Loans & Advances Chapter 1

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.