claims >₹20 lakh.
• SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act):
  • Allows banks to auction assets of defaulting borrowers without court intervention.
• Lok Adalat : Summary courts to settle recovery suits
• Restructuring and Rescheduling of Loans:

        Modifying Loan Terms: Extend repayment periods, reduce interest rates, or restructure debt.

• One-Time Settlement  and write-off :Offer borrowers an option to settle dues at a discount. Remainder amount is written off.
• Downselling to Asset Reconstruction Companies (ARC)

• • ARC purchase bad loans at discount from the lenders based on probable recoverability.