Loans & Advances

📊 Loans & Advances — At a Glance

1 Fund-Based vs Non-Fund-Based Facilities

Fund-based facilities involve an actual, immediate outflow of the bank's own funds to or on behalf of the borrower (e.g., disbursing a term loan, allowing cash credit withdrawals). Non-fund-based facilities involve the bank extending its creditworthiness/guarantee on the customer's behalf, without any immediate cash outflow — the bank only pays if the customer defaults on the underlying obligation.

2 Demand Loan

A Demand Loan is a loan repayable in full "on demand" by the bank — there is no fixed repayment schedule, though interest is usually serviced periodically. The entire sanctioned amount is typically disbursed in a lump sum, unlike a running cash credit account.

3 Term Loan

A Term Loan is sanctioned for a fixed tenure (short, medium, or long-term) to finance capital expenditure — machinery, buildings, or other fixed assets — and is repaid in pre-determined instalments (EMIs) over the loan's life, typically with an initial moratorium period before repayment begins.

4 Cash Credit

Cash Credit (CC) is a running account facility that lets a borrower withdraw funds up to a sanctioned limit, against the security of stocks/receivables, to finance working capital needs. Unlike a term loan, funds can be drawn and repaid repeatedly within the sanctioned limit, and interest is charged only on the amount actually utilised, not the full sanctioned limit.

5 Overdraft

An Overdraft (OD) allows a current/savings account holder to withdraw more than their account balance, up to a sanctioned limit — typically granted against a fixed deposit, other tangible security, or simply as a "clean" facility to trusted customers. Functionally similar to Cash Credit, but usually tied to a regular transaction account rather than a dedicated working-capital limit backed by stock/book-debt statements.

6 Bills Finance

Bills Finance covers a bank purchasing, discounting, or negotiating trade bills/invoices, giving the seller (drawer) immediate liquidity rather than waiting for the buyer (drawee) to pay on the due date. This includes both bill discounting (for usance/time bills, at a discount to face value) and bill purchase (for demand bills).

7 Working Capital

Working Capital finance funds a business's day-to-day operating cycle — raw material purchase, work-in-progress, finished goods, and receivables — bridging the gap between paying suppliers and collecting from customers.

Key Assessment Methods

8 Consortium Lending

Under Consortium Lending, multiple banks jointly finance a single large borrower under a common set of documents, with one bank acting as the lead bank to coordinate documentation, monitoring, and information sharing on behalf of all participating banks. This spreads a large exposure's risk across several lenders.

9 Multiple Banking Arrangement

Under a Multiple Banking Arrangement (MBA), a borrower independently avails credit facilities from several banks separately — each with its own security documents and terms, without a common/joint agreement like a consortium. Because information sharing was historically weaker under MBA, RBI mandates periodic exchange of information among lenders financing the same borrower to curb fraud and over-leveraging.

Consortium vs MBA

10 Letter of Credit

A Letter of Credit (LC) is a bank's written undertaking, issued on a buyer's (applicant's) behalf, guaranteeing payment to the seller (beneficiary) provided the seller submits documents strictly complying with the LC's terms — widely used in domestic and international trade to build trust between parties who may not know each other.

LCs are governed internationally by the Uniform Customs and Practice for Documentary Credits (UCPDC 600), published by the International Chamber of Commerce (ICC).

11 Bank Guarantee

A Bank Guarantee (BG) is the bank's undertaking to pay a specified sum to the beneficiary if the bank's customer (applicant) fails to fulfil a contractual obligation — commonly used for performance guarantees, financial guarantees, and bid bonds in tenders and contracts. Governed internationally by the ICC's Uniform Rules for Demand Guarantees (URDG 758).

12 Drawing Power

Drawing Power (DP) is the actual amount a borrower is permitted to withdraw from a Cash Credit/Overdraft account at any point in time — calculated from the latest stock/book-debt statement, after deducting the prescribed margin — and it can be lower than the sanctioned limit if current stock/receivable values have fallen.
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13 Margin

Margin is the portion of the asset's value that the borrower must fund from their own resources — the bank finances only the remaining percentage. Margin requirements vary by facility type and the risk profile of the underlying security, and serve as a buffer absorbing any fall in the value of stock/security before the bank's exposure is affected.

14 Security

Security is the asset(s) a borrower offers to a bank to secure repayment of a credit facility, giving the bank recourse if the borrower defaults. Security is broadly classified into two types, covered next: Primary Security and Collateral Security.

15 Primary Security

Primary Security is the asset created out of, or directly financed by, the bank's own credit facility — e.g., the stock purchased using a cash credit limit, or the machinery bought with a term loan. It is the first and most direct recourse for the lender.

16 Collateral Security

Collateral Security is an additional security — not directly created out of the loan proceeds — offered as extra comfort to the lender, such as the borrower's residential property, a fixed deposit, or a third party's guarantee. It supplements, rather than replaces, the primary security.

✓ Key Takeaways

• Fund-based facilities involve immediate cash outflow; non-fund-based (LC, BG) are contingent, off-balance-sheet commitments.
• Demand Loan = repayable on demand, lump sum; Term Loan = fixed tenure, EMI-based repayment for capex.
• Cash Credit and Overdraft are both running-account facilities; interest is charged only on the amount drawn.
• Consortium Lending uses common documentation and a lead bank; Multiple Banking Arrangement uses separate documentation per lender, with mandatory information sharing.
• LC assures payment to the seller; BG protects the beneficiary if the applicant fails to perform.
• Drawing Power is derived from the latest stock/book-debt statement minus margin, and is capped at the sanctioned limit.
• Primary Security is created directly from the credit facility; Collateral Security is additional, supplementary comfort.

📝 Top 50 JAIIB-Style MCQs on Loans & Advances

Test your understanding with these 50 practice MCQs, closely modelled on the pattern expected in the upcoming JAIIB PPB exam — including combination-answer questions. Each question has 5 options — the correct answer is hidden by default; tap "Show Answer" to reveal it along with a short explanation.