By

Sunil Pedavally B.Tech,MBA

Introduction
Principles of Sound Lending
Evaluating a borrower
Secured Loans & Unsecured Loans
Types of Credit Facilities
Types of Interest Rates

Activity
How to calculate an EMI?

Income Tax Returns

Form 16 / 16A
CIBIL Report
EMI & How to calculate
Tangible/Non Tangible Assets
Working Capital

A loan is when one party (called the lender,

which is usually a bank or financial
institution) agrees to give another party
(called the borrower) a sum of money that is
to be paid back after a certain period of time.
An advance is a credit facility that is provided
to the individual/corporation by the financial
institution, bank, employer, friend, relative
etc.

A loan is treated as a debt where a lender such

as a bank will formally lend funds to a
borrower, whereas an advance is a credit
facility, which is usually less formal than a loan.

Loans are for a longer period of time, and need

to be repaid with interest while advances are
taken for shorter time periods, and interest is
not charged on the amount borrowed.

What are the parameters/principles does a

bank look for lending?

Safety
Liquidity
Profitability
Purpose of the loan
Sources of Repayment
Diversification of Risks

How do Banks Evaluate a Borrower?

5 Cs of the borrower = Character, Capacity, Capital,

Collateral, Conditions

Sources of information available to assess the borrower

Loan application
Market reports
Operation in the account
Report from other Bankers
Financial statements, IT returns etc.
Personal interview
Unit inspection prior to sanction

Section 5(i) (n) of the Banking Regulation act, 1949, defines

SL as Secured loan or advance means a loan or advance
made on the security of assets, the market value of which is
not at any time less than the amount of loan or advance
Primary Security/Collateral Security

Cannons of a Good banking security

Clear Title of the borrower
Liquidity
Stability is value
Easy Transferability
Realization of advance
Margin

Section 5(i) (n) of the Banking Regulation act,

1949, defines unsecured loan as unsecured loan
or advance means a loan or advance not so
secured

Credit facilities broadly may be classified as under:

(a) Fund Based Credit Facilities: Fund based credit facilities

involve outflow of funds meaning thereby the money of the
banker is lent to the customer. They can be generally of
following types:
(i) Cash credits/overdrafts
(ii) Demand Loans/Term loans
(iii) Bill finance
(b) Non-Fund Based Credit Facilities: In this type of credit
facility the banks funds are not lent to the customer and they
include:
(a) Bank Guarantees
(b) Letter of Credit

A Cash Credit is an arrangement by which a banker allows his

customer to borrow money up to a certain limit against the values
of his stocks & book debts from day to day. This is the most
favourite mode of borrowing by large commercial & industrial
concerns in India, on account of the advantage that a customer
need not borrow at once, the whole amount he is likely to require,
but can draw such amounts as & when required. He can put back
any surplus amount which he may find with him for the time
being.

When a customer requires temporary accommodation, he may

be allowed to overdraw his current account, usually against
collateral securities. This arrangement like the cash credit is
advantageous as he is required to pay interest on the amount
actually used by him.
The main difference between cash credit & overdraft is the
latter is supposed to be a form of bank credit to be made use of
occasionally & the former is used for long terms by
commercial & industrial concerns doing regular business.

Where a loan is granted for a period exceeding one year

& is repayable according to a schedule of repayment, as
against on demand & at a time is known as term loan.
Where the period exceeds one year but not, 5 to 7
years, it is known as medium term loan.
A loan with longer repayment schedule is known as
long term loan.

Fixed Rate
Floating / Variable Rate
Flat Rate
Diminishing Rate

Priority sector lending should constitute 40%

aggregate bank credit
Out of the priority sector advances, at least 40%
should be provided to agriculture.
Direct advances to the weaker sections in
agriculture & allied activities in rural sector should
form at least 40% of the total direct lending to
agriculture.
The advances to rural artisans, village craftsmen &
cottage industries should be at least 12.5% of the
total advances to the small scale industries.

EMI value can be calculated in Excel using PMT function,

which has the following syntax:
=PMT(RATE,NPER,PV,FV,TYPE)
For instance, if you want to find EMI value for a loan
amount of 100,000 which is payable in say 5 years (i.e., 60
monthly installments) with an interest rate of say 12% p.a.,
the EMI can be calculated by placing the following formula
in a cell in Excel spreadsheet:
=PMT(0.01,60,100000,0,0);
It must be noted here that the rate to used in the formula
should be monthly rate i.e. 12%/12=1% or 0.01 in the
above example. You may also note that the last two
parameters in the function (FV and TYPE) are optional and
if ignored they are assumed to be 0; You may refer to
Excel help on this function for further explanation on this.

For the mathematically curious minded, here

is the exact EMI formula that can be used for
calculating EMI amount for any given values
of Principal, Interest Rate and Loan Period:

EMI = (P * R/12) * [ (1+R/12)^N] / [

(1+R/12)^N-1], where
P = Principal (loan amount);
R = Annual Interest Rate;
N = No. of Monthly Installments