V Semester BBA

BANKING LAW & PRACTICES

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MODULE-4
SECTION A
a) Define Commercial bank.
 A commercial bank is a financial institution that provides services like accepting
deposits, granting loans, bank overdrafts, offering certificates of deposits, and savings
accounts to individuals and businesses.

b) Define Lending.
 Lending facilities refer to various financial arrangements and mechanisms through which
individuals, businesses, or governments can borrow money.Ex. cash credit, Loans, LOC,
Over Draft,

c) What is cash credit?

 Cash credit is referred to as short-term funding or loan for a company so that it can
meet its working capital requirements.

d) What do you mean by an overdraft?

 An overdraft occurs when there isn't enough money in an account to cover a transaction
or withdrawal, but the bank allows the transaction anyway.

e) What is meaning of security for loan?

 With reference to lending, security or collateral, is an asset that is pledged by the
borrower as protection in case he or she defaults on the repayment, not paying some or
all back.
 Security on a loan refers to an asset, such as your home, that a lender will accept as
collateral against the amount you wish to borrow.

f) Mention the types of Assets.

g) Give the meaning of NPA.
 A Non-Performing Asset (NPA) is a debt instrument where the borrower has not made
any previously agreed upon interest and principal repayments to the designated lender
for an extended period of time. The nonperforming asset is, therefore, not yielding any
income to the lender in the form of interest payments.
 Non-Performing Assets are financial assets that are not generating income for the lender
or borrower, typically due to delinquency or default on a loan. They are also referred to
as "distressed assets" or "troubled assets". Non-performing assets can include loans,
bonds, and other financial instruments, such as mortgages, commercial loans, and credit
card debt

h) What is Priority Sector Lending?

 Priority Sector Lending is that kind of lending where the weaker sectors of the economy
are helped by providing them with enough credit at the right point in time.
 Priority Sector Lending (PSL) is lending to those sectors of the economy which may not
otherwise receive timely and adequate credit. This role is assigned by the RBI to the
banks for providing a specified portion of the bank lending to a few specific sectors. This
is essentially meant for an all-round development of the economy as opposed to
focusing only on the financial sector
SECTION B & SECTION C
1. Explain the Functions of Commercial Bank
 A commercial bank is a financial institution that provides services like accepting
deposits, granting loans, bank overdrafts, offering certificates of deposits, and savings
accounts to individuals and businesses.

A. Primary Functions: Accepting Deposits and Advancing of Loans are the two primary
functions performed by commercial banks.
1. Accepting Deposits: One of the most essential functions of commercial banks is accepting
deposits. Commercial banks accept deposits from their customers in different forms based
on the requirements of different sections of society. The main types of deposits include:
  Demand Deposits or Current Account Deposits: The deposits which are repayable
on demand by the banks are known as demand deposits or current account deposits.
In general, these kinds of deposits are maintained by businessmen to make
transactions with these deposits. One can get the amount deposited as demand
deposits by a cheque without any restriction. Besides, commercial banks do not pay
any interest to the depositors on these accounts; instead, they charge some amount
as a service charge for running these accounts.
 Fixed Deposits or Time Deposits: The deposits in which the depositor, deposits
money with the bank for a fixed time period are known as fixed deposits or time
deposits. These deposits do not enjoy a cheque facility and carry a high interest rate.
 Saving Deposits: The deposits, which include combined features of demand deposits
and fixed deposits are known as saving deposits. The depositors have the cheque
facility to withdraw money from their accounts, but there are some restrictions on
the number and amount of withdrawals. The restrictions are imposed to discourage
the frequent use of saving deposits. Besides, the interest rate on saving deposits is
less than the interest rate on fixed deposits.
2. Advancing of Loans: The banks are not allowed to keep the amount deposited with them,
idle. Therefore, commercial banks have to keep some amount of the total deposits as cash
reserves and lend the rest of the balance to needy borrowers and charge interest from
them. The interest received by commercial banks from advancing loans is the main source
of their income.
 Cash Credit: The loan given to the borrowers against their current assets like stocks,
bonds, shares, etc., is known as cash credit. For this, a credit limit is sanctioned to
the borrower, and money is credited to this account. The borrower can now
withdraw any amount at any time within his credit limit. Interest is charged from the
borrower on the amount actually withdrawn by him.
 Demand Loans: The loans given by the banks which they can recall at any time on
demand are known as demand loans. The entire amount of the demand loan is
credited to the borrower’s account, and interest is charged on that amount.
 Short-term Loans: Personal loans given to borrowers against some collateral security
are known as short-term loans. The amount taken as a loan is credited to the
account of the borrower, and he can withdraw that money from his account. Interest
is charged on the entire sum of the loan granted.
B. Secondary Functions: Besides primary functions, commercial banks also perform some
secondary functions.
1. Overdraft Facility: A facility that allows the customer to overdraw from the amount of his
current account up to an agreed limit is known as an overdraft facility. In general, an
overdraft facility is given to respectable and reliable customers for a short period. Besides,
the customers have to pay interest on the amount overdrawn by them.
2. Discounting Bills of Exchange: A facility in which the holder of a bill of exchange, before
its maturity date can get the bill discounted with the bank. The bank pays the amount to the
holder after deducting some amount as commission. Now, on the date of maturity, the
party which has accepted the bill pays back the money to the bank.
3. Agency Functions: There are some agency functions performed by commercial banks for
which they charge some commission from their clients. Some of these functions are:
 Transfer of Funds: With the help of instruments like mail transfers, demand drafts,
etc., commercial banks provide their customers with the facility of easy and
economical remittance of funds from one place to another.
 Collection and Payment of Various Items: Commercial banks provide their
customers with the service of collecting bills, interest, subscriptions, rents, and other
periodical receipts on their behalf. They also make payments for insurance
premiums, taxes, etc., on their customer’s standing instructions.
 Purchase and Sale of Foreign Exchange: The central bank gives authority to
commercial banks to deal in foreign exchange. Commercial banks, on the behalf of
their customers, buy and sell foreign exchange and also helps in promoting
international trade.
 Purchase and Sale of the Securities: Commercial banks on behalf of their customers,
purchase and sell government securities and stocks and shares of private companies.
 Income Tax Consultancy: Commercial banks provide advice to their customers
related to income tax. They also help them in the preparation of their income tax
returns.
 Trustee and Executor: Commercial banks play the role of a trustee and preserve the
will of their customers and as an executor, execute the will after their death.
 Letters of Reference: Commercial banks provide information about the economic
position of their customers to the traders and vice-versa.
4. General Utility Functions: Some of the general utility functions performed by commercial
banks are:
 Locker Facility: Commercial banks provide their customers with the facility of lockers
or safety vaults so they can keep their valuable things in safe custody.
 Traveller’s Cheques: To avoid the risk of taking cash on their journey, commercial
banks provide their customers with the facility of traveller’s cheques.
 Letter of Credit: Sometimes people need to show their creditworthiness for various
reasons. Commercial banks certify the creditworthiness of their customers whenever
required.
 Underwriting Securities: Commercial banks also performs the function of
underwriting securities. And as the public has full faith in the bank’s
creditworthiness, they do not hesitate in purchasing the securities which are
underwritten by banks.
 Collection of Statistics: Commercial banks advice their customers on financial
matters by collecting and publishing statistics related to commerce, trade, and
industry.
2. Discuss the various Sound Principles of Bank Lending
 Bank lending is the process by which a financial institution, such as a bank, provides
funds to a borrower. The borrower agrees to repay the loan, plus interest and any other
fees, over a set period of time.
PRINCIPLES OF BANK LENDING
LIQUIDITY
SAFETY
DIVERSITY
STABILITY
PROFITABILITY
PURPOSE
DIVERSIFICATION
NATIONAL INTEREST
 Liquidity: Liquidity is an important principle of bank lending. Bank lend for short periods
only because they lend public money which can be withdrawn at any time by depositors.
They, therefore, advance loans on the security of such assets which are easily
marketable and convertible into cash at a short notice. A bank chooses such securities in
its investment portfolio which possess sufficient liquidity. It is essential because if the
bank needs cash to meet the urgent requirements of its customers, it should be in a
position to sell some of the securities at a very short notice without disturbing their
market prices much. There are certain securities such as central, state and local
government bonds which are easily saleable without affecting their market prices. The
shares and debentures of large industrial concerns also fall in this category. But the
shares and debentures of ordinary firms are not easily marketable without bringing
down their market prices. So the banks should make investments in government
securities and shares and debentures of reputed industrial houses.
 Safety: The safety of funds lent is another principle of lending. Safety means that the
borrower should be able to repay the loan and interest in time at regular intervals
without default. The repayment of the loan depends upon the nature of security, the
character of the borrower, his capacity to repay and his financial standing. Like other
investments, bank investments involve risk. But the degree of risk varies with the type of
security. Securities of the central government are safer than those of the state
governments and local bodies. And the securities of state government and local bodies
are safer than those of the industrial concerns. This is because the resources of the
central government are much higher than the state and local governments and of the
latter higher than the industrial concerns.
 Diversity: In choosing its investment portfolio, a commercial bank should follow the
principle of diversity. It should not invest its surplus funds in a particular type of security
but in different types of securities. It should choose the shares and debentures of
different types of industries situated in different regions of the country. The same
principle should be followed in the case of state governments and local bodies.
 Diversification aims at minimizing risk of the investment portfolio of a bank. The
principle of diversity also applies to the advancing of loans to varied types of firms,
industries, businesses and trades. A bank should follow the maxim: “Do not keep all eggs
in one basket.”
 Stability: Another important principle of a bank’s investment policy should be to invest
in those stocks and securities which possess a high degree of stability in their prices. The
bank cannot afford any loss on the value of its securities. It should, therefore, invest it
funds in the shares of reputed companies where the possibility of decline in their prices
is remote. Government bonds and debentures of companies carry fixed rates of interest.
Their value changes with changes in the market rate of interest. But the bank is forced to
liquidate a portion of them to meet its requirements of cash in cash of financial crisis.
Otherwise, they run to their full term of 10 years or more and changes in the market
rate of interest do not affect them much.
 Profitability: This is the cardinal principle for making investment by a bank. It must earn
sufficient profits. It should, therefore, invest in such securities which was sure a fair and
stable return on the funds invested. The earning capacity of securities and shares
depends upon the interest rate and the dividend rate and the tax benefits they carry. It
is largely the government securities of the center, state and local bodies that largely
carry the exemption of their interest from taxes. The bank should invest more in such
securities rather than in the shares of new companies which also carry tax exemption.
This is because shares of new companies are not safe investments.
 Purpose: The purpose should be productive so that the money not only remain safe but
also provides a definite source of repayment. Loans may be required for productive
purposes, trading purposes, agriculture, transport, self-employment etc. If a loan is
required for a non-productive or speculative purpose, the banker should be very much
cautious in entertaining such proposals. It is very difficult to ensure that the loan has
been utilized for the purpose for which it was sanctioned.
 Diversification: A prudent banker always tries to select the borrower very carefully and
takes tangible assets as security to safeguard his interests. While this is no doubt an
adequate measure, there are other unforeseen contingencies against which the banker
has to guard himself. Further if the bank lends large amounts to a single industry or
borrower, then the default by that customer can affect the banking industry as a whole
and will affect the basic survival of the industry. To safeguard his interest against all such
risks, the banker follows the principle of diversification of risks based on the famous
maxim ‘never keep all the eggs in one basket’. By lending funds to different sectors, a
bank can save itself from the slump in some sectors by way of prosperity in the others.
 National Interest: Even when an advance satisfies all the aforesaid principles, it may still
not be suitable. The advance may run counter to national interest. Bank has a significant
role in the economic development process of a country. They should keep in mind the
national development plan/program while going for lending but maintaining safety,
liquidity and profitability.
3. Explain different kinds of lending facilities offered by a Bank with their advantages and
disadvantages.
 Lending facilities refer to various financial arrangements and mechanisms through which
individuals, businesses, or governments can borrow money.
LOANS
CASH CREDIT
OVERDRAFT
BILLS DISCOUNTING
LETTERS OF CREDIT
a. Loans: A loan is a financial arrangement under which an advance is granted by the bank
to a borrower on a separate account called the loan account. When the loan is
sanctioned, the entire amount of loan is debited to loan account and it is paid to
borrower at once in lump sum and the repayment of the loan is made in one lump sum
or in installments. When a loan is granted generally for a period of less than one year is
called short-term loan or demand loan. Loan may also be granted for a period of more
than one year, two, three to five years, it is termed as Term loan. A loan for a period of
three to five years is known as medium term loan. Loan beyond five years ranging to five
to fifteen years is termed as a long term years. Loans and advances carry a high rate of
interest because of the risk involved, low liquidity and difficulty of shifting them.
Customers may borrow loans from banks by pledging movable and immovable
properties and valuable securities and the like.
b. Overdrafts: An overdraft is a financial arrangement under which a current account
holder is permitted by the banker to draw more than the amount standing to his credit
up to an agreed or a specified limit. Overdraft Facility is a credit-based facility offered by
various banks and financial institutions. With overdraft, you can withdraw money from
your Current or Savings Account even if the account balance has bottomed out and gone
below zero. It is an extension of the monetary limit offered by banks, and the money so
withdrawn is said to be ‘overdrawn’.

c. Cash credit: Cash Credit is a short term loan approved by banks for businesses, financial
institutions and companies to meet their working capital requirements. The borrowing
company can take money, even without a credit balance, up to whatever borrowing
limit exists. Cash credit is referred to as short-term funding or loan for a company so
that it can meet its working capital requirements. Cash credit is a sort of loan that is
offered to businesses by financial institutions like banks. Banks offer cash credit to
businesses based on the latter's credit history and financial stability. If you procure funds
via cash credit, you can use it for various business-related purposes like expansion,
purchasing plant and machinery, raw materials, hiring staff, debt consolidation, et
d. Bill Discounting: Bill discounting is a trade-related activity in which a company sells its
outstanding invoices to a financier (a bank or another financial institution) that agrees to
pay the company for them at a future date. Invoice discounting is a technique or a
process by which a company can borrow cash from financial institutions on the basis of
the invoices raised. In other words, invoice discounting is more of a short-term
borrowing, where a company can draw cash against the invoices

e. Letter of Credit: A Letter of Credit is a contractual commitment by the foreign buyer's

bank to pay once the exporter ships the goods and presents the required documentation
to the exporter's bank as proof. As a trade finance tool, Letters of Credit are designed to
protect both exporters and importers. A Letter of Credit (LC) is a document that
guarantees the buyer’s payment to the sellers. It is issued by a bank and ensures timely
and full payment to the seller. If the buyer is unable to make such a payment, the bank
covers the full or the remaining amount on behalf of the buyer.
4. Explain the Types of securities and Methods of creation of charge
 The term "security" refers to a fungible, negotiable financial instrument that holds some
type of monetary value. A security can represent ownership in a corporation in the form
of stock, a creditor relationship with a governmental body or a corporation represented
by owning that entity's bond; or rights to ownership as represented by an option.
Types of Security

 Debt Securities: Debt securities, or fixed-income securities, represent money that is

borrowed and must be repaid with terms outlining the amount of the borrowed funds,
interest rate, and maturity date. In other words, debt securities are debt instruments,
such as bonds (e.g., a government or municipal bond) or a certificate of deposit (CD) that
can be traded between parties. Debt securities, such as bonds and certificates of
deposit, as a rule, require the holder to make the regular interest payments, as well as
repayment of the principal amount alongside any other stipulated contractual rights.
Such securities are usually issued for a fixed term, and, in the end, the issuer redeems
them.
 Equity Securities: Equity securities represent ownership interest held by shareholders in
a company. In other words, it is an investment in an organization’s equity stock to
become a shareholder of the organization.
 Derivative Securities: Derivative securities are financial instruments whose value
depends on basic variables. The variables can be assets, such as stocks, bonds,
currencies, interest rates, market indices, and goods. The main purpose of using
derivatives is to consider and minimize risk. It is achieved by insuring against price
movements, creating favorable conditions for speculations and getting access to hard-
to-reach assets or markets.
 Hybrid Securities: Hybrid security, as the name suggests, is a type of security that
combines characteristics of both debt and equity securities. Many banks and
organizations turn to hybrid securities to borrow money from investors. Similar to
bonds, they typically promise to pay a higher interest at a fixed or floating rate until a
certain time in the future. Unlike a bond, the number and timing of interest payments
are not guaranteed. They can even be converted into shares, or an investment can be
terminated at any time. Examples of hybrid securities are preferred stocks that enable
the holder to receive dividends prior to the holders of common stock, convertible bonds
that can be converted into a known amount of equity stocks during the life of the bond
or at maturity date, depending on the terms of the contract, etc.
 TYPES OF CHARGING SECURITIES
ASSIGNMENT
LIEN
SET-OFF
HYPOTHECATION
PLEDGE
MORTGAGE
APPROPRIATION
Assignment
 It is a mode of providing securities to a banker for an advance .It is transfer of a right
, property or a debt .The transfer is called assignor and the transferee assignee.
 Borrowers generally assign the actionable claims to the banker as security for an
advance. It is transfer of right, Property or debt. The transferor is called assignor and
the transferee assignee. Borrowers generally assign the actionable claims to the
banker as securities for an advance.
 Section 130 of the transfer of property Act: The transfer of an actionable claim can
be effected only by the execution of an instrument in writing, signed by duly
authorized agent.
 Section 3 of the Transfer of property act: Defines an actionable claim to any debt
other than a debt secured by mortgage of immovable property, or by hypothecation
of or pledge of movable property or two beneficial interest in movable property, not
in the possession of the claimant, which the civil courts recognize as affording
grounds of relief.
Lien
 Lien is the right of the banker to retain possession of the goods and securities owned
by the debtor until the debt due from the latter is paid .The banker’s lien is an
implied pledge. A banker acquires the right to sell the goods which came into its
possession in the ordinary course of banking business, in case the debt is not paid.
 Section 171 of the Indian contract act 1872 gives to the banker an absolute right of
general lien on all goods and securities received by the banker.
Set-off
 Set off means total or partial merging of a claim of one person against another in a
counter claim by the latter against the former. It is in effect, the combining of
accounts of the debtor and creditor, to arrive at the former. It is in effect, the
combining of accounts of the debtors and creditors, to arrive at the met balance
payable to one or the other .The right of set off is a statutory right and can also arise
out of an agreement between parties.
Hypothecation
 The term hypothecation means a charge in or upon any movable property, existing
or future, created by a borrower in favour of a secured creditor, without
 delivery of possession of the movable property to such creditor, as a security for
financial assistance and includes floating charge and crystallization of such charge in
to fixed charge on movable property. The mortgage of movable property is called
hypothecation.
Pledge
 Pledge means bailment of goods for purpose of providing security for payment of
debt or performance of promise. (As per the section 172 of Indian Contract Act
1872).
 The person, whose goods are bailed is called the Pawnor, the person who takes the
goods as security is called the Pawnee.
Mortgage
 Mortgage is a transfer of interest in immovable property to secure an advance loan
or an existing debt or a debt or performance of an obligation.
Transfer of property act contemplates six types of mortgage
 Simple mortgage
 Mortgage by conditional sale
 Usuafructury mortgage
 English mortgage
 Mortgage by deposit of title deeds
 Anomalous mortgage
Right of Appropriation
 When a debtor has several debt with a creditor, section 59, 60 and 61of the Indian
Contract Act 1872, deal with appropriation of payment made by the debtor to the
creditor. The principle also applies to the loans obtained from a bank. We should
also understand clearly the different between right of appropriation and right of off.
When a Fixed deposit receipt of appropriated before maturity it is under the right of
appropriation and when it is appropriated after maturity the right of set off is
exercised.

5. Explain the types of loans (Secured and Unsecured Advances) sanctioned by banker.
 Loan is when the borrower borrows the money from the lender for a certain rate of
interest with a commitment to pay the amount back in future. It is a request of money
from one source to another for fixed time duration.
 Loan is a kind of debt facilitated by an organization to another with a condition of
interest rate.
DIFFERENT TYPES OF LOANS IN INDIA
A. Secured Loans: Secured loans are those loans that are provided against security. The
borrowers need to furnish security for availing of secured loans. In the case of secured
loans, lenders face a lower risk of default by the borrower. In case the borrower is
unable to repay the loan, then the lender can sell the asset to recover its dues. This is
the main reason why secured loans carry a lower interest rate than unsecured loans.
Home Loans: These are the most common types of secured loans availed of by
borrowers. As the name suggests, home loans are taken for the purchase or
construction of a home by the borrower. Here, the home itself acts as a security for the
lender. However, while the home is the primary security, the lender may require the
borrower to furnish collateral security as well depending upon the borrower’s profile
and the valuation of the home. This can either be a fixed deposit or any other asset.
Home loans are long-term loans and the loan tenure can range from 10 years to as long
as 25 years. They are usually high-ticket loans running into lakhs and also the most
affordable ones. The home loan interest rates start anywhere between 7% per annum to
7.5% per annum. The loan needs to be repaid in Equated Monthly Installment (EMIs).
The Loan-to-Value (LTV) ratio is usually 80%. It means, the borrower can avail of a loan
up to 80% of the property value.
Gold Loans: Gold loans are taken against the gold owned by the borrowers. Here, gold
acts as a security for the lender whereby the borrower can pledge the gold with the
lender and avail of money from them. The lender retains possession of the gold until the
loan is repaid. The gold loan interest rate starts from 7.50% per annum. Here, most
lenders require the borrowers to pay only the interest on the loan amount each month.
The principal can be repaid by the borrowers anytime, and they can take back the
possession of the gold. Till the principal is repaid, interest needs to be paid each month
on the outstanding principal. Further, the LTV on gold loans can go up to 90%.
Vehicle Loans: These are the loans taken for the purchase of the vehicle. Vehicles can
include passenger and commercial vehicles as well as two-wheelers, four-wheelers and
heavy vehicles. Here, the vehicle acts as a primary security for the lender. In the event of
non-repayment, the lender can seize the vehicle. The interest rate on vehicle loans can
start anywhere between 7% per annum to 7.5% per annum. The LTV depends upon the
type of vehicle. For certain vehicle loans , the lender can even offer a loan of up to 100%
of the vehicle’s value.
Loan against Property: This is a kind of mortgage loan whereby the borrowers can avail
of funds by mortgaging their property with the lender. Loan against property can be
availed of against both residential and commercial property. The administration charges
for loans against property are higher than for home loans. The funds can be used by the
lender for either business or personal purposes. The LTV in case of a loan against
property can be anywhere between 65% to 70%. Further, the interest rates on loans
against property are also slightly higher as compared to those on home loans. The
interest rate here starts from 8% per annum.
Loan against Securities: Investors often invest in shares and securities. This can include
shares, mutual funds, bonds and debentures. The investors are eligible to borrow money
from banks and financial institutions against these securities. However, as the securities
are volatile in nature, LTV for loans against securities is 50% of the security value. This is
to protect the lender against any downside risk due to a fall in the value of the security.
Further, the interest rate in the case of loans against securities also varies depending
upon the type of security. It can start anywhere between 7.50% per annum.
Title Loans: In title loans, the lender provides loans to the borrowers against their
vehicle. Here, the borrowers can borrow up to 25% to 50% of the value of their vehicle
by handing over their vehicles as collateral security to the lenders. While the possession
of the vehicle remains with the borrower, in case of default, the lender may seize the
vehicle. These loans are usually ultra-short-term loans and can be taken for as short a
period as 30 days. One of the major drawbacks of title loans is that the interest rate is
very high. The interest rate is usually 25% per month. That means it's 300% per annum.
Non-recourse Loans: Non-recourse loans are the type of secured loans whereby the
borrowers can provide collateral security to the lender for borrowing the funds. In case
of default by the borrower, the lender has the right to seize the collateral security.
However, one of the key features of a non-recourse loan is that the lender cannot
proceed against the borrower if the collateral security does not provide full
compensation to the lender. Thus, the lender shall forgo the remaining amount of the
loan after recovery from the collateral security. The borrower does not have any
personal liability to repay the non-recourse loan. The LTV in the case of a non-recourse
loan can be anywhere between 60% to 80%.
Loan against Fixed Deposits: Here, banks and financial institutions provide loans to
borrowers against fixed deposits. The fixed deposits act as primary security for the
lender. Further, as the fixed deposit is equivalent to money, banks do not face many
risks in the case of loans against FD. Borrowers can avail of loans against FD for an
amount up to 60% to 75% of the FD value. In terms of interest rates, while some banks
charge a flat interest rate, other banks may charge interest that is 1%-2% rate higher
than the FD rate. Currently, the FD rate is anywhere between 5% to 7.5% per annum,
depending upon the amount and tenure. Thus, it can be said that loans against FD are
one of the most affordable secured loans.
Loan against Insurance: Loans against insurance are also one of the popular secured
loans in India. Many people have life insurance policies but seldom do they know that
policies can act as a security against which money can be borrowed. To avail of a loan
against an insurance policy, the policy must have a surrender value. The LTV in case of
loan against insurance is anywhere between 85% to 90% per annum. The interest rate in
this case can start anywhere between 10% per annum to 12% per annum.
Working Capital Loans: Working capital loans are extended by banks and financial
institutions to help businesses meet their working capital needs. Also known as Cash
Credit, here the amount of loan that can be availed of depends upon the creditors,
debtors and stock that the business holds which also constitutes the working capital for
the business. Each lending institution has its own way of calculating the working capital
limit. Further, the interest rate on working capital loans can start from 12% per annum.
While the stock and debtors act as a security in the case of working capital loans, the
lending institution may require the borrower to furnish collateral security as well.
B. Unsecured Loans: These are the exact opposite of secured loans. Unsecured loans are
provided against the income or the prospective income-earning capacity of the
borrower. Regarding unsecured loans, the borrowers are not required to furnish any
security. The lenders extend unsecured loans based on the documents provided by the
borrower, their income potential, and their CIBIL history. Unsecured loans increase the
risks of the lender because, in case of default by the borrower, there is no security
available with the lender from which it can recover its dues. This is the reason why
lending institutions charge a higher interest rate for unsecured loans.
Personal Loans: These are one of the most sought-after bank loans in India. Personal
loans are loans extended by banks or financial institutions without any collateral
security. It is essentially a loan against the income of the borrower. The key features of
personal loans are that it does not require any collateral security, and there is no
restriction as to the end use of the borrowed funds. The borrower can utilise the
amount borrowed for any purpose, be it medical emergencies, marriage, education of
the children, purchasing any asset or travelling. The amount of personal loan that a
borrower can avail of depends upon the income of the borrower and his/her CIBIL score.
Further, the rates of interest on personal loans can range anywhere from 8% per annum
to 10% per annum.
Short-term Business Loans: Uncertainties can strike the business anytime. In case a
business is facing a financial crunch, then it can go for short-term business loans. These
bank loans are structured to help businesses meet short-term uncertainties and financial
crises. The eligibility criteria are simple, and the amount of loan that can be disbursed
depends upon the profitability of the business and the profile of the borrower. The
interest rates for short-term business loans can be anywhere between 1% and 1.5% per
month, i.e., 12% to 18% per annum. The reason that business loans attract a higher
interest rate than personal loans is that there is a chance of loss of borrowed funds in
the business. In such cases, the risk falls on the shoulders of the lenders.
Education Loans: The cost of education is rising at a rapid pace. If one wants to pursue
quality education, then he/she needs to shell out lakhs of rupees. In such cases,
an education loan provides monetary assistance. The interest rate on education loans
can start from 8.85% per annum, and the amount of the loan depends upon the cost of
education. The repayment for education loans usually begins 12 months after
completion of the education.
Credit Cards: Many banks offer credit cards . These are great tools as one gets to spend
using the credit card without actual cash outflow. The grace period provides the time for
repayment to the credit card holder. However, credit cards are unsecured in nature.
Further, they come with an option to convert the outstanding balance to a loan if the
credit card holder requires it. This becomes an unsecured loan for the borrower. One of
the major drawbacks of credit card is that it attracts a very high interest rate. The credit
card interest rate can be anywhere between 18% and 36% per annum. Further, like any
other loan, credit cards also have a great impact on the CIBIL score .
6. Discuss the Non-Performing Asset (NPA & impacts
A nonperforming asset (NPA) is a debt instrument where the borrower has not made
any previously agreed upon interest and principal repayments to the designated lender
for an extended period of time. The nonperforming asset is, therefore, not yielding any
income to the lender in the form of interest payments.
Non-performing assets are financial assets that are not generating income for the lender
or borrower, typically due to delinquency or default on a loan. They are also referred to
as "distressed assets" or "troubled assets". Non-performing assets can include loans,
bonds, and other financial instruments, such as mortgages, commercial loans, and credit
card debt
TYPES OF NON-PERFORMING ASSETS

Standard Assets: Standard assets are non-performing assets that have been due for
anywhere from 90 days to 12 months. Among non-performing assets, they are
considered to be of normal risk levels.
Sub-Standard Assets: The non-performing assets that are due past more than twelve
months are known as sub-standard assets. In comparison to standard assets, they pose
significantly higher risk levels. Banks and financial institutions are more skeptical of
borrowers with sub-standards of non-performing assets and thus assign them with a
haircut (market value reduction).
Doubtful Debts: Non-performing assets that are due for a minimum of 18 months period
are termed doubtful debts. Lenders have grave doubts about the intention and ability of
such borrowers to repay their debts.
Loss Assets: Loss assets are non-performing assets with such extended periods that
lenders have given up hope that they would be able to recover their money. They are
forced to write it off as a loss on their balance sheets.
 CIRCUMSTANCES UNDER WHICH NON-PERFORMING ASSET ARISE:
 For Term loan: It becomes a NPA when interest and installment of principal remains
unpaid for period of more than 90 days. (Earlier for 180 days).
 For cash credit and overdraft: It becomes a NPA if the account remains out of order for
period of more than 90 days (Earlier for 180 days).
 Bills purchased /discounted: It becomes a NPA if the bills remain overdue or unpaid for
more than 90 days (Earlier for 180 days).
 For Agricultural advances: It becomes a NPA if the interest and installment of principal
remains overdue for two harvest seasons but for a period not exceeding two and half
years.
 For other accounts: Any other credit facility becomes a NPA if the amount receivable
remains overdue for a period of more than 180 days.
IMPACT OF NPA
 Financial Losses: NPAs hit banks where it hurts the most – their wallets. When
borrowers fail to repay their loans, banks face financial losses as they are unable to
recover the principal amount and interest.
 Provisioning Pressures: Banks set aside provisions for NPAs as per regulatory guidelines.
Higher NPAs can mean larger provisions, which may put a strain on the bank’s financials.
It’s like setting aside money for rainy days that may never seem to end.
 Liquidity Struggles: NPAs tie up a significant chunk of a bank’s funds. This can make it
difficult for them to lend money and meet the liquidity needs of their customers. This
liquidity strain can hamper the bank’s ability to generate revenue and grow its business.
 Credit Quality Concerns: NPAs signal deteriorating asset quality, which can raise red
flags for lenders. Credit rating downgrades may follow, increasing borrowing costs for
the bank and shaking investor confidence. It’s like having a black mark on your credit
history that may be hard to shake off.
 Reputation at Stake: High NPAs can tarnish a bank’s reputation and shake customer
trust. If people start losing faith in a bank’s ability to recover loans, they may withdraw
their deposits. And take their business elsewhere. It’s like a domino effect that can
further weaken the bank’s financial standing.
 Creditworthiness: When a borrower’s loan turns into a Non Performing Asset, it
adversely affects their creditworthiness and credit score. This makes it challenging for
them to secure loans or credit in the future. Lenders become cautious and may perceive
them as high-risk borrowers, resulting in limited access to financial resources.
 Legal Consequences: If a borrower fails to repay their loan, the bank may initiate legal
proceedings to recover the outstanding amount. This can lead to litigation, which not
only adds to the borrower’s financial burden but also damages their reputation and
credibility.
 Asset Seizure: In certain cases, banks have the right to seize and sell collateral provided
by the borrower to recover the outstanding loan amount. This can result in the loss of
valuable assets, causing significant financial setbacks for the borrower.
 Limited Financial Options: Borrowers with NPAs find themselves in a tough spot when it
comes to obtaining additional financing. They may face difficulties in availing of new
loans or credit facilities, which can hamper their ability to meet personal or business
financial needs.
 Negative Credit History: The NPA status of a loan is recorded in the borrower’s credit
history, which can have long-term consequences. Other lenders, including banks and
financial institutions, can access this information when assessing creditworthiness. The
presence of NPAs in the credit history can lead to higher interest rates, stricter
borrowing terms, and limited options.
 Financial Stability: High levels of Non-Performing Assets weaken the financial stability of
banks, reducing their ability to lend and support economic growth.
 Fiscal Implications: NPAs create a burden on government finances as they may require
financial assistance or bailouts to stabilize banks. This puts additional pressure on the
fiscal budget and limits the government’s ability to allocate funds for other
developmental purposes.

7. Discuss the Government Regulations on Priority lending for commercial banks.

 Priority Sector Lending (PSL) is lending to those sectors of the economy which may not
otherwise receive timely and adequate credit. This role is assigned by the RBI to the
banks for providing a specified portion of the bank lending to a few specific sectors. This
is essentially meant for an all-round development of the economy as opposed to
focusing only on the financial sector
 Priority Sectors Lending is the role exercised by the RBI to banks, imploring them to
dedicate funds for specific sectors of the economy like agriculture and allied activities,
education and housing and food for the poorer population.
 Priority Sector Lending is that kind of lending where the weaker sectors of the economy
are helped by providing them with enough credit at the right point in time.
CATEGORIES OF PRIORITY SECTORS
o Agriculture
o Micro, Small and Medium Enterprises (MSMEs)
o Export Credit
o Education
o Housing
o Social Infrastructure
o Renewable Energy
o Others
ACTIVITIES COVERED UNDER PRIORITY SECTOR LENDING IN INDIA
o Agriculture: Loans provided for farming activities, including crop cultivation, animal
husbandry, fisheries, and other allied agricultural activities.
o Micro, Small, and Medium Enterprises (MSMEs): Credit extended to micro, small, and
medium enterprises. It includes loans for starting new businesses, working capital
requirements, and expansion purposes.
o Education: Loans granted for education-related expenses, including tuition fees,
purchase of books, payment for educational courses, and other educational purposes.
o Housing: Lending for housing finance, including loans for the purchase, construction, or
renovation of residential properties.
o Export Credit: Financing provided to exporters to facilitate international trade. It
includes pre-shipment and post-shipment credit, export working capital, and other
export-related financial services.
o Renewable Energy: Loans extended for renewable energy projects such as solar power,
wind power, biomass, and other clean energy initiatives.
o Healthcare: Credit support for healthcare infrastructure development, including funding
for hospitals, clinics, medical equipment, and healthcare services.
o Social Infrastructure: Financing for social infrastructure projects such as schools,
colleges, vocational training centers, and other community development initiatives.
o Loans to Weaker Sections: Special focus on providing credit to marginalized and
economically weaker sections of society. It includes Scheduled Castes, Scheduled Tribes,
and Other Backward Classes.
GUIDELINES OF PRIORITY SECTOR LENDING
o The RBI has increased the mandatory PSL target for all scheduled commercial banks
from 40% to 40% of adjusted net bank credit (ANBC). ANBC is a broader measure of
bank credit. It includes loans, investments, and other advances.
o The RBI has introduced sub-targets for lending to the weaker sections under the PSL.
Under the new guidelines, banks are required to lend at least 15% of their ANBC to the
weaker sections.
o The RBI has introduced differential weightage for lending to certain sectors under the
PSL. This means that banks will get more credit for lending to certain sectors. This
includes agriculture, micro and small enterprises (MSMEs), and export credit.
o The RBI has introduced incentives for banks to lend to underserved areas. For example,
banks will get more credit for lending to districts with low per capita PSL credit.
o The RBI has enhanced the monitoring and reporting requirements for PSL. Banks are
now required to submit more detailed reports on their PSL lending to the RBI.
 8. Distinguish between overdraft and cash credit
Cash Credit Overdraft
Definition
Cash credit is a type of short term loan Overdraft facility is also a loan facility, which is provided to
facility that is provided by banks or an individual or a business, based on the relationship with
financial institutions to businesses for the bank. In this system, an individual can withdraw an
maintaining their working capital amount greater than his available balance till a specified limit
as per regulations of the bank
Purpose
For maintaining the working capital of Overdraft facility is offered for meeting short term
the business, cash credit is offered obligations of individuals or businesses
Rate of Interest
Rate of Interest is comparatively lower Rate of interest is higher than the cash credit
than overdraft
Need of account
New account needs to be opened Overdraft can be availed from an existing account
Calculation of Interest
Calculated based on the entire amount Calculated based on only the amount that is availed
that is withdrawn
Duration of loan
The loan duration is generally 1 year The loan duration can vary and it can be monthly, quarterly,
half yearly or yearly

9. What are the factors considered by a banker while sanctioning of loan?

Purpose of The Loan: Before applying for a loan, the applicant must be clear about the
loan purpose, whether for equipment purchase, working capital, or expansion.
Determining the reason for opting for a loan is a fundamental consideration.
Required Amount: After determining the purpose of the loan, it is crucial to decide the
exact amount that is required to accomplish the desired business goal. This will prevent
one from over borrowing, which may often lead to unwanted expenses on interest as
well as debt.
Creditworthiness: Assess your business as well as your personal credit score. Having a
strong credit history will increase the chance of approval of a loan on the desired terms.
Type of Loan: Conduct thorough research on various business loans available. This will
help in selecting the one that would best suit the financial needs of the business.
Rate of Interest: Compare the rate of interest offered by various lenders, as lower
interest can potentially reduce the overall cost of the loan over a considerable period.
Collateral: Find out whether the loan would require any collateral. Although secured
loans come with less burden of interest, one may lose valuable assets if one defaults.
Terms of Repayment: Go through the terms of repayment thoroughly and see whether
the lender offers enough flexibility in repayment matching with the cash flow of the
business.
 Fees and Hidden Costs: Learn about any hidden costs or fees involved in the process,
such as prepayment penalties, closing costs, or origination fees.
Efficient Selection of Lender: Select a reputable lender entertaining a track record of
offering transparent lending practices and good customer service. Apart from traditional
banks, one can also consider NDFCs, which offer flexible and convenient business loans.
Realistic Financial Projections: Preparing realistic financial projections will help in
demonstrating the ability to repay loans within the stipulated time and abiding by all the
loan terms and conditions.
Age: Your age matters because it is indicative of your financially stability. You start
working in your 20s and by the time you turn 30 you would have five or six years of work
experience. So you are financially stable and moving up the proverbial corporate ladder
with a better salary. As you progress further in the next 20 or 30-odd years you will have
fewer earning years to repay your loans. Therefore, a loan application in your retirement
years is likely to be rejected.
10. Explain the types of Assets

11. Explain the sources of funds for Commercial Banks.

Sources of funds for Commercial Banks
A. Banks Own Funds.
 Paid up capital: Bank’s own paid up capital. The amount with which a banking
company is registered is called nominal or authorized capital. It is the maximum
amount of capital which is mentioned in the capital clause of the memorandum of
association of the company. Capital is further divided into (i) paid up capital and (ii)
subscribed capital. The banks in Pakistan raise authorized capital by issuing ordinary
shares of Rs. 10 each which are fully paid up.
 Reserve fund: Reserve is another source of fund which is maintained by all
commercial banks. At the time of declaring dividend, a certain portion of the profit is
transferred to the reserve fund. This reserve belongs to the .shareholders and at the
time of liquidation, the Shareholders are entitled to these reserves along with the
capital. The main purpose of setting aside part of profit is to meet unforeseen
expenses of the bank. The Banking Companies Ordinance has made it obligatory
(binding) for every banking company incorporated in Pakistan to create a reserve
fund.
 Profit: Profit is another source to a bank for the purpose of business. Profits signify
the credit balance of the profit and loss account which has not been distributed. The
accumulated profits over the years increase the working capital of the bank and
strengthen its financial position.

B. Borrowed Funds: The borrowed capital is a major and an important source of fund for
any banking business. It mainly comes from deposits which are accepted on varying
terms in different accounts. Bank’s borrowing is mostly in the form of deposits. Bank
collects three kinds of deposits from its customers (1) current or demand deposits (2)
saving deposits and (3) fixed or time deposits. The larger the deposits of bank, the larger
will be its (use) fund for employment and so higher are its profit.
 Borrowing from central bank: The commercial banks in times of emergency borrow
loans from the central bank of the country. The central bank extends help as and
when financial help is required by the commercial banks.
 Other sources.: Bank also raise funds by issuing bonds, debentures, cash certificates
etc. etc. Though it is not common but is a dependable source of borrowing.
Bonds: In finance, a bond is a debt security, in which the authorized issuer
owes the holders a debt and, depending on the terms of the bond, is obliged
to pay interest (the coupon) to use and/or to repay the principal at a later
date, termed maturity. A bond is a formal contract to repay borrowed money
with interest at fixed intervals
Debenture: A type of debt instrument that is not secured by physical asset or
collateral. Debentures are backed only by the
general creditworthiness and reputation of the issuer. Both corporations and
governments frequently issue this type of bond in order to secure
 capital. Like other types of bonds, debentures are documented in an
indenture.
Cash certificates: Cash certificates and recurring deposits are similar types of
banking investments. The terms are used most often in relation to the
services that Indian banks provide their customers. These deposits are not
directly related to stock market or bond speculation, but instead give
investors a way to earn interest on money in a safer setting.
 Deposits. Public deposits are a powerful source of funds to a bank. There are’ three
types of bank deposits (i) current deposits (ii) saving deposits and (iii) time deposits.
Due to the spread of literacy, banking habits and growth in the volume of business
operations, there is a marked increase in deposit money with banks.
Current Deposit: In deposit terminology, the term Current Deposit refers to
a deposit to a bank account or financial institution without a specified
maturity date. These types of Current Deposit account generally only earn
demand deposit interest. Interest is very low for current account.
Saving deposits: A deposit account held at a bank or other financial
institution that provides principal security and a modest interest rate.
Depending on the specific type of savings account, the account holder may
not be able to write checks from the account (without incurring extra fees or
expenses) and the account is likely to have a limited number of free
transfers/transactions. Savings account funds are considered one of the most
liquid investments outside of demand accounts and cash. In contrast to
savings accounts, checking accounts allow you to write checks and use
electronic debit to access your funds inside the account. Savings accounts are
generally for money that you don't intend to use for daily expenses
Time Deposit: A time deposit also known as a term deposit is a money
deposit at a banking institution that cannot be withdrawn for a certain
"term" or period of time (unless a penalty is paid). When the term is over it
can be withdrawn or it can be held for another term. Generally speaking, the
longer the term the better the yield on the money. A certificate of deposit is
a time-deposit product