1|Pa ge PPB JAIIB Bullet Points Module-B By Praveen Rana

Unit-22: Principles of Lending, Types of Borrowers, and Types of Credit Facilities Module B

1. Principles of Lending

1. The core principles of lending are Safety, Liquidity, Profitability, Purpose, Diversification.

2. Safety refers to ensuring repayment capacity through borrower’s creditworthiness and sound security.

3. Liquidity ensures the loan can be recovered without loss when needed — especially important for
working capital loans.

4. Diversification of risk prevents over-exposure to a single borrower, industry, or region.

5. Purpose of loan should be productive, legal, and not speculative (e.g., margin trading or gambling).

2. Types of Borrowers

6. Borrowers can be individuals, proprietorships, partnerships, companies, trusts, societies, or

government bodies.

7. Loans to minors are not valid unless secured and operated through a natural guardian.

8. In a HUF, the Karta (head) operates the account and binds other members legally.

9. In partnership firms, all partners are jointly and severally liable unless restricted by the partnership
deed.

10. In joint borrowing, all joint borrowers are jointly and severally liable to repay the loan.

11. In case of companies, loans are sanctioned based on Board Resolution, and directors act as agents,
not as owners.

3. Types of Credit Facilities

12. Fund-based credit includes cash credit, overdraft, term loans, demand loans, and bills
purchased/discounted.

13. Non-fund-based credit includes bank guarantees, letters of credit, and forward contracts.

14. Cash Credit is a running account facility, usually sanctioned for 1 year, subject to review.

15. Overdraft is a temporary facility to withdraw more than the balance in a current account — usually
granted for 3 to 6 months.

16. Term Loans are repayable in fixed installments — classified as:

• Short-term: up to 1 year

• Medium-term: 1–3 years

• Long-term: over 3 years

17. A Demand Loan is repayable on demand, with no fixed schedule — commonly used in gold loans or
bridge financing.

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4. Credit to Government Entities and Public Sector

18. Loans to public sector undertakings or government departments are considered low risk but must
follow proper due diligence.

19. Loans to government bodies often fall under Priority Sector Lending (PSL) if they serve agriculture,
MSMEs, or housing.

5. Risk Categories and Security

20. Primary security refers to the asset created out of loan proceeds (e.g., machinery, stock).

21. Collateral/security is additional cover — like fixed deposits, land, or third-party guarantees.

22. Personal guarantee adds a layer of liability, ensuring repayment even if the borrower defaults.

23. Loans are classified by security as:

• Secured: backed by tangible assets

• Unsecured: based on creditworthiness only

24. Working capital finance is generally assessed for up to 1 year, based on Turnover Method (Nayak
Committee) for limits up to ₹5 crore.

6. Regulatory Limits and Guidelines

25. As per RBI’s Exposure Norms, banks cannot lend more than:

• 15% of capital funds to a single borrower

• 40% of capital funds to a borrower group

26. The margin is the borrower’s own contribution and varies:

• 10–25% for stocks

• Up to 40% for real estate loans

27. Credit facilities to directors of other banks or relatives are governed under Section 20 of Banking
Regulation Act.

28. Loans to related parties must be reported and are subject to stricter internal approval norms.

29. Co-lending by banks and NBFCs must follow RBI’s co-origination model — risk-sharing in agreed
proportion.

7. Loan Documentation and Validity

30. Sanction letters must specify:

• Loan amount

• Purpose

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• Repayment terms

• Interest rate

• Security

31. Credit appraisal reports must include CIBIL score, DSCR, collateral valuation, and borrower profile.

32. Loan documents (e.g., DPN, hypothecation agreement) must be stamped as per Indian Stamp Act and
renewed before expiry.

33. KYC and due diligence must be completed for each borrower and guarantor before disbursal.

8. Miscellaneous Lending Concepts

34. Credit monitoring involves reviewing account conduct, stock statements, and financial covenants on a
monthly/quarterly basis.

35. A credit rating assigned by an approved agency affects loan pricing and capital adequacy risk weights
under Basel norms.

Unit-23: Appraisal and Assessment of Credit Facilities Module B – PPB

1. Credit Appraisal Overview

1. Credit appraisal is the process of assessing the creditworthiness and repayment capacity of a
borrower.

2. Appraisal includes technical, financial, commercial, economic, managerial, and risk analysis.

3. Appraisal of working capital is done using turnover method, MPBF method, or cash budget method.

4. 7 C’s of appraisal: Creditworthiness, Character, Capacity, Capital, Collateral, Conditions, and

Cash flows.

2. Turnover Method (Nayak Committee)

4. As per Nayak Committee guidelines, for working capital up to ₹5 crore, working capital = 25% of
projected annual turnover.

5. Minimum borrower’s margin = 5% of turnover; hence bank funds = 20% of turnover.

6. Working capital limit is assessed for manufacturing units with operating cycle up to 3 months.

Formula:
Working Capital Limit = 25% of Projected Turnover
Bank Finance = 80% of WC; Borrower Margin = 20%

3. MPBF Method (Tandon Committee)

7. Tandon Committee recommended three methods of lending — only Method I and II are followed now.

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8. Method I:
MPBF = Maximum of 75% of the Working Capital gap;

▪ Contribution by the borrowing unit is fixed at a minimum 25% of the working capital gap from long-
term funds.
▪ Working Capital Gap: Current assets – current liabilities other than bank borrowing
▪ Balance amount should come from long-term sources

9. Method II:
MPBF = Bank finance would never exceed 75% of gross current assets

▪ Borrower is required to provide for a minimum of 25% of total current assets out of long-term
funds.
▪ Minimum current ratio of 1.33:1

10. Method III: Core Current Assets (minimum level of raw materials, process stock, finished goods
and stores which are in the pipeline to ensure continuity of production) = Minimum level of current
assets required for uninterrupted operations. Bank finance: 75% of CCA

4. Working Capital Cycle & Operating Cycle

11. Operating cycle = Raw Material Holding + WIP Holding + Finished Goods Holding + Receivables –
Payables

12. Working capital cycle indicates number of days funds are blocked — shorter cycles improve liquidity.

13. An operating cycle > 12 months indicates long-term working capital needs.

5. Financial Ratios Used in Credit Appraisal

14. Current Ratio = Current Assets ÷ Current Liabilities (Ideal: 1.33:1 for bank finance)

15. Debt-Equity Ratio = Total Outside Liabilities ÷ Tangible Net Worth (Ideal: 2:1)

16. Interest Coverage Ratio (ICR) = EBIT ÷ Interest Expense (Ideal: ≥2 times)

17. DSCR (Debt Service Coverage Ratio) = (PAT + Depreciation + Interest) ÷ (Interest + Installments)
Ideal DSCR = ≥1.5

18. Net Working Capital (NWC) = Current Assets – Current Liabilities

19. Fixed Asset Coverage Ratio (FACR) = Net Fixed Assets ÷ Term Loan Outstanding (Ideal: 1.25)

6. Assessment of Term Loans

20. Project Cost = Land + Building + Plant & Machinery + Pre-operative Expenses + Margin for WC

21. Promoter’s contribution is usually 25% of project cost; balance funded by term loan and subsidies.

22. Break-even Point (BEP) = Fixed Cost ÷ Contribution per unit

Contribution = Selling Price – Variable Cost

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23. BEP is used to measure minimum sales required to avoid losses.

24. Payback Period = Investment ÷ Annual Cash Inflows

Indicates time to recover capital invested.

7. Credit Information & Risk Tools

25. CIBIL/Credit Score range: 300 to 900 — minimum 650–700+ preferred for lending.

26. Credit rating from SEBI-registered agencies affects pricing and exposure norms.

27. Banks use tools like CRILC, CICs, SMA classification, EWS to monitor credit risk.

28. SMA-1 = 31–60 days overdue; SMA-2 = 61–90 days; NPA = >90 days overdue.

8. Loan Documentation in Appraisal

29. Appraisal report must include: borrower profile, financials, ratios, security details, risk assessment,
sanction terms.

30. Appraisal must ensure that the end use of funds is productive and legal.

9. Other Important Parameters

31. Promoter’s margin should be brought in before disbursal of term loan.

32. DSA/DSCR < 1 implies negative cash flow — high-risk proposal.

33. Net Worth = Paid-up Capital + Reserves – Intangible Assets – Misc. Expenditures

34. EBITDA = Earnings Before Interest, Taxes, Depreciation & Amortization

35. Break-even Sales (₹) = (Fixed Costs ÷ Contribution Margin Ratio)

10. Projected Financials & Sensitivity Analysis

36. Projected Balance Sheets and P&L are taken for 3–5 years for term loan proposals.

37. Sensitivity analysis checks impact of adverse changes in cost, demand, or interest on viability.

38. Stress testing is done to test repayment capability under worst-case scenarios.

11. Appraisal Cycle & Review

39. For working capital limits, review must be done annually, or at shorter intervals in high-risk accounts.

40. Credit facilities above prescribed limits require appraisal and clearance by Credit Approval Committee
(CAC) or Credit Risk Committee.

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Unit-24: Operational Aspects of Loan Accounts (Module B – PPB)

24.2 Interest Rates on Loans

1. Base Rate System was replaced by MCLR for loans sanctioned on or after April 1, 2016.

2. MCLR-based loans are reset at a frequency agreed upon, usually 6 months or 1 year.

3. Banks must publish benchmark lending rates monthly on their websites.

4. With effect from October 1, 2019, new floating rate retail and MSME loans are linked to external
benchmarks

▪ RBI policy Repo Rate

▪ Government of India 3-Months and 6-Months Treasury Bill yields published by Financial Benchmarks
India Private Ltd (FBIL)

▪ Any other benchmark market interest rate published by FBIL.

5. Interest reset under external benchmark must be done at least once in 3 months.

24.3 Credit Management

6. Credit Exposure means total outstanding including funded and non-funded limits.

7. Banks must classify loans exceeding ₹5 crore as large exposures and report to CRILC monthly.

8. Credit Audit ensures post-sanction compliance and must be conducted annually for high-risk loans.

24.4 Credit Monitoring

9. Monitoring goals include ensuring asset quality, identifying stress early, and maintaining security
coverage.

10. Banks must obtain stock statements at least quarterly, and conduct site visits annually or more
frequently.

11. Monitoring Tools include SMA categorization, early warning signals (EWS), and credit rating triggers.

12. CRILC (Central Repository of Information on Large Credits) captures borrower data with aggregate
exposure ≥ ₹5 crore.

24.5 Common Operational Terms in Loan Functions

13. Drawing Power (DP) is calculated based on stock statements and is valid for 1 month from the date of
statement.

14. Sanction Letter must include amount, interest, margin, security, and repayment terms.

15. Pre-EMI interest is charged during the moratorium before actual EMI begins.

16. Penal interest, if any, must be disclosed upfront and cannot be capitalized.

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24.6 Operational Process of Handling Loans

17. Loan application must be acknowledged within 15 days, and disposal should be done within 30 days
for MSMEs.

18. Viability assessment considers DSCR (≥1.5), market conditions, and repayment source.

19. Sanction must follow appraisal and board/committee approval as per delegation matrix.

20. Disbursement should be in phases, matching project execution, and against invoices in term loans.

21. Post-disbursement monitoring includes checking end-use of funds and verifying insurance/charges.

24.7 Accounting Aspects of Loan Products

22. Interest income must be booked on accrual basis for standard assets and realization basis for NPAs.

23. Subsidies (e.g., in education loans) are accounted as income only on receipt.

24. Banks must reverse unrealized interest in case of downgrade to NPA after 90 days overdue.

24.8 Basic Operating Instructions on Loan Products

25. All loan products must follow Fair Practices Code, including transparent communication of all terms.

26. Limit utilization reports must be generated monthly to track overdraft/CC misuse.

24.9 Operating Manual for Loans and Advances

27. Operating manuals must include SOPs for documentation, pre-sanction checks, and disbursement
flow.

28. Loan documentation checklist includes: DPN, hypothecation agreement, sanction letter, KYC, and
insurance.

24.10 Sample Operating Instructions

29. Loan against Goods must be disbursed only after physical verification and stock insurance.

30. Loan against Warehouse Receipts requires verified negotiable receipts and must be within warehouse
expiry.

24.11 Operational Aspects of Common Loan Products

31. Educational loans for studies in India: up to ₹10 lakh; for abroad: up to ₹20 lakh (IBA model).

32. Vehicle loan margin is generally 10%–25% of on-road cost, and tenure up to 7 years.

33. For education loans, interest subsidy under CSIS is available for income ≤ ₹4.5 lakh p.a.
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34. No collateral required for education loans up to ₹7.5 lakh, if covered under Credit Guarantee Fund for
Education Loans.

24.12 Guidelines on Recovery Agents Engaged by Banks

35. Recovery agents must carry identity cards issued by the bank.

36. They can visit customers only between 7:00 AM and 7:00 PM.

37. Banks must record calls, maintain logs, and issue warnings in case of abuse or misbehavior.

24.13 Fair Practices Code for Lenders

38. Loan terms must be clearly disclosed in the sanction letter, and a copy of all signed documents
must be provided to the borrower.

39. Banks must not charge foreclosure charges on floating-rate home loans to individual borrowers.

40. Borrowers must be informed 30 days in advance before any adverse change in terms and conditions.

Unit 25: Types of Collaterals and Their Characteristics

25.2 Effectiveness of Securities

1. An effective security should be easily realisable, have stable value, and create valid charge.

2. Charge must be enforceable under law; security should be marketable with minimal depreciation.

25.3 Secured vs. Unsecured Loans

3. A secured loan is backed by tangible security; an unsecured loan is granted based on borrower’s
creditworthiness alone.

4. Unsecured exposures are riskier and attract higher capital provisioning as per Basel norms.

25.4 Types of Securities

5. Common securities include land/buildings, goods, documents of title, insurance policies, shares,
bonds, gold, deposits, and book debts.

6. Securities can be primary (asset financed) or collateral (additional cover).

25.5 Land and Buildings

7. Equitable mortgage is created by depositing title deeds with bank — no registration required.

8. Registered mortgage must be executed before a Sub-Registrar under Transfer of Property Act, 1882.

9. Property must be verified for freehold or leasehold title before mortgage.

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10. Leasehold property requires lessor's consent for mortgage and must have minimum lease period of
30 years.

11. Property valuation must be done by approved valuers; validity of valuation report is usually 3 years.

12. Legal scrutiny report must be obtained before accepting property as security.

25.6 Goods

13. Advances against goods require hypothecation or pledge, depending on possession.

14. In pledge, bank holds physical possession; in hypothecation, borrower retains possession.

15. Stock statements must be submitted monthly to calculate drawing power (DP).

16. Margin against goods is usually 25%–40% depending on perishability and marketability.

25.7 Documents of Title to Goods

17. Bill of Lading, Warehouse Receipt, and Railway Receipt (RR) are examples of documents of title.

18. The document must be negotiable and duly endorsed in bank’s favour to be valid security.

19. Under Trust Receipt, goods are released to borrower for sale, with proceeds to be deposited with the
bank.

20. Trust receipt is a bailment contract, not a sale.

25.8 Advances Against Life Insurance Policies

21. Loans can be granted against surrender value of assigned policies (except term policies).

22. Policies must be assigned in bank’s favour and checked for incontestability clause (after 2 years).

23. Only paid-up policies with regular premium payment history are accepted.

25.9 Advances Against Shares

24. As per RBI, banks’ exposure to capital market must not exceed 40% of their net worth (for lending +
investments).

25. Loans to individuals against shares are capped at ₹20 lakh for offline trades and ₹10 lakh for IPO
financing (RBI limit).

26. Margin for advances against listed shares is generally 50%.

27. Bank must hold shares in demat form and create lien in DP account.

28. Advances against mutual fund units are given against NAV after applying margin (usually 40%).

29. Loans to market participants like brokers and market makers must comply with SEBI/RBI norms.

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25.10 Advances Against Debentures

30. Debentures must be non-convertible, listed, and rated by an approved credit agency.

31. Margin against debentures typically ranges between 30%–40%.

25.11 Loan Against Book Debts

32. Book debts must be within credit period, assigned to the bank, and confirmed by buyer.

33. Bills overdue beyond 90 days are ineligible; margin is usually 30%.

25.12 Loan Against Term Deposits

34. Loans can be granted up to 90–95% of deposit value; no margin needed for self deposits.

35. Interest rate on such loans is generally 1%–2% above the deposit rate.

36. Deposits in the name of minors require guardian consent for loan.

25.13 Loan Against Gold Ornaments

37. Gold loans are sanctioned based on Loan-to-Value (LTV) ratio, currently capped at 75% of market
value (as per RBI).

38. Bullet repayment allowed up to 12 months, with interest applied monthly or at closure.

25.14 Supply Bills

39. Advance is granted against verified supply bills from govt. departments or public sector undertakings.

40. Margin is usually 25%–30%; risk of delay in payment makes it a sensitive exposure.

Unit 26: Different Modes of Charging Securities Module B – PPB

26.2 Meaning and Essentials of a Contract

1. A contract under Section 2(h) of the Indian Contract Act, 1872 is an agreement enforceable by law.

2. Essential elements of a valid contract: offer, acceptance, consideration, capacity, lawful object, free
consent.

26.3 Contract of Agency

3. An agent is authorized to create legal obligations on behalf of the principal.

4. Authority may be expressed or implied and must be backed by a valid power of attorney (PoA).

26.4 Contract of Bailment

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5. Bailment means delivering goods by one party (bailor) to another (bailee) for a purpose, under a
contract.

6. Pledge is a special kind of bailment, where goods are delivered as security for payment or
performance.

26.5 Types of Charges

26.5.1 Assignment

7. Assignment is the transfer of an existing or future right or interest to another person.

8. Life insurance policies are assigned to banks using Assignment Deeds under Section 38 of Insurance
Act.

9. Assignment may be legal (registered) or equitable (non-registered).

26.5.2 Lien

10. Lien is the right to retain goods/securities until dues are settled (Section 171 of Contract Act).

11. Banker has general lien on all securities unless contractually excluded.

12. No lien applies to:

o Safe custody articles

o Items under specific purpose/trust

o Securities of third parties

26.5.3 Set-off

13. Set-off allows a bank to adjust credit balance in one account against a debit in another.

14. Set-off requires accounts to be in same name and capacity.

15. A prior written notice is usually given 7 to 14 days before applying set-off.

26.5.4 Hypothecation

16. In hypothecation, borrower retains possession, and charge is created by agreement.

17. Common for stock, receivables, vehicles, etc.

18. In default, the bank must seize the asset via legal process or consent, since no possession is held.

26.5.5 Pledge

19. In pledge, the bank takes physical possession of the goods.

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20. Legal relationship under pledge = bailor (borrower) and bailee (bank).

21. In default, bank may sell goods after giving notice under Section 176 of Contract Act.

26.5.6 Mortgage

22. Mortgage is a transfer of interest in immovable property to secure repayment.

23. Types of mortgage:

• Simple

• Equitable

• English

• Usufructuary

• Anomalous

24. Equitable Mortgage is created by deposit of title deeds (no registration required).

25. Registered Mortgage must be registered with the Sub-Registrar, with stamp duty applicable.

26. Notice of 60 days must be given before enforcing SARFAESI action on mortgaged property.

27. Mortgage deeds must be registered within 4 months of execution as per Registration Act, 1908.

26.5.7 Right of Appropriation

28. Under Section 59–61 of Indian Contract Act, right of appropriation applies when a debtor owes multiple
debts.

29. If debtor gives no instruction, the creditor may apply payment to any lawful debt in chronological
order.

30. Once appropriation is made and communicated, it cannot be altered.

26.6 Registration of Charges

26.6.1 What is a Charge?

31. A charge is an interest or lien created on property as security for debt, with or without possession.

32. Charges can be fixed (on a specific asset) or floating (on changing assets like inventory).

26.6.2 Registration of Charges with ROC

33. Companies must register charge with Registrar of Companies (ROC) within 30 days of creation
(Section 77 of Companies Act, 2013).

34. ROC may allow extension up to 120 days on payment of additional fees.
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35. Form CHG-1 is used to register the charge online via MCA portal.

36. If charge is not registered, lender becomes an unsecured creditor in case of liquidation.

Miscellaneous Legal Points

37. A floating charge becomes fixed when crystallized — e.g., on default or winding up.

38. In case of multiple charges, first registered charge has priority, unless otherwise agreed.

39. Banks must maintain Charge Register and file modification or satisfaction of charge with ROC within 30
days.

40. Failure to register charge is an offence and penal under Section 86 of Companies Act.

Unit 27: Documentation

27.1 Introduction

1. Documentation in banking refers to creating legally enforceable records for credit and financial
transactions.

2. Proper documentation ensures safety of bank funds, defines obligations, and helps in legal
enforcement in case of default.

27.2 Different Types of Documents

3. Documents are categorized as: Standard documents, Security documents, Control documents, and
Supporting documents.

4. Loan application, KYC, sanction letter, and declaration are examples of standard documents.

5. Security documents include: Demand Promissory Note (DPN), hypothecation deed, mortgage deed,
etc.

6. Control documents include stock statements, insurance policies, and invoices.

7. Documents like PAN card, GST certificate, balance sheet are treated as supporting documents.

27.3.1 Selection of Correct Set of Documents

8. Documents are selected based on the type of facility (term loan, CC, BG), borrower constitution, and
security offered.

9. In case of joint borrowers, all borrowers must sign DPN and security documents jointly.

10. Non-corporate borrowers use standard formats; corporates require board resolutions and company
seals.

27.3.2 Stamping of Documents

11. Documents must be properly stamped under Indian Stamp Act, 1899 or state-specific stamp laws.
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12. Stamp duty is payable on: DPN, mortgage deed, hypothecation deed, guarantee deed, etc.

13. Under-stamping makes documents legally inadmissible in court.

14. Stamp duty must be paid before or at the time of execution of the document.

27.3.3 Amount of Stamp Duty

15. Stamp duty is a state subject; rates vary by type of document and borrower category.

16. Example: DPN in most states attracts ₹0.25 per ₹1000 or flat rates like ₹50–₹100.

17. Mortgage deed may attract 0.5% to 2% stamp duty depending on the loan and state.

27.3.4 Filling

18. Blanks in documents must be filled neatly in ink or typed, without overwriting or erasure.

19. All fields must be filled before signature to avoid dispute of blank execution.

27.3.5 Execution

20. Borrower must sign all documents in presence of authorized bank officer.

21. Date of execution must be clearly mentioned and match across all documents.

22. In case of partnership, all partners must sign, unless authorization is given to one.

23. For companies, signature must be as per Board Resolution, with company seal.

27.3.6 Legal Procedures

24. Documents executed outside India must be authenticated by Indian embassy or notary.

25. Time-barred documents can be revived by:

• Acknowledgment of debt

• Part payment

• Fresh DPN

26. Limitation period for enforcing a loan agreement is 3 years from date of default or last
acknowledgment.

27. Limitation period to enforce a loan document (e.g., DPN, agreement) is 3 years from:

28. Date of execution, or

29. Date of default, or

30. Last acknowledgment of debt or part payment

31. A Revival Letter (acknowledgment of debt) must be obtained within 3 years to extend enforceability.
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32. On obtaining acknowledgment, the enforceability extends by another 3 years.

27.3.7 Keeping Documents Valid (In Force)

27. Documents should be revived before limitation expires — typically once in every 3 years.

28. Revival letter (acknowledgment) extends the enforceability of documents by another 3 years.

29. For companies, documents must be executed in accordance with Board Resolution, valid typically for
3 to 6 months (as per bank policy).

27.3.8 Safekeeping and Preservation of Documents

29. Important documents like original title deeds, DPNs, and guarantee deeds must be kept in fireproof
safes or record rooms.

30. Document registers must be maintained and access restricted; periodic physical verification is
mandatory.

31. Banks must retain loan-related documents for at least 12 years from the date of settlement or
closure.
32. For mortgage-related title deeds, documents must be preserved permanently or as mandated under
Bank's Record Retention Policy.
33. Physical verification of important legal/security documents must be done at least once a year.
34. Execution date must match across all documents and should not differ by more than 1 day, especially
in registered mortgage or guarantee documents.
35. When revalidating post-dated cheques or revival of limitation period, acknowledgement must be
secured within 90 days of document expiry.
36. Documents executed abroad must be submitted to Indian authorities within 3 months if registration
is required in India.
Item Limit / Period
Stamp duty payment Before/at execution
DPN enforceability 3 years
Revival letter effect +3 years from date of revival
Document preservation (loans) Min. 12 years
Physical document verification Once per year
Board resolution validity (typ.) 3–6 months
Execution mismatch tolerance Max. 1 day
Title deed storage (mortgage) Permanent

Unit 28: Non-Performing Assets / Stressed Assets ( PPB )

1. An asset becomes NPA when interest/principal is overdue for >90 days in term loans.
2. In CC/OD accounts, an account is NPA if out of order for >90 days.
3. For agricultural term loans, NPA is overdue if installment not paid for two crop seasons (short
duration) or one crop season (long duration).
4. Sub-standard asset: NPA for ≤12 months.
5. Doubtful asset: NPA for >12 months.

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6. Loss asset: Identified as non-recoverable by internal or external auditors or RBI, even if not fully
written off.
7. Provision for Standard Assets:
8. Agri/SMEs: 0.25%
9. CRE-RH: 0.75%,
10. CRE: 1.00%,
11. All others: 0.40%
12. Teaser rate housing loans: Provisioning at 2% for 1 year after reset; reduced to 0.40% post-1 year
if standard.
13. Provisioning for Restructured Standard Advances (Natural Calamity): 5%.
14. Secured sub-standard asset: Provisioning at 15%.
15. Unsecured sub-standard asset: Provisioning at 25%.
16. Unsecured infrastructure loan (sub-standard) with safeguards: 20% provisioning.
17. Doubtful assets provisioning:
18. Up to 1 year: 25%,
19. 1-3 years: 40%,
20. Over 3 years: 100% (secured portion).
21. Unsecured doubtful assets: Provisioning at 100%, regardless of duration.
22. Loss assets: Require 100% provisioning or write-off.
23. Gross NPA = Total NPAs before deducting provisions.
24. Net NPA = Gross NPA – (Interest Suspense + DICGC/ECGC claims + Specific provisions).
25. Income recognition: Income on NPAs to be booked only on realization basis.
26. Unrealized interest on NPA accounts must be reversed.
27. Restructuring of standard assets can lead to downgrade to sub-standard, unless under relief
schemes.
28. Prudential Norms on Restructuring issued by RBI mandate disclosure of restructured accounts.
29. Central Repository of Information on Large Credits (CRILC) captures data of borrowers with
exposure ₹5 crore+.
30. Resolution plan under RBI's Prudential Framework must be implemented within 180 days from
default.
31. Review period under RBI Resolution Framework begins from date of default and lasts 30 days.
32. If no resolution within 180 days, banks must make additional provisioning of 20% (and 15% more
after 365 days).
33. Debt Service Coverage Ratio (DSCR) of ≥1.5 is considered acceptable for term loan viability.
34. SMA-0: Payments overdue 1–30 days, SMA-1: 31–60 days, SMA-2: 61–90 days.
35. NPA classification must be borrower-wise, not facility-wise.
36. Reversal of NPA to standard: Only after repayment of all overdue amounts and regularization for
90 days.
37. Write-off: Does not waive the borrower’s liability; recovery efforts continue through legal or
compromise channels.
38. Restructured standard advances attract 5% provisioning under RBI's natural calamity guidelines.
39. Wilful defaulter is declared if default exceeds ₹25 lakh, and there’s evidence of misutilization or
diversion of funds.
40. RBI’s Early Warning Signals (EWS) system applies to accounts with aggregate exposure of ₹5
crore and above.
41. Banks must report borrower accounts under CRILC if total exposure is ≥ ₹5 crore, including
investments.

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42. Re-aging or restructuring of an NPA without proper viability assessment may attract 100%
provisioning if asset fails post-restructuring.
43. Additional provisioning for delayed resolution:
a. After 180 days of default: 20%,
b. After 365 days: Extra 15%, totaling 35%.
44. For restructured MSME accounts (under RBI dispensation), accounts should be classified standard
only if aggregate exposure ≤ ₹50 crore and borrower is GST-registered (if applicable).
45. If a borrower has multiple facilities, entire exposure is treated as NPA if even one facility is
overdue beyond 90 days.
Unit 29 – Important Laws Relating to Recovery of Dues (PPB Module B)

1. Recovery of Debts and Bankruptcy Act, 1993 (DRB)

1. The DRB Act empowers banks to recover dues of ₹20 lakh and above through DRTs.

2. DRTs (Debt Recovery Tribunals) are established under Section 3 of DRB Act.

3. Appeals against DRT orders lie with DRAT (Debt Recovery Appellate Tribunal).

4. DRAT appeal must be filed within 30 days from DRT order.

5. Pre-deposit of 50% of debt amount is mandatory to appeal in DRAT; may be reduced to 25% at
discretion.

6. DRB Act applies to banks, financial institutions, and multi-state co-operative banks.

7. Borrowers can file counter-claims under Section 19(6) of DRB Act.

8. Proceedings before DRT are deemed judicial proceedings under IPC Sections 193 and 228.

2. Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest

(SARFAESI) Act, 2002

9. SARFAESI applies when secured loan is ₹1 lakh or more and NPA value is ≥ 10% of total dues.

10. SARFAESI empowers banks to enforce security interest without court intervention.

11. Notice of 60 days is mandatory under Section 13(2) before taking possession of secured assets.

12. If borrower fails to comply with 13(2), secured creditor may take possession under Section 13(4).

13. Borrower can appeal to DRT within 45 days of SARFAESI action.

14. SARFAESI applies only to secured loans not below ₹1 lakh and not against agricultural land.

15. Security Receipts (SRs) are issued by Asset Reconstruction Companies (ARCs) to investors.

16. ARCs must be registered with RBI under Section 3 of the SARFAESI Act.

17. Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) maintains public
records.

18. Security enforcement by banks under SARFAESI must be done in accordance with RBI guidelines and
fair practice codes.

19. RBI regulates ARCs under SARFAESI and can cancel their registration.
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20. Borrowers can approach DRT for relief under Section 17 and DRAT under Section 18.

21. Under Section 31, SARFAESI provisions do not apply to security interests in aircrafts, vessels, and
agricultural land.

22. In case of consortium lending, SARFAESI action needs approval of 60% (by value) of lenders.

3. Insolvency and Bankruptcy Code (IBC), 2016

23. IBC applies to individuals, partnership firms, and companies with insolvency default of ₹1 crore or
more (revised from ₹1 lakh).

24. IBC process for corporates must be completed within 180 days, extendable by 90 days (max 330 days
including litigation).

25. Insolvency process is triggered by creditor or debtor under Section 7, 9, or 10.

26. Insolvency Resolution Professional (IRP) is appointed by NCLT (National Company Law Tribunal).

27. Committee of Creditors (CoC) is formed with voting rights based on financial debt proportion.

28. In case of individuals, Debt Recovery Tribunal (DRT) is the adjudicating authority under IBC.

29. IBC gives priority to secured creditors over unsecured and operational creditors during resolution.

4. Legal Services Authorities Act, 1987 (Lok Adalat)

30. Lok Adalats have the same powers as a civil court under CPC for compromise and settlement.

31. The award passed by a Lok Adalat is deemed a decree of a civil court and is final and binding.

32. No court fee is charged and any fee paid is refunded if case is settled through Lok Adalat.

33. Matters not settled by Lok Adalat may be referred back to the regular court for adjudication.

5. Limitation Act, 1963

34. The limitation period to file suit for recovery of money is 3 years from the date the loan becomes due.

35. A written acknowledgment of debt before expiry of limitation restarts the 3-year limitation period
(under Section 18).

36. Under DRB Act, DRT is not applicable if the recovery amount is below ₹20 lakh – such cases must be
filed in civil courts.

37. As per SARFAESI Act, the minimum capital requirement for an ARC is ₹100 crore net owned funds
(post-2022 RBI update).

38. In SARFAESI, auction of secured asset must be preceded by a 30-day public notice with reserve price,
terms, and time.

39. CERSAI must be updated within 30 days of creation or modification of charge on secured assets.

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40. Under IBC, fast track insolvency resolution applies to small companies with assets/turnover as per
threshold notified by MCA (typically for companies with paid-up capital ≤ ₹50 lakh and turnover ≤ ₹2
crore).

41. Resolution plan under IBC must be approved by 66% voting share of Committee of Creditors (CoC).

42. Appeal to NCLAT under IBC must be filed within 30 days, extendable by 15 days if sufficient cause is
shown.

43. Under Limitation Act, money suit on a promissory note or bill of exchange must be filed within 3
years from due date.

Unit 30 – Contracts of Indemnity

1. A contract of indemnity is defined under Section 124 of the Indian Contract Act, 1872.

2. It is a contract where one party promises to save the other from loss caused by the conduct of the
promisor or any third party.

3. The contract may be express or implied from the circumstances of the case.

Distinction with Guarantee

4. In indemnity, there are two parties; in guarantee, there are three parties (surety, principal debtor,
creditor).

5. In indemnity, liability is primary; in guarantee, surety’s liability is secondary.

6. In indemnity, there is one contract; in guarantee, there are three contracts.

Rights of Indemnity Holder

7. As per Section 125, indemnity holder is entitled to recover:

o All damages he is compelled to pay in a suit,

o All costs incurred in such suit,

o All sums paid under the terms of a lawful compromise.

8. These rights arise when the indemnity holder has acted prudently and within his authority.

Implied Indemnity

9. A contract of indemnity may be implied by law, such as agent’s right to be indemnified by

principal.

10. Bankers, agents, and trustees often act under implied indemnity while performing duties.

Enforceability

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11. Indian law allows enforcement of indemnity contracts even before actual loss is incurred, if
liability is absolute.

12. English law required actual loss for enforceability, but Indian courts have moved towards
protective enforcement.

13. A banker can seek indemnity before releasing payment on duplicate demand drafts or fixed
deposit receipts.

Application in Banking

14. Banks commonly take indemnity bonds when issuing duplicate instruments, delivering contents
of safe custody, or dealing with deceased accounts.

15. Letter of Indemnity (LOI) is widely used in banking to cover risk of loss or legal claim.

16. Banks use indemnities when dealing with lost cheques, demand drafts, or deposit receipts.

17. Indemnity is required from legal heirs/claimants in case of settlement of accounts without
succession certificate, as per bank's discretion.

18. In RTGS/NEFT refund claims, banks may seek indemnity before refunding disputed transactions.

Legal Validity

19. Indemnity contracts must follow valid contract essentials: free consent, lawful object,
consideration, etc.

20. Indemnity must not cover unlawful acts; only losses lawfully incurred can be claimed.

Bank Practice Examples

21. Indemnity may be sought in joint account closure without one holder or payment to third-party
without proper documents.

22. When a customer requests premature payment of term deposit, indemnity is taken if the receipt is
not produced.

23. In case of force majeure situations (e.g., floods/fire), banks may accept indemnity for documents
damaged or destroyed.

24. For Locker operations where keys are lost, indemnity along with charges is sought for breaking
locker.

Additional Key Legal Points

25. Courts may award compensation for breach of indemnity, even if not explicitly stated.

26. The period of limitation for indemnity suits is 3 years from the date of actual loss (as per Limitation
Act).

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27. A minor cannot be a party to indemnity as a promisor; the contract must be enforceable by a
competent party.

Unit 31 – Contracts of Guarantee

Contracts of Guarantee: Legal Aspects

1. As per Section 126 of the Indian Contract Act, 1872, a contract of guarantee involves three parties:
principal debtor, creditor, and surety.

2. The contract of guarantee can be oral or written, but banks insist on written form for evidentiary
clarity.

3. The surety's liability is co-extensive with that of the principal debtor unless the contract provides
otherwise (Sec 128).

4. A guarantee must satisfy general principles of contract: free consent, consideration, and lawful
object.

5. Consideration is deemed sufficient if the creditor has given something of value to the principal
debtor.

6. A continuing guarantee covers a series of transactions and remains in force until revoked (Sec
129).

7. A specific guarantee covers a single debt or transaction and terminates once that is fulfilled.

8. Revocation of a continuing guarantee can be done by notice, and is effective only for future
transactions (Sec 130).

9. On the death of a surety, the guarantee is automatically revoked for future liabilities, unless
otherwise agreed (Sec 131).

10. Any variation in contract terms between creditor and debtor without surety’s consent discharges
the surety (Sec 133).

11. Discharge of the principal debtor due to act of creditor releases the surety (Sec 134).

12. A surety is not discharged if the creditor merely forbears to sue the debtor (Sec 137).

13. If creditor gives time or enters into a composition with debtor without surety’s consent, surety is
discharged (Sec 135).

14. A surety has the right to recover dues from principal debtor once he has made the payment (right
of subrogation, Sec 140).

15. A surety has the right to claim any securities held by creditor, even if unknown at the time of
contract (Sec 141).

16. A contract of guarantee is void if obtained through misrepresentation or concealment of material

facts (Secs 142 & 143).

17. Co-sureties are liable to contribute equally, unless there is a contrary agreement (Sec 146).

18. Release of one co-surety does not discharge the others (Sec 147).

19. Minor as a principal debtor does not invalidate the surety's liability if the creditor was unaware of
the minority.

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Bank Guarantees: Practical Aspects in Banking

20. A bank guarantee is a non-fund-based credit facility wherein the bank undertakes to pay a third
party in case of default by the customer.

21. Bank guarantees are governed by Indian Contract Act, RBI Master Circulars, and URDG (Uniform
Rules for Demand Guarantees) when applicable.

22. Types of Bank Guarantees include:

o Financial Guarantee (e.g., loan repayment),

o Performance Guarantee (e.g., project completion),

o Bid Bond Guarantee (e.g., tender participation),

o Advance Payment Guarantee.

23. A performance guarantee assures fulfillment of contractual obligations and is usually invoked if
terms are breached.

24. A financial guarantee ensures payment of money and is often unconditional.

25. RBI guidelines require banks to ensure adequate security and margin before issuing guarantees.

26. Guarantees must be issued only after conducting proper credit appraisal and obtaining necessary
approvals.

27. Guarantees must have fixed validity period and must not be open-ended as per RBI directions.

28. As per RBI, banks should not issue guarantees on behalf of customers who do not enjoy credit
limits unless 100% cash margin is taken.

29. Before honouring a guarantee, banks must verify that invocation is strictly as per terms of the
guarantee.

30. Claims under guarantees must be honoured within the time stipulated; undue delay can attract
penalties.

31. Payment under a guarantee must be made on first demand, unless stated otherwise.

32. Precaution: Guarantee should not be invoked post expiry date, even if claim is otherwise valid.

33. Precaution: Bank must retain original guarantee document and check for proper stamping.

34. For government contracts, invocation is usually supported by a certificate of breach by the
beneficiary.

35. As per FEMA rules, foreign bank guarantees must comply with RBI's forex regulations.

36. Limitation period for suit on guarantee is generally 3 years from date of default or expiry.

37. RBI prohibits issuing guarantees for inter-company deposits or loans between group companies.

38. Banks must create a contingent liability entry in books equal to the amount of the guarantee
issued.

39. Guarantees for exporters may qualify for priority sector lending norms if linked to project finance.
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40. As per RBI (2022 revision), banks must report invoked but unpaid guarantees as NPAs if payment is
not made within 90 days.

Unit 32 – Letters of Credit of PPB

General Concepts & Definition

1. A Letter of Credit (LC) is a written undertaking by a bank to pay a seller on behalf of a buyer against
compliant documents.

2. LCs are commonly used in international trade to mitigate risk between unknown buyers and
sellers.

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

Parties to a Letter of Credit

4. The Applicant is the buyer/importer who requests the LC.

5. The Beneficiary is the seller/exporter in whose favour the LC is issued.

6. The Issuing Bank is the buyer’s bank that opens the LC.

7. The Advising Bank informs the beneficiary about the LC and authenticates it.

8. The Negotiating Bank examines and forwards documents to the issuing bank, and may make
payment.

9. The Confirming Bank adds its own commitment to pay, in addition to the issuing bank.

10. The Reimbursing Bank pays on behalf of the issuing bank when documents are compliant.

Types of Letters of Credit

11. Revocable LC can be amended or cancelled by the issuing bank without prior notice – but not used
under UCP 600.

12. Irrevocable LC cannot be amended/cancelled without consent of all parties – default under
UCPDC 600.

13. Confirmed LC has additional payment assurance from a confirming bank.

14. Unconfirmed LC carries only the issuing bank’s commitment.

15. Sight LC requires payment on presentation of documents.

16. Usance (Deferred Payment) LC allows payment after a specified credit period (e.g., 30/60/90 days).

17. Revolving LC reinstates its value automatically after use.

18. Back-to-Back LC involves two LCs where a trader uses an LC received from the buyer to open
another LC to the supplier.

19. Transferable LC allows the beneficiary to transfer the LC to one or more second beneficiaries (only
once).
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20. Red Clause LC allows partial advance payment before shipment, based on a written undertaking.

21. Green Clause LC allows advance against pre-shipment and warehousing.

22. Standby LC acts as a guarantee and is payable only if the applicant fails to fulfill contractual
obligations.

Documents Under LC (as per UCPDC 600)

23. Typical documents: Bill of Exchange, Commercial Invoice, Packing List, Bill of Lading, Insurance
Certificate, Certificate of Origin.

24. LC documents must be exactly compliant with the terms and conditions mentioned in the credit.

25. Discrepant documents can lead to non-payment or refusal unless the applicant waives
discrepancies.

26. UCPDC 600 Article 14 mandates that banks must examine documents within 5 banking days from
presentation.

27. Partial shipment and trans-shipment are allowed unless specifically prohibited in the LC.

UCPDC 600 Key Points

28. UCPDC 600 came into effect on 1 July 2007 and applies globally unless excluded.

29. An LC is considered irrevocable by default under UCPDC 600 Article 3.

30. The expiry of LC must be clearly stated and cannot be left open-ended.

31. Banks deal only with documents, not with actual goods, services, or performance.

32. UCP 600 Article 6 states that presentation of documents must be made on or before the expiry
date of the credit.

Payment Under Letter of Credit

33. Payment may be made by sight payment, deferred payment, negotiation, or acceptance
depending on LC terms.

34. Sight payment is made immediately after verifying compliant documents.

35. Usance payment is made on maturity after acceptance (e.g., 60 days from shipment).

36. In a negotiation LC, the negotiating bank pays to the beneficiary and seeks reimbursement from
issuing bank.

37. Clean LC does not require shipping documents – only a bill of exchange is submitted.

38. Discrepant documents can be accepted only with the applicant's consent.

Practical Bank Precautions

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39. LC should be opened only for genuine trade transactions with proper due diligence.

40. Banks must ensure that FX regulations (FEMA guidelines) are followed in case of cross-border LCs.

41. Banks must obtain appropriate margin and collateral before issuing LCs.

42. As per FEMA, import LCs with usance > 6 months (non-capital goods) may attract ECB rules or RBI
scrutiny.

43. Banks must record contingent liability for the full value of the LC till it is settled or cancelled.

44. LCs used for accommodation or circular transactions are prohibited under RBI/AML norms.

45. LCs must have a clearly defined expiry date, shipment date, and place of presentation.

Unit 33 – Deferred Payment Guarantee (DPG)

1. A Deferred Payment Guarantee (DPG) is a bank guarantee issued to a supplier for payment over an
agreed future period.

2. DPG facilitates credit-based capital goods purchases, especially in sectors like infrastructure,
machinery, and project finance.

3. It is a non-fund based facility that becomes fund-based when the bank makes payment on behalf
of the buyer.

Purpose of Deferred Payment Guarantee

4. DPG is commonly issued in import or capital equipment purchases where the buyer pays in
installments.

5. It ensures the supplier receives payment even if the buyer defaults.

6. DPG helps in credit substitution, where the seller relies on the bank’s guarantee instead of the
buyer’s creditworthiness.

7. It is often used for deferred installment schemes such as "payable in 12/24/36/60 months".

Method of Payment

8. Under a DPG, the bank commits to pay the supplier if the buyer fails to pay on the due date(s).

9. Payment is made as per the installment schedule agreed upon in the contract.

10. Each defaulted installment is treated as a separate liability under the DPG.

11. DPG liability is recorded as contingent liability in the books of the bank.

12. When payment is made under a DPG, it is converted to a funded advance in the name of the
borrower.

13. Interest is charged on DPG from the date of payment by the bank until recovery from the buyer.

14. DPG is typically issued for medium to long-term durations, like 1 to 7 years, depending on the
nature of the asset.

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Documentation & Security

15. Banks issue DPG only after conducting credit appraisal of the buyer.

16. Adequate margin, collateral, and loan documentation are required before issuing a DPG.

17. The guarantee should have a clearly defined schedule, expiry date, and amount.

18. A counter indemnity is usually taken from the buyer in favor of the bank.

Risk Management & Regulatory Considerations

19. DPG is considered a credit exposure and is subject to exposure limits under RBI Prudential Norms.

20. Banks must provision for DPGs if invoked and unpaid for more than 90 days, classifying it as an
NPA.

21. RBI requires banks to assign credit risk weight to DPGs like other off-balance-sheet items.

22. DPG is treated as a non-fund based facility, but can impact capital adequacy (CRAR) under Basel
III norms.

Special Use Cases & Guidelines

23. DPGs can be used for both domestic and cross-border transactions, subject to FEMA and RBI
approvals.

24. Under FEMA, for import transactions involving deferred payments, DPGs must comply with Trade
Credit guidelines.

25. Banks must report DPG exposures under CRILC if borrower exposure exceeds ₹5 crore.

26. DPGs should not be used to evergreen or roll over old guarantees – a fresh appraisal is mandatory.

27. If payment is made under a DPG, the account must be monitored for prompt recovery and
provisioning.

Numerical/Operational Highlights

28. Credit conversion factor (CCF) for DPGs is typically 100% (as per RBI guidelines for capital
adequacy).

29. A DPG may cover multiple payments, each with a specific due date and amount.

30. If default occurs, the bank must honor the DPG on first written demand, similar to performance
guarantees.

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Unit 34 – Laws Relating to Bill Finance

Classes of Bills and Governing Laws

1. Bill finance is governed primarily by the Negotiable Instruments Act, 1881.

2. A bill of exchange is defined under Section 5 of the NI Act.

3. A promissory note is defined under Section 4 of the NI Act.

4. The instrument must be in writing, unconditional, and signed by the maker/drawer.

5. Bills are used for financing genuine trade and commercial transactions.

Classification of Bills

6. Demand Bill is payable on presentation without any days of grace.

7. Usance Bill is payable after a specified period (e.g., 30, 60, 90 days).

8. Usance bills allow 3 days of grace unless otherwise mentioned.

9. Clean Bill has no documents attached; Documentary Bill has shipping and commercial
documents.

10. Inland Bill is drawn and payable in India; Foreign Bill is either drawn or payable outside India.

11. Trade Bills arise from genuine trade transactions; Accommodation Bills are not backed by trade.

12. Sight Bill is payable on demand; Time Bill is payable after a certain time.

Various Types of Bill Finance

13. Bills Discounting: Bank purchases the bill before maturity at a discount and collects on due date.

14. Bills Purchase: Bank pays the drawer upfront (with recourse) and collects from drawee on
maturity.

15. Drawee Bill Scheme: Financing is extended to the drawee rather than the drawer.

16. Invoice Financing is an alternative to bill finance, where the invoice itself is financed.

17. Bills Rediscounting Scheme (BRDS) is used by banks to rediscount bills with RBI or financial
institutions.

18. Advances against bills under collection are extended with bills as security.

Legal Position of Banker

19. In case of discrepant documents or forged bills, banks may lose protection unless due diligence is
proven.

20. A banker is considered a holder in due course if it accepts the bill in good faith, for value, and
without knowledge of defect.

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21. Under Sec 9 of NI Act, "holder in due course" gets better title than previous holder.

22. If bill is dishonoured, noting and protesting may be done to preserve the legal right to claim.

23. Noting must be done within a reasonable time (usually within 24–48 hours of dishonour).

24. Banker may proceed against the drawer, drawee, or endorsers in case of default.

Operational & Regulatory Aspects

25. RBI encourages use of electronic bill discounting through platforms like TReDS (Trade Receivables
Discounting System).

26. TReDS is used for financing MSME trade receivables by banks and NBFCs.

27. RBI mandates that public sector buyers on TReDS must settle invoices within 45 days (MSME Act
provision).

28. Under FEMA, foreign bills involving currency exchange must comply with RBI forex guidelines.

29. In bill discounting, the maximum usance period for export bills is typically 180 days, extendable by
RBI approval.

30. Interest rates on bill finance must follow RBI's external benchmark linked lending rate (EBLR)
framework for eligible borrowers.

31. As per RBI's revised guidelines, overdue bill finance for >90 days must be classified as NPA.

Risk and Precautions

32. Banks must check for genuineness of trade, KYC of parties, and documentary consistency.

33. Accommodation bills, without real trade, pose high fraud risk and must be avoided.

34. Recourse clause must be clear – with recourse bills give bank legal recovery rights against drawer.

35. Credit limits under bill finance should be within borrower’s sanctioned limits and exposure norms.

Unit 35 – Personal Finance

35.1 Credit Card

1. A credit card allows customers to buy now, pay later, usually with a billing cycle of ~30 days.

2. Main parties involved: Issuer Bank, Cardholder, Merchant Establishment, and Card Network (Visa,
MasterCard, etc.).

3. Credit cards offer interest-free periods (usually up to 45-50 days) on purchases if paid in full by due
date.

4. Revolving credit carries monthly interest between 24–48% per annum (2–4% per month).

5. Credit card users earn rewards, cashback, EMI offers, and travel benefits.

6. Disadvantages: high interest if unpaid, overuse risk, debt trap, and late payment penalties.

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7. As per RBI guidelines, banks must dispatch billing statement at least 14 days before payment due
date.

8. RBI mandates one-time password (OTP) for all card-not-present transactions above ₹5,000
(domestic).

9. Banks must offer auto-debit payment options, pre-closure, and grievance redressal for card
disputes.

10. Credit card complaints must be resolved within 30 days as per RBI guidelines.

11. As per RBI (July 2022), card issuers cannot increase credit limit without the explicit consent of the
cardholder.

35.2 Home Loans

12. Home loans are long-term loans used for purchase, construction, or renovation of residential
property.

13. The quantum of home loan is based on Loan-to-Value (LTV) ratio – typically up to 90% for loans ≤
₹30 lakh.

14. LTV Ratio:

o Up to ₹30 lakh → max 90%

o ₹30–₹75 lakh → max 80%

o Above ₹75 lakh → max 75%

15. Tenure of home loans can be up to 30 years, subject to borrower’s retirement age.

16. Key documents: KYC, salary slips, income tax returns, property papers, sanction plan, etc.

17. EMI begins after full disbursement or as agreed, though pre-EMI interest may be charged on part
disbursement.

18. Housing loans are available for:

o Buying ready-to-move homes

o Under-construction property

o Renovation/repairs

o Plot purchase + construction

19. Prepayment penalty: Nil for floating-rate loans to individuals (RBI directive); may apply for fixed-
rate loans.

20. Foreclosure without penalty is allowed for individual borrowers in floating rate housing loans.

35.3 Personal Loans

21. Personal loans are unsecured loans offered for consumption purposes – no asset security
required.
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22. Typical tenure: 1 to 5 years; amount sanctioned based on income, CIBIL score, and repayment
history.

23. Salaried individuals must submit salary slips, bank statement, Form 16, ID/address proof.

24. Personal loans carry higher interest rates than secured loans: typically 10% to 25% per annum.

25. Banks may impose processing fees (1-2%), prepayment charges, and late penalties.

26. Credit scoring models (e.g., CIBIL score ≥ 750) improve chances of approval and lower interest
rates.

27. Some banks offer top-up personal loans or pre-approved offers based on credit history.

35.4 Consumer Loans

28. Consumer loans are typically for purchase of white goods, vehicles, electronics, etc.

29. Many consumer durable loans are offered at zero interest (0% EMI) schemes with processing fee.

30. Banks may partner with retailers/brands to provide point-of-sale loans or cardless EMI.

31. These are short-term loans, usually 6 to 24 months with structured EMI repayment.

32. Goods purchased on consumer loans may be hypothecated to the bank until full repayment.

Regulatory Guidelines & Common Points

33. All personal/home/consumer loans must comply with KYC/AML norms, CIBIL reporting, and RBI
fair lending practices.

34. As per RBI’s Digital Lending Guidelines (2022), charges must be transparent, and grievance
redressal must be accessible.

35. Borrowers must be provided loan sanction letter, repayment schedule, and terms & conditions in
writing.

36. NBFCs and fintechs offering personal loans must report to Credit Information Companies (CICs).

37. In case of prepayment, borrower must be informed of updated outstanding balance and interest
within 2 working days.

Unit 36 – Priority Sector Advances

1. Applicable to All Commercial Banks, RRBs, SFBs, LABs & UCBs (except salary earners’ banks).

2. Objective – ensure credit flow to underserved yet creditworthy sectors vital for socio-economic
growth.

3. All existing PSL loans under 2020 Directions continue till maturity.

4. Allied activities include dairy, fisheries, poultry, sericulture, bee-keeping etc.

5. Non-Corporate Farmers (NCFs) cover individuals, SMFs, proprietorship farms, SHGs and JLGs.

6. On-lending = bank loans to intermediaries for further priority sector lending.

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Categories & ANBC Computation

9. 8 priority sectors – Agriculture, MSME, Export Credit, Education, Housing, Social Infra, Renewable
Energy, Others.

10. ANBC = Bank Credit in India – Bills rediscounted + RIDF/NHB/SIDBI/MUDRA deposits + PSLC +
other eligible items.

11. Long-term bonds for Infra & Affordable Housing can be excluded from ANBC.

12. Public Sector Banks’ recapitalization bonds are deducted from ANBC.

13. CEOBSE calculated per RBI Large Exposure Framework (June 3, 2019).

14. Prudential write-offs must reduce PSL achievement proportionately.

15. Targets are based on ANBC/CEOBSE whichever is higher as on previous year end.

PSL Targets – Main and Sub-Targets

17. Commercial Banks/Foreign (≥20 branches): 40 % of ANBC as PSL target.

18. Foreign Banks (<20 branches): 40 % of ANBC – up to 32 % Export Credit allowed; min 8 % for others.

19. RRBs: 75 % of ANBC as total PSL target.

20. SFBs: 75 % of ANBC as total PSL target.

21. Infra + Renewable Energy count up to 15 % of ANBC for priority achievement.

22. Agriculture target: 18 % of ANBC; within it 14 % for NCFs and 10 % for SMFs.

23. Micro Enterprises: 7.5 % of ANBC for DCBs, RRBs and SFBs.

24. Weaker Sections: 12 % of ANBC for DCBs and SFBs; 15 % for RRBs.

25. UCB targets: Total PSL 60 %, Micro 7.5 %, Weaker 12 %.

Regional Weight Adjustments

26. From FY 2024-25, districts with per-capita PSL < ₹ 9,000 get 125 % weight.

27. Districts with per-capita PSL > ₹ 42,000 get 90 % weight.

28. Others retain 100 % weight; review due FY 2026-27.

29. Weights apply to incremental credit; adjustment handled via ADEPT database.

30. RRBs, UCBs, LABs & Foreign banks exempt from weight adjustment.

Agriculture Sector

31. Farm Credit includes crop loans, allied activities, KCC, pre/post-harvest finance etc.

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32. Loan against produce: ₹ 90 lakh limit (NWR/eNWR); ₹ 60 lakh (other receipts).

33. Corporate farmer/FPO limit: ₹ 4 crore aggregate per entity.

34. FPOs undertaking farming with assured marketing: loan up to ₹ 10 crore.

35. FPOs buying members’ produce: loan up to ₹ 10 crore.

36. UCBs cannot lend to farmer co-operatives.

37. Agri-Infrastructure limit: ₹ 100 crore per borrower.

38. Agri-Start-up limit: ₹ 50 crore.

39. Food & Agro processing limit: ₹ 100 crore per borrower.

40. Export credit to agri sector is PSL eligible (excluding off-balance sheet items).

41. RIDF deposits with NABARD for shortfall count as agri PSL.

42. Small Farmers: landholding > 1 ha ≤ 2 ha; Marginal: ≤ 1 ha.

43. Allied without landholding: loans ≤ ₹ 2.5 lakh eligible as SMF.

44. SMF FPOs/FPCs: ≥ 75 % SMF membership required.

45. NBFC-MFIs & other MFIs eligible for on-lending to Agri PSL (per para 22).

46. NBFC (on-lending): eligible for term lending up to ₹ 10 lakh per borrower.

MSME Sector

47. MSME definition as per Master Direction [Link] & NFS 12/06.02.31/2017-18.

48. All bank loans to MSMEs qualify as PSL.

49. Start-ups as MSME: loans up to ₹ 50 crore eligible.

50. Factoring transactions (with recourse & TReDS) count as PSL.

51. RRBs & UCBs excluded from factoring provision.

52. Khadi and Village Industries = micro enterprise category.

53. NBFC-MFI on-lending to MSME: allowed (conditions in para 22).

54. NBFC on-lending limit: ₹ 20 lakh per micro/small borrower.

55. PMJDY OD facility is PSL under Micro Enterprises.

56. SIDBI and MUDRA deposits for shortfall count towards MSME PSL.

Export Credit

57. Export Credit includes pre & post-shipment credit (excluding off-BS items).

58. Agri and MSME export credit classified under respective categories.

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59. Other Export Credit eligible up to 2 % of ANBC/CEOBSE or ₹ 50 crore per borrower.

60. Foreign banks < 20 branches may count up to 32 % of ANBC as Export Credit.

61. Not applicable to RRBs and LABs.

Education & Housing

62. Education loans ≤ ₹ 25 lakh (incl. vocational courses) = PSL.

63. Housing loan limits: ₹ 50 lakh (> 50 lakh pop.), ₹ 45 lakh (10–50 lakh pop.), ₹ 35 lakh (< 10 lakh pop.).

64. Dwelling unit cost caps: ₹ 63 lakh / ₹ 57 lakh / ₹ 44 lakh respectively.

65. Repair loan limits: ₹ 15 lakh / ₹ 12 lakh / ₹ 10 lakh (according to city size).

66. Govt. agency housing eligible up to 60 sq. m carpet area.

67. Affordable housing projects: ≥ 50 % FAR/FSI used for units ≤ 60 sq. m carpet area.

68. NHB shortfall deposits count toward housing PSL.

Social Infra & Renewable Energy

69. Social infra loan limit: ₹ 8 crore for schools, water & sanitation; ₹ 12 crore for health centres (Tier
II-VI).

70. Renewable Energy limit: ₹ 35 crore for projects/public utilities and ₹ 10 lakh per household.

Other Modes of PSL Lending

29. Banks can meet PSL targets by buying securitised assets with underlying PSL exposure (not
applicable to RRBs/UCBs).

30. Direct Assignment (DA)/outright purchase of eligible PSL assets is permitted.

31. Inter-Bank Participation Certificates (IBPCs) are allowed for PSL portfolio sharing.

32. Banks can use Priority Sector Lending Certificates (PSLCs) to meet shortfall without actual
disbursement. Standard lot size is ₹25 lakh.

33. Types of PSLCs:

• PSLC-General
• PSLC-Agriculture
• PSLC-MSME
• PSLC-SF/MF

34. Validity of a PSLC is up to 31st March of the financial year of issuance.

35. Co-origination model (now called Co-Lending Model) allows banks and NBFCs to jointly lend to
PSL sectors.

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36.8 – Interest Subvention Schemes

36. Under the Modified Interest Subvention Scheme (MISS 2024–25), farmers availing crop loans up to
₹3 lakh at 7% get 3% subvention on timely repayment, reducing effective rate to 4%.

37. Interest Subvention under NRLM: Women SHGs under NRLM are eligible for subvention up to 5.5%
for loans up to ₹3 lakh.

Unit 37 – Agricultural Finance

37.2 – Short-Term Loans

1. Short-term crop loans are sanctioned for a period of up to 12 months to meet seasonal agricultural
operations.

2. These are eligible for interest subvention under the Modified Interest Subvention Scheme (MISS)
up to ₹3 lakh.

37.3 – Medium / Long-Term Loans

3. Medium-term loans: 1 to 5 years, for asset creation like irrigation, wells, farm equipment.

4. Long-term loans: Above 5 years, used for land development, tractors, cold storage, etc.

37.4 – Crop Loan

5. Crop loans are production loans and qualify as short-term agricultural credit under PSL.

6. Banks may sanction crop loans through Kisan Credit Cards (KCCs) or direct credit route.

37.5 – Revised Scheme for Issue of Kisan Credit Card (KCC)

7. KCC is a flexible credit product designed to provide timely and adequate credit to farmers.

8. Eligible borrowers: Owner cultivators, tenant farmers, oral lessees, sharecroppers.

9. KCC includes credit for crop production, post-harvest needs, consumption, farm maintenance,
etc.

10. KCC coverage was expanded to include Animal Husbandry and Fisheries in 2018.

11. Short-term limit: Up to ₹3 lakh eligible for interest subvention and prompt repayment incentive.

12. Term loan component under KCC: Up to ₹2 lakh for allied activities.

13. ROI under KCC:

• Base rate + margin for general
• 7% p.a., reduced to 4% p.a. with 3% subvention for prompt repayment (MISS 2025 update).

14. Interest subvention is applicable for loans up to ₹3 lakh for a period of up to 1 year.
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15. Margin: Generally nil up to ₹1.6 lakh; margin applicable beyond that as per bank’s norms.

16. Security:
• Up to ₹1.6 lakh – no collateral
• Above ₹1.6 lakh – hypothecation or mortgage required.

17. Repayment period for short-term KCC: 12 months or aligned to crop season.

18. KCC review: Every 5 years for revision of credit limit.

19. Banks issue RuPay Kisan Cards with ATM and PoS features linked to the KCC account.

37.6 – Selected Activities Under Agricultural Financing

20. Loans are extended for farm mechanization, minor irrigation, dairy, poultry, horticulture, fisheries,
sericulture, etc.

21. Finance to horticulture includes crops like mango, banana, pomegranate, and protected
cultivation.

22. Farm mechanization loans are eligible for tractor, power tillers, harvesters, etc.

23. Loans for drip/sprinkler irrigation systems are encouraged under water-use efficiency schemes.

24. Land purchase loans are allowed to small/marginal farmers up to ₹10 lakh, subject to state laws.

37.7 – Minimum Support Prices (MSP)

25. MSP is fixed by the Commission for Agricultural Costs and Prices (CACP) and announced by GOI.

26. The MSP ensures a minimum price guarantee to farmers, especially for 23 major crops.

27. As per Budget 2024–25, MSP ensures 50% margin over cost of production (A2+FL).

37.8 – Prime Minister Fasal Bima Yojana (PMFBY)

28. PMFBY is a crop insurance scheme for farmers, operational since 2016, revised in 2020.

29. Premium rates:

• Kharif crops: 2%
• Rabi crops: 1.5%
• Commercial/horticultural crops: 5%

30. Balance premium is shared by Central and State Governments on 50:50 basis.

31. Enrollment is voluntary since 2020 for all farmers including loanee farmers.

32. Coverage includes yield loss, post-harvest losses (up to 14 days), localized calamities.

33. Insurance companies must settle claims within 2 months of harvest/loss data.

34. PMFBY is mandatory for farmers availing KCC/crop loans unless they opt out in writing.

Unit 38 – Finance to MFIs / Co-Lending Arrangements with NBFCs

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1. Banks provide credit to NBFCs registered with RBI under Section 45-IA of the RBI Act, 1934.

2. NBFCs use bank funds for on-lending, co-lending, or financing of specific segments like MSME,
housing, vehicle, and MFIs.

3. Borrowings from banks are a key funding source for NBFCs and NBFC-MFIs.

38.3 Bank Finance to NBFCs

4. Banks can lend to NBFCs registered with RBI only.

5. Activities not eligible for bank credit: investment in capital markets, land acquisition, real estate
(except for infrastructure).

6. Banks cannot issue guarantees for deposits or placement of funds with NBFCs.

7. As per RBI, bank exposure to a single NBFC (excluding gold loan companies) is capped at 20% of
eligible capital base.

8. This limit can be extended to 25% with board approval (RBI circular, June 2022).

38.4 Bank Loans to NBFCs for On-Lending

9. Bank loans to NBFCs (non-MFIs) are eligible for PSL if used for onward lending to priority sectors.

10. For agriculture, NBFCs must on-lend to farmers with individual loans ≤ ₹50 lakh.

11. For MSMEs, NBFCs can on-lend up to ₹1 crore per borrower to qualify under PSL.

12. For housing, NBFCs must lend up to ₹20 lakh per borrower for PSL classification.

13. The eligibility under PSL is valid up to March 31, 2025, unless extended by RBI.

38.5 Bank Loans to NBFC-MFIs

14. An NBFC-MFI is an NBFC where 85% of net assets are in the form of qualifying assets (small value
loans).

15. MFIs with loan amounts not exceeding ₹1.25 lakh per borrower (₹1.5 lakh for rural) qualify as
qualifying assets.

16. MFIs exempted from registration: Societies, Trusts, Section 8 Companies not accepting public
deposits.

17. Pricing of credit by NBFC-MFIs must be board-approved and transparent, replacing earlier margin
caps.

18. MFIs must submit borrower data to Credit Information Companies (CICs) within weekly timelines.

19. NBFC-MFIs must comply with Fair Practices Code (FPC) for transparency and ethical lending.

20. MFIs must avoid multiple lending, ghost borrowers, and over-indebtedness by adhering to CIC
feedback.

38.6 NBFC-MFIs as Channelising Agents

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21. NBFC-MFIs often act as agents for government schemes like PM Svanidhi, NRLM, etc., ensuring
rural credit delivery.

22. Banks prefer MFIs as intermediaries for deeper outreach to underserved rural/urban poor.

38.7 Co-Lending by Banks and NBFCs (CLM)

23. Under Co-Lending Model (CLM), banks and NBFCs jointly lend to priority sectors while sharing
credit risk.

24. Minimum share of bank in individual loan under CLM: 80%, NBFC’s share: 20%.

25. NBFC originates the loan, does documentation, monitors, and collects repayments; bank funds
and takes risk on its share.

26. NBFC must service the account on behalf of the bank under Master Agreement.

27. Co-lending must comply with PSL guidelines and NBFC must be RBI-registered.

28. Interest rate to end borrower should be blended and disclosed transparently upfront.

29. Delays in repayment attribution must be reconciled within 30 days to avoid classification issues.

30. Master agreement must be signed between bank and NBFC and should include customer
grievance redressal mechanism.

38.8 Scale-Based Regulation (SBR) Framework for NBFCs

31. RBI introduced SBR Framework (effective from Oct 2022) to regulate NBFCs based on size, risk,
and activity.

32. NBFCs are classified under 4 layers:

• Base Layer (BL) – e.g., NBFC-Peer Lending, NBFC-AA
• Middle Layer (ML) – e.g., NBFC-Investment and Credit
• Upper Layer (UL) – top 10–15 systemic NBFCs based on risk scoring
• Top Layer (TL) – empty unless risk triggers mandate upgrade from UL.

33. NBFCs in Upper Layer face stricter norms: leverage caps, higher capital adequacy (CRAR ≥ 15%),
and corporate governance.

34. NBFCs must maintain liquidity coverage ratio (LCR) phased in for those in Middle & Upper layers.

35. NBFCs must adhere to CIC reporting, risk management, fair lending practices, and board-level
governance.

Bank Loans to NBFCs for On-Lending (PSL Eligibility Caps):

36. On-lending to individual farmers (by NBFCs) qualifies for PSL if the loan amount does not exceed
₹50 lakh per borrower.

37. On-lending to micro and small enterprises (MSEs) qualifies if the loan amount is ≤ ₹1 crore per
borrower.

38. On-lending to housing sector qualifies if the loan amount is ≤ ₹20 lakh per borrower.

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39. The PSL eligibility of on-lending by NBFCs to the above sectors is applicable up to March 31, 2025,
unless extended.

Bank Exposure to NBFCs:

40. Aggregate bank exposure limit to a single NBFC (excluding gold loan NBFCs) is 20% of eligible
capital base, extendable to 25% with Board approval.

41. For NBFCs predominantly engaged in gold loans, this limit is 10%, extendable to 15% with Board
approval.

42. Exposure to NBFC-HFCs is subject to sectoral exposure ceilings and separate PSL treatment
(notified separately by RBI).

NBFC-MFI Loan Size Definition (Post-2022 Guidelines):

43. A loan qualifies as a microfinance loan if:

• It is unsecured,
• Given to a household with annual income ≤ ₹3 lakh,
• Loan amount ≤ ₹1.25 lakh per borrower (₹1.5 lakh in rural areas),
• Repayable in installments.

44. Cap on outflow (EMI): Total EMI of all loans (including bank + NBFC-MFI) should not exceed 50% of
household income.

Co-Lending (CLM) Operational Framework:

45. Bank’s minimum share in co-lending model: 80% of individual loan.

46. NBFC’s share in co-lending: Minimum 20% of loan amount.

47. Reconciliation timeline of repayment: Must be done within 30 days of receipt to avoid NPA
mismatch.

48. NBFC must transfer the bank’s share of principal and interest within the above period to ensure
compliance.

Regulatory Reporting / CIC & Monitoring:

49. NBFC-MFIs and co-lending NBFCs must report borrower details to at least one Credit Information
Company (CIC) on a weekly basis.

50. Non-compliance with timely reporting to CIC can result in regulatory action or loss of PSL
classification.

Unit 39 – Micro, Small and Medium Enterprises (MSMEs)

39.3 – MSMED Act, 2006 & Classification

1. MSMEs are defined under the MSMED Act, 2006 using investment and turnover criteria (as revised
on 1 July 2020).
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2. As per latest classification:

• Micro: Investment ≤ ₹2.5 Cr & Turnover ≤ ₹10 Cr
• Small: Investment ≤ ₹25 Cr & Turnover ≤ ₹100 Cr
• Medium: Investment ≤ ₹125 Cr & Turnover ≤ ₹500 Cr

3. Classification is self-declared and verified through the Udyam portal.

4. Investment includes only Plant & Machinery or Equipment, excluding GST, IT, and land/building
cost.

39.4 – Policy Package for MSMEs – Credit/Finance

5. Public sector banks must have a specialized MSME branch in every district.

6. RBI mandates priority sector lending for MSMEs, with ₹1 crore cap for PSL classification on loans.

39.5 – Promotional Measures for MSMEs

7. Government schemes for MSMEs include:

• MSE-Cluster Development,
• Credit Linked Capital Subsidy Scheme,
• Technology Upgradation,
• Marketing Assistance.

39.6 – Delayed Payments (Section 16, MSMED Act)

8. MSMEs must be paid within 45 days of acceptance of goods/services; otherwise, compound

interest applies.

9. Interest is 3 times the bank rate notified by RBI for delays beyond the stipulated period.

10. Disputes are settled by the MSME Facilitation Council (MSEFC).

39.7 – TReDS (Trade Receivables Discounting System)

11. TReDS is an online invoice discounting platform regulated by RBI for MSME receivables.

12. MSME suppliers, large buyers (corporates/PSUs), and financiers (banks/NBFCs) are participants.

13. TReDS supports bill discounting without collateral, enabling liquidity for MSMEs.

14. Invoices must be accepted by buyer within 48 hours, else deemed accepted.

15. Payment must be made within T+1 settlement cycle.

16. Three RBI-approved platforms: RXIL, M1xchange, and Invoicemart.

39.8 – Performance and Credit Rating Scheme

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17. This scheme helps MSMEs access cheaper credit through external performance rating.

18. NSIC subsidizes 75% of the rating fee for micro and small enterprises.

19. Ratings are provided by agencies like CRISIL, CARE, ICRA, etc.

39.9 – Credit Guarantee Fund Scheme for MSEs (CGTMSE)

20. CGTMSE (operational since 2000) provides collateral-free credit guarantee to MSE loans.

21. Under CGS-I, coverage up to ₹5 crore per borrower is provided.

22. As per CGTMSE Circular No. 250 & 251 (March 2025):
• Credit guarantee coverage enhanced up to ₹10 crore for select borrowers.
• AGF (Annual Guarantee Fee) is linked to loan slab and risk category.

23. For loans up to ₹5 lakh, AGF is 0.37% per annum; for higher slabs, it varies from 0.55% to 1.20%.

24. CGS-II is for loans to NBFCs for on-lending to MSEs, including co-lending under RBI guidelines.

25. Distressed Asset Fund – Subordinate Debt Scheme:

• Offers subordinated debt up to 15% of promoter’s stake, capped at ₹75 lakh.

26. PM SVANidhi 2.0: Micro-credit for street vendors up to ₹50,000 (after first cycle of ₹10,000 &
₹20,000) with interest subsidy.

27. Co-lending Credit Guarantee Scheme (CGSCL): Covers risk in bank + NBFC co-lending to MSEs.

28. Claims under CGTMSE must be filed within 1 year of NPA classification, after initiation of recovery.

39.10 – Cluster-Based Financing

29. A cluster is a geographical concentration of MSMEs producing similar products/services.

30. Banks are encouraged to adopt cluster-based approach to finance sectors like textiles, leather,
auto, pharma.

31. RBI and SIDBI have identified over 100 clusters for focused lending.

32. Cluster financing helps in cost-effective credit appraisal and monitoring.

39.11 – Lending Guidelines to MSMEs

33. Composite loan limit up to ₹1 crore can be sanctioned for term loan + working capital.

34. No collateral is required for loans up to ₹10 lakh to eligible MSEs under RBI's CGTMSE mandate.

35. Banks must provide acknowledgment for MSME loan applications and communicate decisions
within 15 days.

36. Working capital limits can be assessed using turnover method (20% of projected turnover).

37. One-time restructuring was permitted for MSMEs (without downgrade to NPA) under COVID relief
till March 2021

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8. All MSMEs must register on the Udyam Portal and obtain Udyam Certificate (URC).

9. Retail & Wholesale Trade included as MSMEs only for PSL purpose.

10. Udyam Assist Portal (UAP) certificates for Informal Micro Enterprises (IMEs) treated as Udyam
Registration.

11. IMEs with Udyam Assist Certificate = Micro Enterprises for PSL classification.

Targets & Sub-Targets

16. Banks must meet PSL targets for MSME sector as per PSL Directions 2025.

17. As per PM Task Force on MSMEs, banks must ensure:

a) 20 % year-on-year credit growth to Micro & Small Enterprises.
b) 10 % annual growth in number of Micro Enterprise accounts.
c) 60 % of MSE lending should go to Micro Enterprises.

Collateral & Credit Facilities

18. Collateral-free loans up to ₹ 10 lakh for all MSE units mandated.

19. PMEGP units (under KVIC) also get collateral-free loans up to ₹ 10 lakh.

20. Banks may enhance limit to ₹ 25 lakh collateral-free based on track record.

21. Officers’ performance linked to use of CGTMSE Guarantee Cover.

22. Composite Loan Limit: Up to ₹ 1 crore (single window Term + WC).

23. General Credit Card (GCC): Working Capital for non-farm entrepreneurs eligible under PSL.

24. GCC issuance as per Credit Card Directions 2022 (Apr 21, 2022).

25. Collateral-free lending rules apply to GCC too; data to be reported to RBI.

Timely Credit & Life Cycle Support

26. Banks must provide standby credit in term loans & additional WC for emergencies.

27. Mid-term review of WC limits annually based on actual sales.

28. Credit decision timeline: ≤ 14 working days for loans ≤ ₹ 25 lakh.

29. Above ₹ 25 lakh – as per bank Board-approved norms.

30. Banks must display MSME credit info & checklist on their websites.
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Debt Restructuring

31. Banks to follow RBI’s Master Circular on IRAC and Provisioning for MSME restructuring.

32. Every bank must adopt a Board-approved Revival, Restructuring and OTS policy.

33. Reasonable time to apply and repay under OTS to be given to borrowers.

Revival & Rehabilitation Framework

34. Applicable for MSMEs with loan limits up to ₹ 25 crore.

35. Three SMA sub-categories created to detect incipient stress before NPA.

36. Borrower can voluntarily initiate revival process.

37. Committee approach mandatory for corrective action plans.

38. Fixed timelines for decisions prescribed in the Framework.

Credit Monitoring Mechanism

40. Banks must set up a Credit Proposal Tracking System (CPTS) with unique application ID and auto-
acknowledgement to MSME borrowers.

CGTMSE Guarantee Coverage (Post March 2025 Update – Circular No. 250 & 251)

5. Revised Maximum Guarantee (Mar 2025):

• Enhanced to ₹10 crore for borrowers under co-lending, export, and certain manufacturing.

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6. Annual Guarantee Fee (AGF)

7. Time for claim lodgement under CGTMSE: within 1 year of NPA classification and after recovery
steps initiated.

TReDS Operational Timelines

10. Buyer must accept invoice on TReDS platform within 48 hours of submission, else it is auto-
deemed accepted.

11. Settlement of discounting must occur on T+1 basis.

PM SVANidhi 2.0 – Loan Progression

12. 1st Cycle: ₹10,000

13. 2nd Cycle: ₹20,000

14. 3rd Cycle: ₹50,000

15. Interest Subsidy:

• 7% per annum, credited quarterly
• Additional cashback of ₹100/month for digital repayments

Distressed Asset Fund (Subordinate Debt for MSMEs)

16. Subordinate debt coverage:

• Up to 15% of promoter’s equity or ₹75 lakh, whichever is lower.

17. Moratorium: Up to 7 years with moratorium of 2 years on principal repayment.

Composite Loan & Collateral-Free Limits

18. Composite Loan under MSME: Up to ₹1 crore for term + working capital in a single sanction.

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19. Loans up to ₹10 lakh can be extended without collateral under RBI’s CGTMSE-linked collateral
waiver.

Unit 40 – Government Sponsored Schemes

1. DAY-NULM aims to reduce poverty and vulnerability of urban poor households by enabling self-
employment and wage employment.

2. It promotes formation of Self Help Groups (SHGs) and supports micro-enterprise creation.

2. Key Beneficiary Criteria

3. Target group: Urban poor aged 18 years and above, preferably women beneficiaries.

4. Must not have availed similar benefits under any other government scheme.

5. Beneficiary must be from urban local body (ULB) area and preferably listed in the SECC (Socio-
Economic Caste Census).

3. Financial Assistance – SEP-I (Individual Enterprises)

6. Loan limit under SEP-I: Up to ₹2 lakh per individual.

7. Subsidy: 15% of project cost, subject to a cap of ₹15,000.

8. No collateral security required for loans under SEP-I.

9. Subsidy is back-ended, credited after loan disbursement and asset verification.

4. Financial Assistance – SEP-G (Group Enterprises)

10. Group must consist of minimum 3 urban poor members (at least 70% women).

11. Loan limit under SEP-G: Up to ₹10 lakh per group.

12. Subsidy: 35% of project cost, subject to a ceiling of ₹3 lakh, equally shared among all members.

13. Group enterprises must submit a joint application with a detailed project plan.

5. Skill Training & Education Requirements

14. Minimum education qualification: None mandated, but functional literacy is preferred.

15. Training is mandatory before loan sanction; duration is 15–30 days, based on enterprise category.

6. Interest Subsidy for Loans Above Subsidy Limits

16. Loans above ₹2 lakh (SEP-I) or ₹10 lakh (SEP-G) are eligible for interest subsidy only, not capital
subsidy.

17. Interest subsidy is equal to the difference between bank’s rate and 7%, up to a max loan of ₹2 lakh.
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18. Interest subsidy is claimed quarterly by the bank and credited directly to borrower’s loan account.

7. SHG–Bank Linkage (Urban SHGs)

19. Urban SHGs formed under DAY-NULM must include 10–20 members, preferably all-women groups.

20. SHG loans up to ₹10 lakh are eligible for interest subvention.

21. SHGs are eligible for 7% interest rate, with additional 3% incentive for prompt repayment, making
effective rate 4%.

22. Loan limit per SHG under linkage: ₹1 lakh to ₹10 lakh, based on micro-credit plan and repayment
behavior.

23. Interest subsidy on SHG loans is credited quarterly to the account by SRLM (State Rural Livelihood
Mission).

8. Bank’s Role & Guidelines

24. Banks must not demand collateral for NULM-sponsored loans up to ₹10 lakh.

25. Banks must verify income certificate, Aadhaar, and urban residency proof before sanction.

26. Loans sanctioned under DAY-NULM must be tagged with a Unique Identification Code (UIC) for
tracking.

27. Subsidy claims must be submitted to ULB/SULM within 90 days of disbursement.

28. Banks must maintain a NULM loan register and report progress quarterly to the ULB.

9. Technology, Marketing & Credit Card for Enterprise Development

29. Technology and Marketing Support includes help in digital platform onboarding, GST registration,
and e-commerce market access.

30. Beneficiaries may be issued a Credit Card for Enterprise Development with limit between ₹2,000
to ₹50,000, repayable in 12–18 months.

31. Credit card loans are without subsidy but are eligible under priority sector lending.

10. Monitoring & Reporting

32. Banks must ensure asset verification within 30 days of disbursal to release subsidy.

33. ULBs must validate physical setup of micro-enterprise within 60 days of disbursement.

34. Defaulted loans must be reported quarterly to the ULB and SLBC.

35. NPA under NULM must be declared if overdue is more than 90 days, and subsidy is reversed.

DAY-NRLM (Deendayal Antyodaya Yojana – National Rural Livelihoods Mission)

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1. DAY-NRLM is implemented by the Ministry of Rural Development (MoRD) to promote financial

inclusion and self-reliance among rural poor.

2. It focuses on universal SHG coverage, women empowerment, bank linkage, and income
generation.

3. Implemented in intensive and non-intensive blocks via State Rural Livelihood Missions (SRLMs).

2. SHG Structure & Inclusion

4. Priority is given to women SHGs, especially from Scheduled Castes, Tribes, minorities, PVTGs.

5. A typical SHG includes 10–20 rural poor women; in difficult areas (e.g., deserts/hills), 5–20
members are allowed.

6. At least 70% of SHG members must be women under DAY-NRLM.

3. Financial Assistance to SHGs

7. SHGs are eligible for Revolving Fund (RF) of ₹10,000 to ₹15,000 per group after 3–6 months of
formation.

8. Community Investment Fund (CIF) is provided to SHGs and their federations for income-
generating activities.

9. CIF may be up to ₹50,000 to ₹3 lakh, depending on SHG maturity and grading.

10. Funds are routed through Village Organizations (VOs) or Cluster Level Federations (CLFs).

4. Opening of Bank Accounts

11. SHG bank account must be opened with minimum 3 authorized signatories (usually president,
secretary, treasurer).

12. KYC compliance is mandatory for all members as per RBI Master Directions.

13. SHG savings accounts are zero-balance accounts with no minimum balance requirement.

5. Lending Norms to SHGs

14. Banks are advised to extend credit linkage within 6 months of SHG formation (especially in
intensive blocks).

15. Credit limit for SHG:

• 1st Dose – ₹10,000–₹1 lakh
• 2nd Dose – ₹1 lakh–₹2 lakh
• 3rd Dose – ≥ ₹2 lakh

16. SHGs are eligible for repeat loans after 60% utilization of previous loan & satisfactory repayment.

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17. Loan repayment tenure:

• Up to ₹50,000: 6–12 months
• Above ₹50,000: 12–24 months

6. Interest Subvention Scheme for Women SHGs (Updated 2024)

18. SHGs in Category I districts (intensive blocks) are eligible for 7% interest on loans up to ₹3 lakh.

19. If SHG repays on time, it gets 3% subvention, reducing the effective rate to 4%.

20. Interest subvention is credited quarterly by SRLM into the loan account.

21. In Category II districts, banks can claim interest subvention from MoRD via NABARD portal.

22. SHG loans above ₹3 lakh are not eligible for subvention; bank’s regular MCLR applies.

23. Subvention is available only for loans with prompt repayment behavior (no overdue >30 days).

24. Bank must claim subvention within 60 days of quarter end through online reporting.

7. Post-Credit Follow-Up and Recovery

25. SHG repayment performance is tracked via Community Based Repayment Mechanism (CBRM).

26. SHG NPA account must be reported to SRLM for counseling and restructuring.

27. Recovery from SHGs must comply with RBI Fair Practices Code and No Coercive Recovery Norms.

8. Role of Bankers & Monitoring

28. Banks must depute SHG Nodal Officers at district level to coordinate with SRLMs.

29. Special bank SHG cells are to be created for account opening, grading, and monitoring.

30. SHG gradation and loan eligibility is based on Participatory Identification of Poor (PIP) and internal
grading tools.

31. Annual SHG loan outstanding and repayment report to be submitted by banks to SLBC & SRLM.

9. Documentation and Digitization

32. SHGs must maintain minutes register, savings register, passbook, loan ledger, and photo ID proof
of members.

33. E-Shakti platform (by NABARD) is used in select states for SHG digital grading & credit linkage.

34. Banks must ensure Aadhaar-seeded CBS-enabled accounts for SHG members.

10. Additional Guidelines (Budget 2024–25 Update)

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35. Union Budget 2024–25 aims to promote Women-Led Development (WLD) under DAY-NRLM,
focusing on 20 crore women via 30 lakh SHGs.

36. New “Lakhpati Didi” initiative under DAY-NRLM targets ₹1 lakh annual income per SHG woman.

37. As of 2024, over 87 lakh SHGs have been formed under DAY-NRLM.

Pradhan Mantri Jan Dhan Yojana (PMJDY)

1. PMJDY (Pradhan Mantri Jan Dhan Yojana) was launched on 28 August 2014.

2. The scheme focuses on basic savings bank accounts (BSBDA) for every unbanked household.

3. PMJDY is implemented by Ministry of Finance – Department of Financial Services (DFS).

2. Key Features

4. Zero balance savings account can be opened under PMJDY.

5. BSBDA under PMJDY comes with no minimum balance requirement.

6. PMJDY accounts must be Aadhaar-seeded, KYC-compliant, and operated via core banking
platform (CBS).

7. Mobile number, Aadhaar, and bank account form the JAM Trinity for DBT transfers.

3. Overdraft (OD) Facility

8. Overdraft (OD) facility is available to only one earning account holder per household.

9. OD eligibility: Account must be at least 6 months old with satisfactory transaction history.

10. OD limit: Up to ₹10,000, with no collateral or processing fee.

11. Earlier ₹5,000 limit was revised to ₹10,000 in Aug 2018, and continues per latest 2024 circular.

12. Age eligibility for OD: 18 to 65 years.

13. The bank may apply a debit freeze if the account becomes dormant.

4. Accidental Insurance via RuPay Debit Card

14. PMJDY account holders get a RuPay Debit Card with built-in accident insurance.

15. Accidental insurance cover:

• For accounts opened before 28 Aug 2018 → ₹1 lakh
• For accounts opened on or after 28 Aug 2018 → ₹2 lakh

16. Condition for claim: The cardholder must have performed at least one financial/non-financial
transaction within 90 days prior to accident.

17. Insurance is provided by NPCI and settled via partner insurance companies.

18. Eligibility: Account holder must be the first-time bank account holder, aged 18–59 years, with
Aadhaar and RuPay card.
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20. PMJDY accounts must be regularly reviewed to detect inactivity/dormancy; dormancy if no

transaction in 24 months.

21. Dormant accounts are still eligible to receive DBT subsidies and pensions.

22. Banks must issue passbooks and RuPay cards within 15 days of account opening.

23. PMJDY accounts are mapped for DBT under PFMS portal.

24. No charges on deposits, withdrawals, or issuance of passbook.

31. PMJDY contributes to achievement of Financial Inclusion Plans (FIPs) by banks and SLBCs.

32. PMJDY accounts are automatically counted under PM SVANidhi, NRLM, and PM-KISAN schemes
for DBT delivery.

33. PMJDY accounts are monitored under Pragati Dashboard by PMO for performance.

34. PMJDY accounts can be converted to regular accounts after KYC completion.

35. Multiple PMJDY accounts are not permitted per household; only one operative account allowed.

36. Banks must provide at least 4 free withdrawals per month in PMJDY-linked BSBDAs as per RBI
circular (Jan 2023).

37. Interest is payable on PMJDY accounts at bank’s prevailing savings rate, generally between 2.5–4%
p.a.

38. No SMS alert charges, NEFT/IMPS fund transfer charges waived for PMJDY accounts.

PMSBY – Pradhan Mantri Suraksha Bima Yojana

1. PMSBY Scheme

1. PMSBY provides accidental death and disability insurance at very low premium.

2. It is offered by public and private general insurance companies in partnership with banks.

2. Eligibility Criteria

3. Age eligibility: 18 to 70 years.

4. The subscriber must have a savings bank account with auto-debit mandate.

5. The account must be Aadhaar-linked for smooth processing.

3. Premium & Benefits (As of FY 2024–25)

6. Annual premium: ₹20 per annum, auto-debited from bank account.

7. Risk coverage period: 1 June to 31 May, renewed annually.

8. Benefits under PMSBY:

• ₹2 lakh – Accidental death or total permanent disability
• ₹1 lakh – Partial permanent disability
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4. Enrollment & Renewal

9. Enrollment period: Any time, with benefits starting after auto-debit confirmation.

10. Enrollment can be done via bank branches, internet banking, SMS, mobile apps, BCs, etc.

11. Renewal is automatic if there is sufficient balance in the account during May.

12. The subscriber can exit the scheme anytime by giving a written request to the bank.

5. Claim Procedure

13. Claim must be submitted within 30 days from the date of accident.

14. Claim forms must be submitted to the bank branch or insurance company along with documents.

15. Claim is processed and paid directly to beneficiary’s bank account within 15–30 working days.

6. Other Key Points

16. Premium is reviewed annually by DFS & IRDAI in consultation with insurance providers.

17. Multiple enrollments under PMSBY are not allowed; benefit is restricted to one policy per
individual.

🔹 APY – Atal Pension Yojana

1. APY Scheme

18. APY is a pension scheme for unorganized sector workers, regulated by PFRDA.

19. It offers guaranteed monthly pension after retirement, based on fixed contributions.

2. Eligibility Criteria

20. Age eligibility: 18 to 40 years.

21. The subscriber must have a savings bank account, preferably Aadhaar-linked.

22. Subscriber must provide nominee details, and spouse details if applicable.

3. Contribution & Pension Slabs

23. Pension options: ₹1,000 / ₹2,000 / ₹3,000 / ₹4,000 / ₹5,000 per month (after 60 years of age).

24. Monthly contribution varies based on entry age and chosen pension.

25. Minimum contribution: ₹42/month (age 18, pension ₹1,000).

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26. Maximum contribution: ₹1,454/month (age 40, pension ₹5,000).

4. Co-Contribution by Government (Old Provision)

27. Govt co-contribution was applicable only to non-income tax payers who joined before 31 March
2016.

28. Co-contribution was ₹1,000/year or 50% of contribution, whichever is lower, for 5 years only.

5. Exit / Withdrawal Rules

29. Premature exit is allowed only on death or terminal illness (subscriber or spouse).

30. If subscriber exits voluntarily before 60, only contributions + interest earned (without government
co-contribution) is refunded.

31. On death of subscriber:

• Spouse can continue or
• Claim lump sum of pension corpus.

32. Pension is paid from age 60 until death.

6. Payment Mode & Auto-Debit

33. Contribution is auto-debited monthly/quarterly/half-yearly from savings account.

34. Account must maintain sufficient balance; else penalty is levied.

35. Penalty for non-payment: ₹1 to ₹10 per month, based on contribution slab.

36. After 6 months of non-payment, account is frozen; after 12 months, it is deactivated; after 24
months, closed.

7. Tax Benefit

37. Contribution under APY is eligible for tax deduction under Section 80CCD(1B) up to ₹50,000 in
addition to ₹1.5 lakh under 80C.

Pradhan Mantri MUDRA Yojana (PMMY)

1. MUDRA was launched on 8 April 2015 to provide collateral-free institutional credit to non-
corporate micro enterprises.

2. MUDRA is operated through banks, NBFCs, MFIs, refinanced by SIDBI.

3. Maximum loan limit under PMMY is ₹10 lakh per borrower.

4. MUDRA has 3 product categories:

• Shishu – Loans up to ₹50,000
• Kishor – ₹50,001 to ₹5 lakh
• Tarun – ₹5 lakh to ₹10 lakh, Tarun Plus+ ; ₹10 lakh to ₹20 lakh

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5. Shishu loans are mostly for first-time entrepreneurs and start-ups.

6. No processing fee is charged for Shishu loans.

7. Repayment tenure: up to 5 years based on the borrower's cash flow.

8. Interest rates are as per bank's policy, typically 9–12% for Shishu, 11–16% for Kishor/Tarun.

9. MUDRA loans are eligible under priority sector lending (PSL).

10. No collateral or third-party guarantee is required for MUDRA loans.

11. CGFMU (Credit Guarantee Fund for Micro Units) provides guarantee cover up to 85% of the
sanctioned loan.

12. Women entrepreneurs are eligible under Mahila Mudra Yojana with interest concession of 0.25%
(as per bank’s policy).

13. Working capital MUDRA loans may be issued as MUDRA RuPay debit card linked to overdraft or
cash credit limit.

14. MUDRA refinance is provided to eligible institutions for up to 24 months.

15. All MUDRA loans must be reported to CERSAI and Credit Information Companies (CICs).

🔹 KVIC – Prime Minister's Employment Generation Programme (PMEGP)

16. PMEGP is a credit-linked subsidy program under KVIC, launched in 2008.

17. Nodal agencies: KVIC, DICs (District Industries Centres), and Coir Board.

18. The objective is to generate employment in rural and urban areas by setting up micro-enterprises.

19. Maximum project cost:

• Manufacturing: ₹25 lakh
• Services: ₹10 lakh

20. Beneficiary contribution:

• General category: 10%
• SC/ST/OBC/Women/Ex-Servicemen/PH: 5%

21. Margin money (subsidy):

• Urban General: 15%, Rural General: 25%
• Urban SC/ST/OBC/etc.: 25%, Rural: 35%

22. No income ceiling to apply under PMEGP.

23. Age limit: Minimum 18 years; no upper age limit.

24. Applicant must have passed at least 8th standard for projects above ₹10 lakh (manufacturing) or
₹5 lakh (services).

25. EDP (Entrepreneurship Development Program) training of 10 days (rural) or 6 days (urban) is
mandatory before loan disbursement.

26. Composite loans are provided by banks for capital + working capital together.

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27. Working capital must be utilized within 3 years to claim full subsidy.

28. Margin money (subsidy) is held in a lock-in period of 3 years with the bank.

29. Interest is applicable only on bank credit portion (excluding subsidy).

30. Claims for margin subsidy must be uploaded by banks to KVIC portal within 90 days of
disbursement.

31. PMEGP is not available for existing units or units already availing benefits under any other subsidy-
linked scheme.

32. Projects under agriculture-related and rural industries like food processing, khadi, crafts, dairy,
poultry, etc., are eligible.

33. Units under PMEGP must create 1 job per ₹1 lakh of loan for services and ₹1.25 lakh/job in
manufacturing.

Unit 41 – Self-Help Groups (SHGs)

41.1 – SHG Definition

1. An SHG (Self-Help Group) is a voluntary group of 10–20 people, typically from similar economic
backgrounds.

2. Most SHGs are formed by women, with the aim of mutual savings, credit, and economic
empowerment.

3. SHGs are based on principles of mutual trust, self-help, group responsibility, and collective
decision-making.

41.2 – Need for SHGs

4. SHGs provide access to financial services for rural poor, especially women and marginalized
sections.

5. They help build credit discipline and improve creditworthiness among low-income households.

6. SHGs reduce reliance on informal moneylenders and enable group-based economic activity.

41.3 – Forming SHGs

7. Ideal SHG size:

• 10–20 members in plain areas
• 5–20 members in difficult/hilly/tribal/desert areas

8. SHGs are formed by NGOs, SRLMs (under DAY-NRLM), or banks (through BCs or RSETIs).

9. SHG leadership includes President, Secretary, and Treasurer, chosen from among members.

10. Each SHG must maintain records like Minutes Book, Savings Ledger, Loan Register, and
Passbooks.

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41.4 – SHG–Bank Linkage Programme (SBLP)

11. SHG–Bank Linkage Programme was initiated by NABARD in 1992, and scaled nationally by RBI in
1996.

12. Under SBLP, banks lend directly to SHGs without requiring individual member-level appraisal.

13. SHG savings account must be opened with minimum 3 authorized signatories.

14. Banks must ensure KYC of at least 3 office bearers and maintain Aadhaar-seeded accounts.

15. SHG must function for minimum 3–6 months and show regular savings habit before becoming
eligible for credit.

16. SHG loans up to ₹10 lakh are to be provided without collateral security (as per latest RBI
guidelines).

17. Loans beyond ₹10 lakh may be provided based on repayment record, savings, and group grading.

18. Repayment period for SHG loans:

• Up to ₹50,000 → 6–12 months
• Above ₹50,000 → 12–24 months

19. Interest subvention under DAY-NRLM is available on SHG loans up to ₹3 lakh (7% ROI, 3% incentive
→ effective 4%).

20. Grading of SHGs is based on quality indicators such as regular meetings, savings, record
maintenance, and repayment history.

Additional Regulatory & Monitoring Norms (2024 Update)

21. Banks must submit SHG disbursement and outstanding data quarterly to SLBC/SRLM.

22. SHG NPA must be reported separately in CBS and flagged under 'Group Lending Portfolio'.

23. RBI mandates banks to report SHG credit data to Credit Information Companies (CICs) regularly.

24. Banks may engage Business Correspondents (BCs) to handle SHG-related operations in remote
areas.

25. Digitization of SHGs is promoted via E-Shakti platform (pilot by NABARD) for real-time credit
scoring.

26. SHG account dormancy norms: Account inactive for 24 months is to be reviewed and revived or
closed.

Documentation & Operational Guidelines

27. SHG documentation includes:

• Group Resolution, Member ID, Aadhaar/KYC, PAN (if available), Savings Ledger, and Loan
Ledger.

28. Group must pass resolution signed by 2/3rd members for account opening and availing loan.

29. E-KYC and geotagging of SHGs are being encouraged by SRLMs and banks for monitoring.
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30. All SHG records should be updated monthly, and audited at least once per year.

31. Loan disbursement must be done directly to SHG account, not to individual members.

Benefits of SHG Lending (for Banks)

32. SHGs are low-NPA and low-cost portfolios, especially in women-led rural lending.

33. SHGs ensure peer monitoring and collective repayment pressure, reducing default risk.

34. SHG loans qualify under priority sector lending (PSL) for commercial banks.

35. Interest subvention schemes under NRLM and state-specific missions offer banks timely claims.

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