A brief introduction of LOANS


Granting loans is a major income earning activity for the banks. Roughly, over two third of total income of the banks is by way of interest earned on loans. Banks are free to charge any rate of interest on loan accounts. Bank loans can be classified in two broad types – Demand Loans and Term Loans.


These accounts are also called as limit accounts as bank sanctions a limit to the borrower up to which he can draw the cheques. These accounts are operated like Current Accounts through cheques and allow for frequent withdrawals and deposits. These accounts are of two types: Cash Credit (CC) and Over Draft (OD) account.

Cash Credit Account: 
These are most popular loan accounts, meant for the business community only. These limits are sanctioned against security of stocks and are meant for financing the day to day requirements of the business i.e. the working capital requirements. Also known as ‘Limit Account’, these are sanctioned for 12 months only and have to be renewed every year. As they are renewed after every 12 months, they are also called ‘Evergreen Loan Account’.

Over Draft Account: 
These are limited period temporary loan facilities sanctioned by banks, usually, against some securities. Over Draft can be granted for both business as well as general purposes.


In these loan accounts, the sanctioned loan amount is disbursed in one or more installments and there after the borrower has to start the repayment in installments. Use of cheque books is not allowed in these accounts. There are two main types of term loans:-

1. Retail Loans or Personal Loans: 
    Housing Loans, Car Loans, Education Loans, Consumer Loans etc.
2. Commercial Loans or Business Loans: 
    Machinery Loans, Factory Loans, Loans for equipment etc.


These norms refer to the minimum capital that has to be maintained by the banks all over the world. The norms have been formulated by Bank for International Settlements (BIS). This bank coordinates and regulates the banking business all over the world. Its headquarters are located at Basel, Switzerland and that is why their recommendations are popularly known as‘Basel norms’. The bank has formed a committee by the name Basel Committee on Banking Supervision (BCBS) which prescribes various recommendations for banks. One of the major recommendations of BCBS is minimum capital requirement for banks. As per this, minimum capital of a bank cannot be less than 8% of its Risk Weighted Assets (RWA). Here assets refer to loans & investments. RBI has prescribed CAR at 9% for Indian Banks. This ration is called Capital Adequacy Ratio (CAR). Another name of this ratio is Capital to Risk Weighted Assets Ratio (CRAR).


Released in June 2004, these recommendations are known as 3 pillars of Basel – II norms.
  1. Minimum capital requirement: It revises the 1988 Accord’s by aligning the minimum capital requirements more closely to each bank’s actual risk of economic loss.
  2. Supervisory review process: Supervisors will evaluate the activities and risk profile of individual banks to determine whether those organizations should hold higher levels of capital and see whether there is any need for remedial actions.
  3. Market discipline: It refers to certain mandatory disclosures that banks have to make to ensure transparency.


The Base Committee issued the Basel – III guidelines in December 2010. The Framework sets out higher and better- quality capital, better risk coverage, the introduction of a leverage ratio as a backup to the risk-based requirement, measures to promote the buildup of capital that can be drawn down in periods of stress. It recommends formation of Capital Conservation Buffer equivalent to 2.5% of risk weighted assets of the bank, over and above the prescribed minimum capital requirements. These norms shall be implemented w.e.f. 01.04.2013 to 31.03.2019, in a phased manner. It is estimated that Indian banks will require additional capital to the tune of around Rs. 5,00,000 Crore to comply with Basel – III norms.


Banking operations are susceptible to the risks of money laundering and terrorist financing. In order to arrest money laundering and to stop the entry of ‘undesirable persons’ it is imperative that banks know their customers well. To achieve this international body Financial Action Task Force (FATF), Paris introduced certain standard systems and procedures for proper document based identification of customers and verification of their address, known as “Know Your Customer” (KYC) norms. In India, these norms in banking have been introduced by RBI and their compliance is mandatory for opening all types of bank accounts. Suitable provisions have been enacted in the Prevention of Money Laundering Act 2002 for the purpose.

Violation of KYC norms may attract penalty up to Rs. 5 crore.

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