Operational Aspects of Loan Accounts: Jaiib/DBF Paper 2 (Module D) Unit-6

Operational Aspects of Loan Accounts: Jaiib/DBF Paper 2 (Module D) Unit-6

Dear bankers,

As we all know that  is Operational Aspects of Loan Accounts for JAIIB Exam. JAIIB exam conducted twice in a year. So, here we are providing the Operational Aspects of Loan Accounts (Unit-6), Banking Operations and Accounting Functions (Module D), Accounting Finance for Bankers-Paper 2.

♦Operational Terms/ Aspects Common in loan Functions

  • Types of Borrowers
  1. An individual
  2. Sole Proprietary Firm
  3. Partnership firm and joint venture
  4. HUF
  5. Companies
  6. Statutory Corporations
  7. Trusts and Co-Op societies
  • Funded and Non-Funded Credit Facilities
  • Term Loans
  • Demand Loans
  • Bills Purchased
  • Bills Discounted
  • End use of funds
  • Primary Securities
  • Collateral Securities
  • Personal Security of Guarantor
  • Fixed Charges
  • Floating Charges
  • Margin
  • Priority Sector
  1. Agricultural Financial
  2. Finance to micro and small enterprises       
  3. Housing Finance (loans upto 20 lakhs to individual, loans upto Rs 1 lakh for rural /semi urban and Rs. 2 lakhs for urban areas)
  4. Educational loans (upto Rs 10 lacs for studies in India and Rs 20 lakhs for studies abroad)
  5. Export credit
  6. Retail trade
  • Refinance
  • Credit Risk Management
  • Credit Exposure Norms
  • Base Rate System of Interest on Advances
  • Fixed/Floating Rate of Interest on Loans
  • Penal Rate of Interest
  • Security
  • Documents of Title of Goods
  • Banker’s General Lien
  • Negative Lien
  • Restrictions on Advances
  • Rehabilitation and Recovery
  • Fair Practices code: The guidelines issued by RBI on fair practices code for lending are required to be compulsorily followed by all banks in India. The operating staff should be aware of these guidelines. These guidelines pertain to:
  1. Application for loans and their processing
  2. Loan appraisal and terms/conditions’
  3. Disbursements of loans
  4. Post disbursement supervision
  5. General guidelines relating to discrimination based on sex, caste and religion, harassment in recovery, transfer/ takeover of account etc.

♦Operational Process of Loans in the Banks

  • Receipt of Loan Application
  • Assessment of viability and credit worthiness
  • Sanction
  • Disbursement
  • Monitoring and supervision
  • Inspections
  • Review of the conduct of the account
  • Renewal of advances
  • Methods of Assessment of loans

♦Assessment of working CMA formats

Under the Credit Monitoring Arrangement (CMA), banks have been permitted for sanctioning credit proposals (of large borrowers) after detailed analysis of the past performance. There is another requirement for the Banks. They need to submit the large credit proposals to the Reserve Bank of India for post-sanction scrutiny. These proposals involve working capital limits of Rupees 500 lakhs (5 crores) and above and/or term loan in excess of Rupees 200 lakhs (2 crores).

CMA covers the following statements

  • Particulars of current & proposed limits
  • Operating statement
  • Analysis of Balance sheet
  • Comparative statement of Current Asset & Current liabilities
  • Calculation of Maximum Permissible Bank Finance (MPBF)
  • Fund flow statement

♦Operating Manual for Loans and Advances

The operations Manual of a bank is intended to provide guidelines to the operating staff on the above mentioned areas and any other areas considered relevant by the bank. The operational guidelines regarding loans and advances, contained in a bank’s operational manual, are based primarily on-

  • Principles of credit
  • Bank’s loan policy
  • Regulatory and legal framework

♦Samples Operating instructions

Advance against Goods and Warehouse Receipts

  • Documentation
  • Margin
  • Valuation
  • Marketability
  • Go down Board
  • Insurance
  • Godowns in a Pledge Account
  • Pledging of Stocks
  • Storage of goods pledged in the godowns where goods not pledged are also stored
  • Delivery of stocks pledged
  • Submission of stock statements in Hypothecation accounts
  • Goods hypothecated in the godowns where goods not hypothecated are also lying
  • Staff accountability
  • Charges for inspection of Godowns/Assets/Securities etc.
  • Godown charges
  • Selective credit control
  • Advances against warehouse receipts

♦Operational aspects of few common loan products

Gold Loans

  • Must be covered under policy framed by Bank’s Board
  • Prohibited from granting any advance against bullion/primary gold
  • End use of the funds to be ensured
  • Ownership of the ornaments to be ensured
  • Valuation of gold ornaments to be done
  • Prefer hallmarked jewellery
  • Purpose of loan can be for both Agriculture and non-agriculture purposes
  • Loan to Value (LTV) to be maintained (Max. 75 % of value of gold ornaments)
  • Maximum amount of loan should be within board approved limit
  • Record of security
  • Custody of ornaments
  • Repayment should not be more than 12 months (other than agriculture)
  • Return of ornaments on repayment
  • Delivery to third parties
  • Default
  • Insurance
  • Verification

Educational Loans

  • Service area norms
  • Eligibility criteria
  • Student eligibility
  • Expenses considered for loan
  • Quantum of finance
  • Margin: No margin may be insisted upon Rs 4 lakhs. However, for loan of higher amounts, the margin requirement may be 5% for inland studies and 15% for studies abroad .
  • Security: No security must be insisted upon for loans upto Rs 4lakhs.
  • Documentation
  • Sanction
  • Disbursement
  • Repayment
  • Follow up
  • Processing charges
  • Capability certificate

Home Loans

  • Valuation of property
  • Eligibility
  • Loan to Vale (LTV) ratio:
  1. Upto Rs 20 lakhs; 90%
  2. Above Rs 20 lakhs and Upto Rs 75 lakhs; 80%
  3. Above Rs 75 lakhs; 75%
  • Interest rate
  • Security
  • Insurance
  • Disbursal – for purchase of constructed property/built up property
  • Disbursal – for building construction
  • Repayment
  • No Foreclosure charges/Prepayment penalty for floating rate individual borrowers

Vehicle Loans

  • Purpose of Auto Loan – New/used Car, MUVs, SUVs, Two wheelers
  • Eligibility
  • Documents required to be submitted
  • Loan Tenure: Maximum 84 months
  • Loan to Vale (LTV) ratio:
  1. Upto Rs 10lakhs: Maximum Permissible LTV ratio is 85% of “on road Price” of the car
  2. Above Rs 10lakhs: Maximum permissible LTV ratio is 80% of “ on road price’ of the car
  • Interest rate – Fixed/Floating
  • Calculation of interest
  • Penal interest
  • Bounced cheque/ECS or SI dishonorurs
  • Intimation of change in base rate
  • Repayment
  • Security
  • Insurance
  • Prepayment penalty is waived
  • Inspection
  • Fees and charges
  • Disbursement

♦Others Point

  • KYC: All loans should be sanctioned only after completion of KYC verification by the branch.
  • CIBIL Disclosure: The Borrowers should agree and give consent for disclosure by the Bank of all or any
  1. Information and data relating to the Borrowers
  2. Information or data relating to any credit facility availed or/to be availed by the borrowers and default, if any, committed by the borrowers in discharge or his/their such obligation as the Bank may deem appropriate and necessary, to disclose and furnish to Credit Information Bureau (India) Ltd. (CIBIL), and other agency authorized in this behalf by RBI.
  • Default: Default is failure to meet the legal obligations of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity.
  • Time taken for disposal of application: The loan applications with complete information and required documents should be disposed by the branch within the stipulated periods.

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