Operational Aspects of Loan Accounts | PAPER II – PRINCIPLES & PRACTICES OF BANKING | MODULE B: FUNCTIONS OF BANKS
Operational Aspects of Loans and Credit Management
1. Operational Aspects of Loan Accounts
Loan accounts involve the administration of credit given to borrowers. This includes disbursement, interest application, repayment tracking, and delinquency management.
Example: If a customer takes a loan of ₹5,00,000, the bank maintains a loan account to monitor the disbursement and repayments.
2. Interest Rates on Loans
Interest rates may be fixed or floating and are often linked to benchmarks like MCLR, Repo Rate, or external benchmarks.
Mathematical Illustration:
Loan Amount = ₹1,00,000
Interest Rate = 10% p.a.
Time = 1 year
Interest = (1,00,000 × 10 × 1) / 100 = ₹10,000
3. Credit Management
Credit management involves assessing borrower creditworthiness, setting limits, and ensuring repayment capacity.
4. Credit Monitoring
Credit monitoring includes periodic review of the borrower's financial health, usage of funds, and adherence to loan covenants.
5. Common Operational Terms/Aspects in Loan Functions
- Sanction: Approval of credit limits.
- Disbursement: Actual release of loan amount.
- EMI: Equated Monthly Installment comprising principal and interest.
6. Operational Process of Handling Loans
- Loan Application
- Credit Appraisal
- Sanction
- Documentation
- Disbursement
- Monitoring & Recovery
7. Accounting Aspects of Loan Products
Loans are recorded as assets in the bank's books. Interest income is accrued and recognized as per regulatory norms.
8. Basic Operating Instructions on Loan Products
Instructions include loan classification, risk categorization, provisioning norms, and reporting requirements.
9. Operating Manual for Loans and Advances
This document outlines step-by-step procedures for different types of loans, such as housing, personal, and business loans.
10. Sample Operating Instructions
Example: For a home loan, operating instructions may include verifying property title, loan-to-value calculation, and insurance requirements.
11. Operational Aspects of a Few Common Loan Products
- Personal Loan: Unsecured, short-term, based on salary/income.
- Home Loan: Long-term, secured by property mortgage.
- Vehicle Loan: Secured by the vehicle being financed.
12. Guidelines on Recovery Agents Engaged by Banks
Banks must ensure recovery agents follow ethical practices, are properly trained, and comply with RBI's fair practice norms.
13. Fair Practices Code for Lenders
Issued by RBI, this code ensures transparency in lending, proper borrower communication, and responsible recovery processes.
MCQs on Operational Aspects of Loan Accounts
-
Which of the following is a floating benchmark rate?
- a) Fixed Rate
- b) MCLR
- c) Term Deposit Rate
- d) Base Rate
-
What is the main purpose of credit appraisal?
- a) To recover the loan
- b) To assess the creditworthiness of the borrower
- c) To create an EMI schedule
- d) To monitor account balance
-
Which of the following is NOT an operational term in loan functions?
- a) Disbursement
- b) Deposit Insurance
- c) EMI
- d) Sanction
-
How are loans classified in a bank's books?
- a) Liability
- b) Asset
- c) Contingency
- d) Income
-
Which code governs fair practices in lending?
- a) Banking Code of Ethics
- b) Fair Practices Code
- c) Income Recognition Code
- d) Basel Guidelines
-
What is the function of recovery agents?
- a) Sanction loans
- b) Recover dues from borrowers
- c) Monitor credit
- d) Open accounts
-
Which of the following is an unsecured loan?
- a) Home Loan
- b) Personal Loan
- c) Vehicle Loan
- d) Mortgage Loan
-
What is EMI?
- a) Equated Monthly Insurance
- b) Equated Monthly Installment
- c) Electronic Monthly Invoice
- d) Estimated Monthly Income
-
Which of the following ensures regular monitoring of borrower's financial position?
- a) Loan Sanction
- b) Documentation
- c) Credit Monitoring
- d) Disbursement
-
Which entity issues guidelines for recovery agents?
- a) SEBI
- b) IRDAI
- c) RBI
- d) NHB
Comments