Operational Aspects of Loan Accounts
Principles & Practices of Banking | Unit B · Chapter 24
The day-to-day machinery of lending: interest rate frameworks (Base Rate → MCLR → external benchmarks), exposure norms, credit audit, credit monitoring with QIS and CRILC, the loan handling process, advances against goods and warehouse receipts, education and vehicle loans, recovery agents and the Fair Practices Code.
📌 Why This Chapter Matters in JAIIB
Expect 4–5 questions — this chapter is a dates-and-numbers goldmine. High-yield areas: the benchmark timeline (Base Rate 1 July 2010 → MCLR 1 April 2016 → external benchmarks 1 October 2019), MCLR components and the five published tenors, large exposure limits (20% single / 25% group of Tier 1), CRILC thresholds, education loan slabs (₹4 lakh / ₹7.5 lakh) and vehicle loan LTV (85% / 80%). MCLR is set by banks themselves, not RBI — the most repeated MCQ from this unit.
All Key Numbers — Chapter 24 at a Glance
Interest Rates on Loans — From BPLR to the Base Rate
The Benchmark Journey
After lending rates were deregulated, RBI issued normative frameworks that evolved through four internal/external benchmarks:
Base Rate System (1 July 2010 – 31 March 2016)
The RBI Working Group on BPLR (Chairman: Shri Deepak Mohanty) found BPLR calculations opaque, with banks frequently lending BELOW BPLR to prime borrowers. On its recommendations the Base Rate replaced BPLR from July 1, 2010 — including only those cost elements common across all borrower categories.
- →Only ONE Base Rate per bank; floating rate rupee loans sanctioned/renewed between 1 Jul 2010 and 31 Mar 2016 were priced on it.
- →Methodology not to be reviewed for at least 3 years from finalisation; the rate itself reviewed at least QUARTERLY and made public.
- →No lending below the Base Rate — except the exempt categories.
- →Constituents: card rate on retail deposits (below ₹15 lakh) of one-year maturity adjusted for CASA + negative carry on CRR & SLR + unallocatable overhead cost + average return on net worth.
- →Spread rules: credit risk premium to an existing borrower not increased except on deterioration of credit risk profile or tenor change (not applicable to consortium/multiple banking); tenor premium changes uniform for all loans of a given residual tenor.
⚠️ Loans priced WITHOUT reference to Base Rate (as of July 2012)
(i) DRI advances; (ii) loans to banks' own employees including retired employees; (iii) loans to depositors against their own deposits; (iv) loans with interest rate subvention; (v) loans where refinance is availed. Learn this list — it repeats under the MCLR exemptions too.
MCLR & the Switch to External Benchmarks
MCLR — Marginal Cost of Funds Based Lending Rate
Introduced after RBI's December 2015 review; governed by the Interest Rate on Advances Directions, 2016 — applicable to scheduled commercial banks (excluding RRBs), small finance banks and local area banks, but NOT to foreign branches of Indian banks. All rupee loans sanctioned and credit limits renewed w.e.f. April 1, 2016 are priced on MCLR; no lending below the MCLR of the relevant maturity.
- →Tenor premium makes MCLR a TENOR-LINKED benchmark: at least FIVE MCLRs published — overnight, one-month, three-month, six-month and one-year (longer maturities optional).
- →MCLR of every maturity reviewed and published EVERY MONTH on a pre-announced date.
- →Lending rate = tenor MCLR + spread (components: business strategy + credit risk premium from a rating/scoring model). Spread to an existing borrower increased only on credit-risk deterioration, backed by a full risk-profile review (not applicable to consortium/multiple banking).
- →Loan agreement must state the reference benchmark and the reset periodicity — one year or lower.
- →Interest at MONTHLY rests (agri advances per their norms); rupee interest rounded to the nearest rupee; small-value/personal loan rates must be justifiable against cost and reasonable return.
- →Fixed rate loans of tenor BELOW 3 years cannot be priced below the benchmark of similar tenor; fixed rate loans ABOVE 3 years are exempt (floating portion of hybrid loans follows MCLR rules).
- →Penal interest policy must be transparent and fair; NO penal interest on priority sector loans up to ₹25,000.
⚠️ The most-repeated MCQ
Who determines the MCLR? Banks themselves — RBI only prescribes the framework. (Check Your Progress Q1.)
External Benchmark Linking (from 1 October 2019)
An RBI Internal Study Group recommended phased switchover from MCLR. From 1 Oct 2019, all NEW floating rate personal/retail loans (housing, auto, etc.) and floating rate loans to Micro & Small Enterprises — and from 1 Apr 2020 to Medium Enterprises — must be benchmarked to one of:
- →ONE uniform benchmark within a loan category — a bank cannot adopt multiple benchmarks within the same category (banks may offer such loans to other borrowers too).
- →Existing MCLR/Base Rate/BPLR loans continue till repayment or renewal; eligible floating-rate borrowers (without pre-payment charges) can switch to the external benchmark WITHOUT charges except reasonable administrative/legal costs, at the same rate as a fresh loan of the same category.
Exemptions from Benchmark-Based Interest Rates
- →Loans under Government of India schemes where rates are prescribed by the scheme.
- →WCTL / FITL etc. granted as part of a rectification/restructuring package.
- →Refinance-scheme loans (GoI or its undertakings) — scheme rate to the extent of refinance; the uncovered portion follows the benchmark rules.
- →DRI advances; advances to depositors against their own deposits; advances to banks' own employees (including retired) and to the CEO/Whole Time Directors.
- →Loans linked to a market-determined external benchmark; fixed rate loans of tenor above 3 years (floor for ≤3-year fixed loans = marginal cost of funds + negative carry on CRR + operating cost + tenor premium).
Credit Management, Exposure Norms & Credit Audit
Credit Management — What It Covers
The process of appraising, sanctioning and monitoring loans for recovery, to increase revenue — spanning pre-sanction appraisal, sanction, documentation, disbursement and post-lending supervision. It encompasses:
Credit Exposure — Large Exposure Norms
Exposure = credit exposure (funded + non-funded limits) PLUS investment exposure (including underwriting commitments). Reckon sanctioned limits or outstandings, whichever is HIGHER — except fully drawn term loans with no re-drawal scope, where the outstanding may be taken.
| Counterparty | Limit (of eligible capital base = Tier 1 capital) |
|---|---|
| Single counterparty | 20% of Tier 1 capital at all times |
| Group of connected counterparties | 25% of Tier 1 capital at all times |
| Single NBFC (excluding gold loan companies) | 20% of Tier 1 capital |
| Group of connected NBFCs | 25% of Tier 1 capital |
The eligible capital base is effective Tier 1 capital per the last audited balance sheet (Basel III); later capital infusion counts after an external auditor's certificate is submitted to RBI, and accrued profits also count for Indian banks.
- →SECTORAL limits: banks may fix INTERNAL limits for sectors (textiles, jute, tea, steel, cement, power etc.), reviewed periodically.
- →Unhedged foreign currency exposure: Board-approved policy mandatory for clients with FC loans above US$ 10 million; hedging may not be insisted for exporters with uncovered receivables covering the loan.
- →Leasing, hire purchase and factoring (departmental): exposure to EACH capped at 10% of total advances.
- →Real estate: Board-approved prudential ceilings on total loans, single/group limits, margins, security; SEZ exposure treated as commercial real estate for risk weight and capital adequacy.
- →Indian JVs / wholly-owned subsidiaries abroad (and step-down subsidiaries): credit/non-credit facilities capped at 20% of unimpaired capital funds (Tier I + Tier II).
Loan Review Mechanism / Credit Audit
Handled by a separate functional team; the focus is broader than account level — the overall portfolio and the credit process. Purposes: review sanction process and compliance of large loans, independent review of credit risk assessment, feedback on regulatory compliance, and picking up early warning signals with remedial measures.
Coverage
All fresh proposals and renewals reviewed within 3–6 months of sanction; all accounts above a cut-off limit; a random 5–10% of the rest; plus sister/group/associate concerns of covered accounts even below the cut-off. Portfolio review examines credit & quasi-credit quality and concentration reduction.
Frequency by risk
High risk — 3 months; average risk — 6 months; low risk — 1 year. Review checks policies/procedures adequacy, regulatory compliance, the credit risk assessment methodology, documentation adequacy, conduct of account, and action on serious irregularities.
Credit Monitoring — Goals, Process, Tools, QIS & CRILC
Definition & Goals
Credit monitoring = continuous supervision of loan accounts to ensure the quality of loan assets: it is supervision, it is continuous (not one-time), it ensures asset quality and adherence to IRAC guidelines, and it verifies conformity with sanction terms. The main objective is to minimise or eliminate NPAs — ensuring end use of funds, tracking performance vs projections, watching account transactions, stock statements and periodic performance statements (MSOD, QIS I/II, half-yearly, fund flow statements). A NEGATIVE LIEN (commitment not to mortgage property without the bank's consent) is an example covenant for strong borrowers who offer no mortgage.
Under the Credit Monitoring Arrangement banks ensure
Reasonable estimates of CA/CL and working capital; CA/CL classified per bank guidelines; current ratio minimum 1.33 (except export industry and new units); audited accounts submitted in time for annual review; ad hoc limits for not more than 3 months; post-sale limits as far as possible in the form of BILL FINANCE.
⚠️ Reading a stock statement
High finished goods = slow market (or poor product quality); high raw material = poor inventory management; incorrect details = wilful concealment or poor record keeping. Breach of a financial covenant (current ratio, debt cap, debtor turnover) = an EVENT OF DEFAULT — triggering higher interest, more frequent statements, a stock audit, or recall of the loan (Check Your Progress Q4).
Monitoring Tools & Steps
- →Identify POTENTIAL NPAs when default runs for TWO MONTHS; diagnose the cause (inherent weakness vs temporary cash flow problem).
- →Offer contingency support (ad hoc limits) immediately if cash flow mismatches are genuine; enhance limits if inadequacy caused the default.
- →Scrutinise cheques drawn on parties unrelated to the business or heavy cash withdrawals without stock build-up — pass only after detailed inquiry.
- →Collect interest monthly; visit the factory regularly (frequently on default); verify adequate, marketable inventory; exchange information in consortium meetings.
QIS — Quarterly Information System (Chore Committee Follow-up)
Post-Chore Committee, financial follow-up rests on quarterly and half-yearly statements — applicable to accounts of ₹100 lakh and above (banks free to evolve strategies). Scrutiny covers operating results, funds movement vs the agreed pattern, current assets/liabilities vs QIS estimates, profit before tax, STATUTORY LIABILITIES (PF dues outstanding beyond 6 months precede even secured creditors in winding up), and fixed-asset investment beyond limits needing prior bank approval.
QIS I
At least ONE WEEK BEFORE the quarter begins — estimates of production/sales checked against the annual plan; current liabilities vs CMA data.
QIS II
Within SIX WEEKS of the close of the quarter — actuals vs estimates.
QIS III
Half-yearly — actual sales vs proportionate budget; net funds generation vs estimate (explanation sought if lower).
Annual review re-examines production/sales/profit vs estimates, covenant compliance and conduct issues, and decides continuation. Working capital renewals are annual; accounts with incipient sickness or deteriorating risk get quarterly short reviews.
CRILC
- →Central Repository of Information on Large Credits — created by RBI in September 2013 from the Return on Large Borrowers (Form A), originally covering exposures above ₹100 million (₹10 crore), so banks can see building leverage and common exposures. Penal action for inaccurate data.
- →The Framework for Revitalising Distressed Assets (effective 1 April 2014) added reporting of SMA-2 accounts and customer current-account balances of ₹10 million+ (even without a credit facility, if the client is in the CRILC PAN master).
- →Report parts: CRILC-Main and CRILC-SMA2 & JLF formation. Threshold now ₹50 million (₹5 crore); Main report MONTHLY; instances of default by all borrowers reported WEEKLY by close of business every Friday.
- →Red Flagged Account (RFA): suspicion of FRAUD thrown up by one or more Early Warning Signals — reported on the CRILC platform with classification dates.
CERSAI
- →Central Registry of Securitisation Asset Reconstruction and Security Interest of India — a Government company under Section 8 of the Companies Act 2013.
- →Shareholding: 51% Central Government; select public sector banks and the National Housing Bank are also shareholders.
- →Maintains the registration system for securitisation, asset reconstruction and creation of security interest over property under the SARFAESI Act, 2002.
Operational Terms, the Loan Handling Process & Accounting
Common Operational Terms
End use of funds
The bank's PRIMARY responsibility — drawals from CC/OD strictly for the sanctioned purpose; no diversion of working capital to fixed assets, associate companies, shares/debentures/mutual funds or other capital market investments.
Primary vs collateral security
Primary = assets acquired with bank finance (or against which credit is provided) — the principal security. Collateral = ADDITIONAL security, a cushion in case of need.
Personal security of guarantor
A third-party guarantee for payment on the borrower's default — enforceable only through a competent Court, since no charge is created over the guarantor's assets.
Fixed vs floating charge
Fixed = charge on specific assets; the creator cannot deal with them without the bank's consent. Floating = equitable charge on present AND future assets; it CRYSTALLISES into a fixed charge when money becomes repayable and the bank moves to enforce.
Margin
Banks never finance the full value of charged assets — a margin per the bank's risk perception is deducted from the asset value.
Refinance
Available from EXIM Bank, NABARD and SIDBI for eligible advances — but the RISK REMAINS WITH THE BANK, so refinance availability does not affect the credit decision.
Operational Process of Handling Loans — 5 Steps
1. Receipt of loan application
Formal request in the bank's standard format, entered in the Loan Applications Received Register (manual or software), with supporting documents per loan policy. Online submission is now near-universal; GST-registered MSMEs can apply through a government portal connected to several banks and get in-principle approval quickly.
2. Assessment of viability & creditworthiness
Against RBI directions (prudential exposure limits) and the bank's risk guidelines — technically feasible, economically viable, commercially acceptable. Checks include promoter experience and profile, financial soundness and stake, projected cash flow capability, guarantees/collateral, CIBIL/RBI defaulter lists/other banks' credit reports, and locational/Government policy restrictions.
3. Loan sanction
Delegated sanctioning powers by customer type, purpose/facility type and exposure quantum. Most banks use CENTRALISED processing at hubs; higher-exposure proposals sanctioned by COMMITTEES of officers rather than individuals. The appraisal note with recommendations goes to the competent authority.
4. Disbursement
Sanction letter conveys terms; customer's consent obtained; documents executed; charges created and noted with ROC, CERSAI, Road Transport Authority, insurance company, land records authority etc. — THEN the loan is released. Branch managers may certify periodically to controlling authority that disbursements followed completion of formalities.
5. Monitoring & supervision
Inspection of business/assets/books (end use, project progress, no finance against unpaid stocks, physical stock verification, working levels, stock turnover and age limits, continued activity); review of account conduct via stock statements and financial data; ANNUAL RENEWAL of working capital limits (same/reduced/enhanced level) — also serving risk re-evaluation and interest reset.
Accounting Aspects of Loan Products
- →Working capital (CC/OD) runs as a running account — deposits and withdrawals within limit/drawing power. Other loans disburse in one or more instalments, then repay per schedule.
- →Disbursement entry: DEBIT the customer's loan account; CREDIT the customer's current account, cash, or a third-party/draft/pay-order account for direct vendor payment.
- →TERM LOANS should be disbursed DIRECTLY to the suppliers of goods and services; refinancing of existing debt, general corporate purpose/long-term working capital or reimbursements may be credited to the borrower's CC/OD/current account.
- →Repayments arrive by cash/transfer/clearing or NEFT/RTGS/IMPS; for instalment loans banks obtain a NACH mandate on the customer's account with any bank to automate recovery of instalments.
Advances Against Goods & Warehouse Receipts
Advance Against Goods — Ground Rules
- →Acceptable goods: non-perishable, not liable to rapid deterioration; easily marketable with an unrestricted market; relatively stable prices, ascertainable day-to-day.
- →Pledge is more secure than hypothecation, but banks now mostly lend against HYPOTHECATION — pledge burdens the bank with safe receipt/storage/delivery, complete records, and protection against damage.
- →Lend only against goods the borrower NORMALLY DEALS IN, which are the borrower's SOLE PROPERTY and are PAID FOR — never goods received on credit or under agency arrangements. Title determination is of primary importance; ascertain the age of the goods.
- →MARGIN: generally 25–30% on stocks (export finance may be as low as 10%); Selective Credit Control commodities per RBI directives; margin maintained AT ALL TIMES as a cushion against price falls.
Valuation (conservative basis)
Non-manufacturers: invoice price or market price, whichever LOWER. Manufacturers: raw material at cost/invoice or market (lower); WIP at cost of manufacture; FG at cost of sales — or the borrower's own lower accounting values. Small manufacturers: market price less reasonable discounts. Daily market-quotation record kept; expert valuers at the borrower's cost if in doubt.
Marketability = turnover
Judge turnover from RECEIPTS AND DELIVERIES of goods in stock statements and the borrower's records — not just the ledger's financial turnover. ALL items must move, not a few at the top; stagnation signals unmarketable stocks the bank may be saddled with.
⚠️ Insurance — the Average Clause (numerical favourite)
Insure for FULL MARKETABLE VALUE against fire and burglary (plus riot/war where needed). Under the average clause, an under-insured party is their own underwriter for the difference: goods worth ₹2 lakh insured for ₹1 lakh with a ₹50,000 loss → insurer pays only ₹25,000 (pro-rata). Policy in the bank's name as mortgagee with a BANK CLAUSE; existing policies assigned to the bank by endorsement on the policy itself.
- →GODOWN BOARD ('Goods pledged/hypothecated to Bank') at the main entrance — notice to third parties of the bank's interest.
- →Pledge godowns: within municipal/panchayat limits of the branch with independent access; first-class construction (leak-proof, strong doors, full-height partitions, no dampness/white ants).
- →Hypothecation: stock statements (daily/weekly/fortnightly/monthly per sanction) signed by the borrower — if not submitted in time, CHEQUES SHOULD NOT BE HONOURED till submission. Checked for value, quantity, arithmetic and signature; abnormal receipts/deliveries enquired into.
- →Stock inspection monthly/quarterly per sanction terms; reports filed account-wise for auditors. In consortium accounts the CONTROLLING BRANCH inspects for the company as a whole. Inspectors verify borrower's title, stock correctness, godown suitability, sign boards, bank's locks, stock age/movement/packaging, storage mode, godown keys and rent regularity.
Advances Against Warehouse Receipts
- →Accept receipts of CENTRAL/STATE GOVERNMENT warehouses; private-agency receipts only if the agency is bank-approved. Selective Credit Control commodities per RBI directives.
- →Foodgrains: only GRADE I stocks (marked on the receipt) — no advance against Grade II/III/IV.
- →Receipts must be of RECENT DATE (no old stocks), issued IN THE BORROWER'S NAME (avoid receipts endorsed to the borrower), and describe stock in words and figures.
- →NO advance against a NON-NEGOTIABLE warehouse receipt (the negotiable/non-negotiable character is marked in capitals). The receipt is endorsed by the borrower in the bank's favour, with a confirming letter of genuineness.
- →Borrower's letter notifies the Warehousing Corporation of the pledge and the bank's lien; the branch supplies the warehouseman specimen signatures of officers authorised to sign delivery orders (updated on transfers).
- →Sample bags examined before advancing where issued; a sealed sample may be retained to guard against substitution. Insurance is arranged by the WAREHOUSEMAN for full cost price or market value, whichever HIGHER — particulars recorded in branch books. Periodic inspections follow the first one.
Education & Vehicle Loans, Recovery Agents, Fair Practices Code
Educational Loans — IBA Model Scheme 2021
- →Eligibility: Indian national (including NRI); PIO/OCI and children of parents repatriated from deputation abroad — studies in INDIA only. Admission through entrance test/merit-based selection after 10+2; for studies abroad banks may lend on an invite/conditional offer letter. Service area norms do NOT apply.
- →The student normally has no credit history and is ASSUMED CREDITWORTHY; for NRI/PIO/OCI students the co-applicant must be a permanent resident of India.
- →Portfolio classified in three categories: top-rated institutions, other domestic institutions, studies abroad — terms fine-tuned by risk/reputation/employability.
- →Expenses covered: fees, hostel, books/equipment/uniforms, exam/library/lab fees, travel/passage abroad, essential computer, student's insurance premium, study tours/project/thesis. Scholarships may count toward assessment (credited to the loan account when received).
- →Quantum: NEED-BASED finance subject to repaying capacity of parents/student, with margin brought in pro-rata on each disbursement.
| Loan slab | Margin | Security |
|---|---|---|
| Up to ₹4 lakh | NIL | None — parent/guardian as joint borrower(s) |
| Above ₹4 lakh – ₹7.5 lakh | 5% (studies in India) / 15% (abroad) | Parent(s)/guardian(s) joint borrower + suitable THIRD-PARTY GUARANTEE (waivable in exceptional cases on net worth) |
| Above ₹7.5 lakh | Bank's discretion | Bank's discretion (collateral as per policy) |
- →Scholarship/assistantship counts within the margin; a computer bought with the loan is hypothecated to the bank.
- →Repayment: 15 YEARS in EMIs for all categories, after moratorium = COURSE PERIOD + 1 YEAR; SIMPLE interest during moratorium; telescoped/stepped-up instalments possible for slow-starting careers (e.g. doctors).
- →Interest linked to Base Rate/MCLR; differential rates allowed for collateralised vs non-collateralised loans and by course/institution/student rating.
- →NO processing charges up to ₹7.5 lakh; sanction preferably by the branch nearest the place of domicile; NO REJECTION without concurrence of the NEXT HIGHER AUTHORITY.
- →Follow-up: progress reports from the institution; SSN/UIN/ID for studies abroad; employment details after course completion; banks may mandate life/credit-life/personal accident insurance on the student. Branches can issue a CAPABILITY CERTIFICATE for sponsors of students going abroad.
Vehicle Loans (Non-Commercial) — Typical Manual Terms
Eligibility & tenure
Traders, professionals, firms, companies, individuals (singly/jointly); individual age up to 65 YEARS; maximum tenure 84 MONTHS.
LTV on 'on-road price'
Up to ₹10 lakh → max 85%; above ₹10 lakh → max 80%.
Interest & repayment
Daily reducing balance with monthly rests; EMI-based repayment; PRE-PAYMENT PENALTY WAIVED; penal interest per bank policy.
Documents
3 years' audited financials (firms/companies) or IT returns with income computation; dealer invoices; 3 months' salary slips/Form 16; 1 year's bank statement; KYC.
Security
Undertaking to mark the bank's HYPOTHECATION in the RC book immediately after purchase; branch verifies the original RC.
Insurance
Comprehensive — for market value or at least 10% ABOVE the outstanding, whichever HIGHER; bank noted as hypothecatee; on lapse the bank insures by debit to the loan account.
Disbursement is credited DIRECTLY to the supplier/dealer via RTGS/NEFT, after statutory compliances and KYC verification; on default, reminders go by post, phone, e-mail, SMS or through appointed third parties.
RBI Guidelines on Recovery Agents
- →Due diligence for engaging agents; agents must verify their employees' antecedents (including pre-employment POLICE VERIFICATION); banks decide re-verification periodicity.
- →The borrower must be told the agency's details when a case is forwarded; the agent carries the notice, the bank's authorisation letter (with the agency's phone numbers) and an identity card.
- →CALLS between agents and customers must be RECORDED, with the customer informed; up-to-date agency details posted on the bank's website.
- →No referral to agents while a borrower's grievance is pending disposal; utmost caution where dues are sub-judice; a grievance mechanism communicated to the borrower.
- →Agents must complete the prescribed TRAINING AND CERTIFICATION; banks, AS PRINCIPALS, are responsible for their agents' actions (BCSBI Code adherence); periodic review of the mechanism.
- →PROHIBITED: verbal/physical intimidation, public humiliation, intruding on family/referees/friends, inappropriate mobile/social media messages, threatening or anonymous calls, persistent calls, calls BEFORE 8 AM or AFTER 7 PM, and false or misleading representations.
Fair Practices Code for Lenders (Board-Approved)
Applications & processing
Comprehensive application forms for ALL loan categories regardless of amount; transparent disclosure of fees/charges, refundable amounts, pre-payment options, penalties, fixed↔floating conversion charges, interest reset clauses — plus the ALL-IN-COST for comparison; acknowledgement for every application; published timelines for credit decisions; REJECTION REASONS conveyed in writing.
Appraisal & terms
Margin and security are NOT a substitute for due diligence on creditworthiness. Sanction conveyed with terms; borrower's acceptance kept on record; negotiated terms reduced to writing and certified; copy of the loan agreement WITH ALL ENCLOSURES furnished to the borrower; purely discretionary facilities (drawings beyond limits etc.) clearly stipulated; consortium members to appraise and decide within a time-bound frame.
Disbursement & post-disbursement
Timely disbursement per sanction terms; changes in terms (interest, charges) only PROSPECTIVELY with notice. Supervision of loans up to ₹2 LAKH should be CONSTRUCTIVE toward lender-related genuine difficulties; notice before recall/acceleration or seeking additional security; securities may be retained till the relevant claim is settled.
General
No interference in the borrower's affairs beyond sanction terms; NO DISCRIMINATION on sex, caste or religion (credit-linked weaker-section schemes permitted); no harassment in recovery (odd-hour bothering, muscle power); consent/objection to transfer of a borrowal account within 21 DAYS; grievance redressal disposing disputes at least at the NEXT HIGHER LEVEL.
Check Your Progress — Answers Explained
Q1 — Who determines the MCLR? (c) Banks themselves
RBI prescribes the framework and components; each bank computes and publishes its own MCLR monthly.
Q2 — RBI has NOT prescribed a prudential exposure ceiling for: (a) Vehicle loans
Prudential ceilings/frameworks exist for NBFCs, capital market and real estate exposure — not for vehicle loans.
Q4 — Breach of a financial covenant is termed: (b) An event of default
Non-observance of covenants (current ratio, debt level, debtor turnover) triggers steps like higher interest, more frequent statements, stock audit, or recall.
Q5 — Margin for an educational loan of ₹3 lakh: (d) Nil
Loans up to ₹4 lakh carry NO margin (and no security beyond the parent as joint borrower) under the IBA Model Scheme.
✅ Exam Strategy — Chapter 24 (Operational Aspects of Loan Accounts)
- 1.Benchmark timeline: BPLR → Base Rate (1 Jul 2010, Deepak Mohanty Group) → MCLR (1 Apr 2016) → external benchmarks (1 Oct 2019; medium enterprises 1 Apr 2020).
- 2.Base Rate: ONE per bank, quarterly review, public; exemptions = DRI, staff (incl. retired), deposit-backed loans, subvention loans, refinance loans.
- 3.MCLR components: marginal cost of funds + negative carry on CRR + operating costs + tenor premium. Five tenors published, reviewed MONTHLY. Set by BANKS, not RBI.
- 4.MCLR Directions 2016 apply to SCBs (excl. RRBs), SFBs, LABs — not foreign branches of Indian banks. Reset periodicity ≤ 1 year; interest at monthly rests, rounded to the rupee.
- 5.External benchmarks: repo rate or FBIL-published 3-month/6-month T-bill or other FBIL rate; ONE benchmark per loan category; free switchover (only admin/legal costs).
- 6.No penal interest on priority sector loans up to ₹25,000.
- 7.Large Exposures: single 20%, group 25% of Tier 1; single NBFC 20%, NBFC group 25%; leasing/HP/factoring 10% of advances each; JV/WOS abroad 20% of unimpaired capital (Tier I+II); unhedged FC policy above US$10 mn.
- 8.Exposure = higher of sanctioned limit or outstanding (fully drawn term loans: outstanding).
- 9.Credit audit frequency: high risk 3 months, average 6 months, low 1 year; fresh sanctions reviewed within 3–6 months; 5–10% random sample.
- 10.Credit monitoring = CONTINUOUS supervision to minimise NPAs; CMA checks: current ratio ≥ 1.33 (except exports/new units), ad hoc limits ≤ 3 months, post-sale limits via bill finance.
- 11.Covenant breach = EVENT OF DEFAULT. High FG = slow market; high RM = poor inventory management. Potential NPA flagged at 2 months' default.
- 12.QIS (Chore Committee): accounts ₹100 lakh+; QIS I one week before the quarter, QIS II within six weeks of quarter close, QIS III half-yearly. PF dues > 6 months precede secured creditors.
- 13.CRILC: Sept 2013; threshold now ₹5 crore; monthly Main report + WEEKLY default report (Friday); SMA-2 and ₹1 crore+ current accounts reported; RFA = fraud suspicion via EWS.
- 14.CERSAI: Section 8 company, 51% Central Government, SARFAESI 2002 registry for securitisation/ARC/security interest.
- 15.Fixed charge = specific assets; floating charge = present + future assets, crystallises on enforcement. Guarantor's personal security enforced only through court.
- 16.Refinance (EXIM/NABARD/SIDBI): risk stays with the bank — does not affect the credit decision.
- 17.Goods advances: margin 25–30% (export 10%); value at LOWER of cost/invoice and market; insure FULL value (average clause: ₹2L goods, ₹1L cover, ₹50k loss → ₹25k paid); godown board; no cheques honoured till stock statement received.
- 18.Warehouse receipts: only Government warehouses (private if approved); Grade I foodgrains only; borrower-name receipts of recent date; NO advance on non-negotiable receipts; warehouseman insures at HIGHER of cost/market.
- 19.Education loans: nil margin/security ≤ ₹4L; 5%/15% margin + third-party guarantee for ₹4–7.5L; repayment 15 years after course + 1 year; simple interest in moratorium; no processing fee ≤ ₹7.5L; rejection needs next-higher-authority concurrence.
- 20.Vehicle loans: age ≤ 65, tenure ≤ 84 months, LTV 85%/80% of on-road price (₹10 lakh cut-off), disbursed straight to the dealer, hypothecation in RC book, no pre-payment penalty.
- 21.Recovery agents: police-verified staff, recorded calls, notice + authorisation + ID, no calls before 8 am/after 7 pm, banks liable as principals.
- 22.Fair Practices Code: written rejection reasons; margin/security ≠ due diligence; prospective-only term changes; constructive supervision ≤ ₹2 lakh; transfer response in 21 days; disputes disposed at the next higher level.
Discussion
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