Loans & Advances
Loans and advances are the primary ways banks provide money to borrowers. A loan is a specific amount of money lent for a fixed period. The borrower must repay this amount with interest according to a set schedule. An advance is a short-term credit facility provided by a bank to help a business meet its daily needs. While people often use these terms together, they have slight differences. Loans are usually long-term and paid in one lump sum.
Concepts (3)
In fund-based credit, the bank actually gives money to the borrower, such as a Cash Credit or a Term Loan. In non-fund based credit, the bank does not give money immediately. Instead, it gives a promise to pay if the borrower fails to do so.
In fund-based credit, the bank actually gives money to the borrower, such as a Cash Credit or a Term Loan. In non-fund based credit, the bank does not give money immediately. Instead, it gives a promise to pay if the borrower fails to do so. Examples include Bank Guarantees and Letters of Credit. Banks earn interest on fund-based loans but earn commission or fees on non-fund based facilities.
Banks must categorize loans based on how well the borrower is repaying. A 'Standard Asset' is one where payments are regular. If a payment is overdue for more than 90 days, it becomes a Non-Performing Asset (NPA).
Banks must categorize loans based on how well the borrower is repaying. A 'Standard Asset' is one where payments are regular. If a payment is overdue for more than 90 days, it becomes a Non-Performing Asset (NPA). NPAs are further divided into Sub-standard, Doubtful, and Loss assets based on the duration of the default. This helps the RBI monitor the health of the banking system.
This is a process where a group of lenders, called a 'syndicate', provides funds to a single borrower. It is used for very large projects like building power plants. The main benefit is risk diversification.
This is a process where a group of lenders, called a 'syndicate', provides funds to a single borrower. It is used for very large projects like building power plants. The main benefit is risk diversification. If the borrower defaults, the loss is shared among all participating banks. One bank acts as the 'Lead Manager' to coordinate the process. Example: A group of five public sector banks lending to a large airline company.
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Start Lesson: Fund-based vs Non-fund based