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Questions and Answers
What are the usual types of facilities allowed by the bank under fund-based facilities?
Overdraft accounts are treated as current accounts.
True
What is a demand loan account?
An advance for a fixed amount with no debits except for interest and charges.
Borrowers should be financially sound, have a good market reputation, and possess adequate ______ to contribute to margin requirements.
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What should be ensured before granting a loan facility?
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Projects financed must be closely monitored during ______ stage to avoid overruns.
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What is the role of the controlling office when a loan application is received for an unspecified facility?
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Study Notes
Efficient Management of Loans and Advances
- Loans and advances are the largest asset for banks, directly influencing profitability.
- Tightened norms in income recognition, asset classification, and provisioning contribute to the need for robust credit functions.
- The Reserve Bank of India (RBI) advocates the development of guidelines for effective credit risk management.
Steps for Healthy Loan Portfolio
- Policies and procedures have been aligned with market changes to enhance credit risk management.
- Strengthening of pre-sanction appraisals and post-sanction monitoring systems is essential.
- Specialised branches are established to cater to specific borrower needs.
Credit Proposal Guidelines
- Loan applications must be supported by Confidential Reports on borrowers and guarantors.
- Borrowers should demonstrate the capability to manage their business successfully.
- Projects must be technically feasible and economically viable to ensure they can service debts.
Financial Assessment
- Project costs and financing means must be thoroughly assessed to avoid under or over-financing.
- Borrowers are required to be financially sound with a good market reputation and sufficient liquid resources for margin requirements.
Sanctioning Authority and Disbursement
- Loans must be approved by competent authorities according to delegated powers.
- Disbursement occurs only after proper documentation is completed.
- Projects should be monitored closely to prevent delays and budget overruns during implementation.
Types of Loan Facilities
- Fund-based facilities include term loans, cash credit, bills discounted, demand loans, and overdrafts.
- Non-fund based facilities encompass issuance of letters of credit, guarantees, and bills acceptance under specific schemes.
Specific Loan Features
- Overdrafts are classified as current accounts, secured against bank deposits, securities, or personal security.
- Demand loans are provided for a fixed amount with limited debits; only interest and fees are chargeable post-initial advance.
Overdrafts
- Overdrafts are allowed against approved securities and must be maintained within ordinary current account ledgers.
- Temporary overdrafts should be recorded under regular current account headings.
Demand Loans
- These accounts represent a fixed advance with no additional debits allowed, except for interest and associated charges.
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Description
This quiz covers the general instructions on loans and advances as outlined in Chapter 1 of the Book of Instructions on Loans. It emphasizes efficient management and the significance of these assets in banking profitability amid strict regulatory norms. Test your understanding of these essential banking concepts.
