JAIIB PPB Paper-2 Module-B Unit 3: Operational Aspects of Loans Accounts

11/03/2023

JAIIB Paper 2 (PPB) Module B Unit 3: Operational Aspects of Loans Accounts (New Syllabus)

The Institute of Indian Banking and Finance (IIBF) has recently announced the revised syllabus and exam format for the JAIIB Exam 2023. The upcoming exam will comprise of four papers, with Paper 2 (Principles & Practices of Banking) covering Unit 3: Operational Aspects of Loans Accounts. This particular unit holds significant importance for candidates, as it will greatly impact their performance in the exam.

To assist candidates in comprehending the topic, we will provide all the necessary details related to Unit 3: Operational Aspects of Loans Accounts of JAIIB Paper 2 (PPB) Module B: Functions of Banks. We strongly recommend candidates to refer to this article and also utilize our Online Mock Test Series to enhance their understanding of Foreign Currency Accounts for Residents and other related aspects.

For candidates appearing for the JAIIB Certification Examination 2023, it is essential to comprehend each unit in the syllabus, including the Marketing unit. This unit holds great importance in the banking industry, and candidates must prepare thoroughly to excel in the exam and establish a successful career in the banking sector.

Interest Rate On Loans

RBI regulations for interest rates on advances have over the period undergone several changes. The internal benchmark initially was PLR that was replaced by the Base Rate System and further by the MCLR.
The Reserve Bank Working Group on Benchmark Prime Lending Rate (BPLR) (Chairman: Shri Deepak Mohanty) reviewed the BPLR system and suggested changes to make credit pricing more transparent. Based on the committee’s recommendations, the Base Rate system replaced the BPLR system with effect from July 1,
All floating rate rupee loans sanctioned and renewed between July 1, 2010 and March 31, 2016 were priced with reference to the Base Rate
In December 2015, RBI reviewed the norms for determination of base rate and introduced the Marginal Cost of Funds Based Lending Rate (MCLR) concept. MCLR would serve as the internal benchmark for pricing all rupee loans and limits.
Scheduled commercial banks shall charge interest on advances on the specified terms and conditions in these directions. All floating rate loans, except those excluded, shall be priced with reference to the benchmark as indicated by the RBI.
Interest rates on fixed rate loans of tenor below 3 years shall not be less than the benchmark rate for similar tenor
There shall be no lending below the benchmark rate for a particular maturity for all loans linked to that benchmark.

MCLR Basic Norms

All floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 are priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark for such purposes.
The MCLR shall comprise of: (a) Marginal cost of funds; (b) Negative carry on account of CRR; (c) Operating costs; (d) Tenor premium.
Banks are required to publish at least five MCLRs overnight MCLR; one month MCLR; three-month MCLR; six-month MCLR; and One year MCLR.
The spread charged to an existing borrower shall not be increased except on account of deterioration in the credit risk profile of the customer.

Exemptions From Benchmark Based Interest Rate

Loans covered by schemes specially formulated by Government of India
Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the rectification/ restructuring package.
Loans granted under various refinance schemes formulated by Government of India

The following categories of loans –

Advances to banks’ depositors against their own deposits.
Advances to banks’ own employees including retired employees.
Advances granted to the Chief Executive Officer/Whole Time Directors.
Loans linked to a market determined external benchmark.
Fixed rate loans of tenor above three years.

External Benchmark Based Rates

In September 2019, RBI issued instructions for linking certain categories of loans to one of the prescribed external benchmarks, with effect from October 1, 2019.
All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans extended by banks to Micro and Small Enterprises from October 01, 2019 and floating rate loans to Medium Enterprises from April 01, 2020 shall be benchmarked to one of the following: – RBI policy repo rate – Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd. (FBIL) – Government of India 6-Months Treasury Bill yield published by the FBIL – Any other benchmark market interest rate published by the FBIL.
The adoption of multiple benchmarks by the same bank is not allowed within a loan category.

Credit Management

Credit management is the process of appraising and sanctioning the loan/s and monitoring the account/s for recovery, with a view to increase revenue of banks and financial institutions.

The term ‘Credit management’ encompasses the following:

Capital adequacy norms
Risk management, including asset liability management (ALM)
Exposure norms
Risk pricing policy and credit risk rating
Asset classification, income recognition and provisioning norms
Appraisal, credit decision-making and loan review mechanism

Credit Exposure

The sum of all the exposure values of a bank to a single counterparty must not be higher than 20 percent of the bank’s available eligible capital base at all time
The sum of all the exposure values of a bank to a borrower group must not be higher than 25 percent of the bank’s available eligible capital base.
A bank’s exposure limit to a single NBFC (excluding gold loan companies) will be restricted to 20 percent of that bank’s eligible capital base.
Banks’ exposures to a group of connected NBFCs or group of connected counterparties having NBFCs in the group will be restricted to 25 percent of their Tier I Capital.
Each bank should have a Board approved policy that explicitly recognises and takes account of risks arising out of foreign exchange exposure of their clients, with foreign currency loans above US $10 million.
Banks should frame comprehensive prudential norms relating to the ceiling on the total amount of real estate loans, single/ group exposure limits for such loans, margins, security, repayment schedule and the policy should be approved by the banks’ Boards.
Exposure to Leasing, Hire Purchase and Factoring Services: Their exposure to each of these activities should not exceed 10 per cent of total advances.
Exposure to Indian Joint Ventures/Wholly-owned Subsidiaries Abroad and Overseas Stepdown Subsidiaries of Indian Corporates: The above exposure will, however, be subject to a limit of 20 percent of banks’ unimpaired capital funds (Tier I and Tier II capital).

Loan Review Mechanism/ Credit Audit

Credit Audit examines compliance with extant sanction and post-sanction processes/ procedures laid down by the bank from time to time. The objectives of credit audit are as follows:

Improvement in the quality of credit portfolio
Review sanction process and compliance status of large loans
Feedback on regulatory compliance
Independent review of Credit Risk Assessment
Pick-up early warning signals and suggest remedial measures
Recommend corrective action to improve credit quality, credit administration and credit skills of staff, etc.

Functions of Credit Audit Department

Usually a separate functional team handles credit audit. Its functions are as given below:

To analyse Credit Audit findings and advise the departments/ functionaries concerned
To follow up with controlling authorities
To apprise the Top Management
To process the responses received and arrange for closure of the relative Credit Audit Reports
To maintain database of advances subjected to Credit Audit

Scope and Coverage

The focus of credit audit is broader and not merely at the account level, but covers the overall portfolio and the credit process being followed.

Portfolio Review
Loan Review
Action Points for Review
Frequency of Review

Credit Monitoring

Credit monitoring can be defined as a continuous supervision process enabling the bank to ensure the quality of loan assets.

This underlines four points:

It means supervision of loan accounts.
Supervision is to be continuous and not one time exercise.
To ensure quality of assets and the adherence to regulatory IRAC guidelines
It helps in verifying that the borrower is conforming to the terms of sanction.

Note: The main objective of credit monitoring is to minimize or eliminate NPA.

The bank has to keep a close watch over the conduct of the credit account through keeping track of:

Transactions in the account i.e. if these are commensurate with the manufacturing and sales activity estimated and reported in monthly statements.
Study of stock statements submitted periodically.
Periodic statements on performance parameters like sales, level of debtors, creditors, operating profit etc.

Classification of current assets and current liabilities is done as per bank’s guidelines. Current ratio is maintained at minimum 1.33.

It should Identify potential NPAs when the loan default is for two months. Collect the interest on monthly basis. Frequent visits are required wherever there is a default of interest payment.

Scrutiny of operating statements of company should be done. Banker should study in detail the data related to sales, cost of goods sold, operating profit, profit before tax, current assets and current liabilities and their movement, statutory liabilities, variance in long term outlays.

Banks are free to evolve strategies on submission of QIS returns, applicable for all accounts of Rs. 100.00 Lakh and above. Scrutiny of QIS Returns I, II, III is to be done.

QIS I (to be submitted at least one week before the commencement of quarter to which it relates). QIS II (to be submitted within six weeks from the close of quarter to which it relates). (c) QIS III (to be submitted within one month of close of the Half-year to which it relates)

Central Repository of Information on Large Credits (CRILC)

In September 2013, RBI decided to use the information supplied by the banks through the Return on Large Borrowers (Form A), which covered borrowers with exposure (both fund and non-fund based) of more than Rs. 100 million, for creation of central repository of large credits across banks.
The objective was to make this information available to banks to enable them to be aware of building leverage and common exposures.
RBI Guidelines on “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy” became effective from April 1, 2014. Simultaneously, the Report format was modified to include reporting of SMA-2 accounts, and also current account balances of their customers (debit or credit) of Rs. 10 million and above.
The CRILC Report contains two parts, CRILC-Main and CRILC- SMA2 and JLF Formation The reporting threshold in CRILC Report has been changed to Rs. 50 million. The CRILC Main Report is to be submitted on a monthly basis. Besides, a weekly report of instances of default by all borrowers is to be submitted by close of business on every Friday.
Banks are also required to report particulars of borrowers classified as ‘non-cooperative’ as per the prescribed procedures. The cut-off exposure (fund and non-fund based) for such borrowers is 50 million.
Further, all loan accounts beyond Rs. 500 million classified as RFA (Red Flagged Accounts) or ‘Frauds’ are to be reported on the CRILC data platform together with the dates on which the accounts were classified as such.

Central Registry of Securitisation Asset Reconstruction and Security Interest of India

CERSAI is a Government of India Company licensed under Section 8 of the Companies Act, 2013 with of India; having a shareholding of 51% by the Central Government and select Public Sector Banks and the National Housing Bank also being shareholders of the Company.
The objective of the company is to maintain and operate a Registration System for the purpose of registration of transactions of securitisation, asset reconstruction of financial assets and creation of security interest over property, as contemplated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

Operational Process of Handling Loans

Receipt of Loan Application
Assessment of Viability and Credit Worthiness
Loan Sanction
Disbursement
Monitoring and Supervision

(i)Inspection

(ii)Review of the conduct of the account

(iii)Renewal of Advances

Sample Operating Instructions

Advance Against Goods

They should neither be perishable articles nor those liable for rapid deterioration. They should be easily marketable having an unrestricted market. • The day to day prices of the goods should be easily ascertainable. • Their prices should be relatively stable and should not fluctuate widely.
Goods which are not the sole property of the borrowers should not be accepted as security. Advances should be allowed only against goods which have been paid for and not against goods received on credit or under an agency arrangement
While advancing against goods, a suitable margin is kept on the value of the goods for arriving at the extent of drawings (commonly known as drawing power) that may be allowed against such stocks.
Margins stipulated for advances against goods are to be calculated on Cost Price or Market Price whichever is lower, or Invoice Price or Market Price whichever is lower.
For advances to borrowers other than manufacturers, the basis of valuation should be invoice price or market price whichever is lower.
A healthy turnover in the stocks is indicative of their ready marketability.
Godown board reading ‘Goods in possession of —— Bank’ or ‘Goods pledged/ hypothecated to —— Bank’ should be affixed to the main entrance of the godown, at a conspicuous place in the premises, compound or at the entrance to the compound; where goods pledged/hypothecated to the bank are stored.
Insurance must be for full marketable value of the goods pledged/ hypothecated to the bank. This is necessary in view of the ‘Average Clause’. The insurance policies should be in the name of the bank as mortgagee and the borrower as mortgagor.
In case of hypothecation accounts, the goods advanced against remain in the custody of borrowers. It is, therefore, essential to get the Stock Statements signed by borrowers at regular intervals to ensure that the goods hypothecated are sufficient to cover day to day debit balance in the account.
Godown and factories in which goods pledged or hypothecated to the bank are stored should be inspected on monthly or quarterly basis in accordance with the terms of sanction by the official/ branch manager. The report on verification of stocks is prepared, analysed at the branch level and the stock inspection report must be filed account-wise.

Advance Against Warehouse Receipt

Advances may be made against security of Warehouse Receipts issued by Central and State Government Warehouses.
The Warehousing Corporation classifies all goods stored with them into Grade I to IV. I represents ‘good’ quality and IV –the poor quality.
Warehouse Receipts endorsed to the borrowers should be avoided. No advance is made against a Non-negotiable Warehouse Receipts.
The Warehouse Receipt against which advance is to be made should be got endorsed by the borrower in favour of the bank. The Warehouse Receipt must describe the stock in words and figures.
The branch should then serve a notice on the Warehousing Corporation, intimating them of the pledge of Warehouse Receipt to the bank and of the bank’s lien on the stocks.

Operational Aspects of Loan Products

Educational Loans

IBA Model educational loan scheme for pursuing higher education in india and abroad 2021. The scheme provides broad guidelines to the banks for operationalising the Educational loan scheme.
The student should be an Indian National (including Non-Resident Indian)
No margin may be insisted upon for loans upto Rs, 4 lakh. However, for loans of above Rs. 4 lac and upto Rs. 7.5 lac the margin requirement may be 5% for inland studies and 15% for studies abroad. Banks can decide on margin for loan of above Rs. 7.5 lac.
No security must be insisted upon for loans upto Rs. 4 lakh. Parent /guardian to be joint borrower(s). However, for loans above Rs. 4 lac and upto Rs. 7.5 lac, Parent(s)/ guardian(s) to be joint borrower(s) along with suitable third-party guarantee.
Repayment holiday/Moratorium: Course period + 1 year. Repayment of the loan will be in equated monthly instalments for a period of 15 years for all categories.
Interest to be charged at rates linked to the Base Rate/ MCLR as decided by individual banks. Banks may make it mandatory to arrange for life insurance policy/ credit life insurance policy/ Personal Accident Insurance scheme on the students availing Education Loan. No processing/upfront charges may be collected on educational loans for loan amount upto Rs. 7.5
Branch should contact college/university authorities to send the progress report at regular intervals in respect of students who have availed loans. In case of studies abroad, student to submit the Social Security Number (SSN)/ Unique Identification Number (UIN) /Identity Card and banks to note the same in records.

Vehicle Loan

The age of the individual should not be more than 65 years.
The branch should obtain the following documents along with the application: Audited financial statements for 3 years in case of firms/companies. • Income tax returns for last 3 years along with computation of income of individuals/partners/ directors. • Copies of relevant documents/invoices from the authorised dealers of the vehicle to be purchased. • Latest salary slips for preceding 3 months/form No. 16. • Statement of operative bank account for last one year. • KYC documents.
Loan tenure: Maximum 84 months.
Loan to Value Ratio (LTV): Upto Rs. 10 lacs: Maximum permissible LTV ratio is 85% of ‘on road price’ of the car Above Rs. 10 lacs: Maximum permissible LTV ratio is 80% of ‘on road price’ of the car.
The branch should obtain an undertaking from the borrower to get hypothecation to the bank marked in the Registration Certificate (RC) book of the vehicle, immediately after purchase of the vehicle.
The vehicle purchased is to be kept comprehensively insured for the market value or at least 10% above the loan amount outstanding, whichever is higher, and the bank’s interest as a hypothecatee should be noted in the Certificate of Insurance and the Insurance Policy.
Loan amount will be credited to the account of supplier/dealer by way of RTGS/NEFT facility.

Guidelines On Recovery Agents Engaged By Banks

Banks should inform the borrower details of the recovery agency when a default case is forwarded to the recovery agency. The agent should carry a copy of the notice and the authorization letter from the bank along with the identity card issued by the bank/ the agency.
Banks should ensure that there is a recording of the calls made by recovery agents to the customers. Up to date details of the recovery agency firms/ companies engaged by banks may also be posted on the bank’s website.
The contracts with the recovery agents should not induce adoption of uncivilized, unlawful and questionable behaviour or recovery.
Banks should ensure that all their Recovery Agents undergo the certificate course of IIBF on Debt Recovery.

Fair Practices Code For Lenders

RBI guidelines on fair practices code for lending must be followed by all banks in India. Banks need to frame the Fair Practices Code (approved by their Board of Directors) based on these.

Applications for loans and their processing

Loan application forms should be comprehensive.
Banks must transparently disclose to the borrower all information about fees/ charges payable for processing the loan application, the amount of fees refundable, if loan amount is not sanctioned/ disbursed, pre-payment options and charges, if any, penalty for delayed repayments, if any, conversion charges for switching loan from fixed to floating or viceversa.
Acknowledgement for receipts of all loan applications
Banks should disclose the timelines for conveying credit decisions through their websites, notice-boards etc.
the lenders should convey in writing within stipulated time, the main reason/ reasons which, in the opinion of the bank after due consideration, have led to rejection of the loan applications.

Loan appraisal and terms/conditions

Proper assessment of credit application should be done.
Approval of the credit limit should be conveyed along with the terms and
A copy of the loan agreement along with a copy each of all enclosures quoted in the loan agreement should be furnished to the borrower.
As far as possible, the loan agreement should clearly stipulate credit facilities that are solely at the discretion of lenders, namely approval or disallowance of facilities,

Timely Disbursement of loans including changes in terms and conditions

Post disbursement supervision

The Board of Directors should also lay down the appropriate grievance redressal mechanism within the organization to resolve disputes arising in this regard. Such a mechanism should ensure that all disputes arising out of the decisions of lending institutions’ functionaries are heard and disposed of at least at the next higher level.

JAIIB PPB Module B UNIT-3 Operational Aspects of Loans Accounts (Ambitious Baba) PDF