Introduction to Credit Products
Credit products refer to the range of commitments or obligations under which a bank agrees to make payments on behalf of or for the account of a borrower. These include various types of loans and advances, as well as non-fund-based facilities such as letters of credit, guarantees, and other arrangements designed to facilitate transactions between the borrower and third parties.
Bank Assets
Assets of a bank represent what the bank owns—its resources and claims on others. These assets typically include loans extended to customers, investments in various instruments, cash holdings, and physical assets such as buildings and equipment. In essence, any item the bank owns or has a right to claim is considered an asset.
Key Types of Bank Assets:
- Loans and Advances
- Investments
- Cash
- Fixed Assets
- Other Assets
Detailed Overview
1. Loans and Advances
Banks extend credit or loans to borrowers for the purchase of movable or immovable property, consumer durables, vehicles, or other needs. These are the primary source of income for banks, as they earn interest on the funds lent. Loans may be extended to individuals (e.g., home loans, personal loans) or businesses (e.g., commercial loans).
In banking, advances are typically short-term credit facilities provided for varied requirements. These differ from traditional loans and include products such as overdrafts, cash credit, and bill discounting.
- Overdrafts allow customers to withdraw more than their account balance.
- Cash credit offers working capital based on the value of pledged assets.
- Bill purchases involve providing funds against trade bills or invoices.
Advances do not have a fixed tenure. As long as the business remains a going concern and the account reflects healthy turnover, the bank generally reviews and renews the limits annually. However, the bank reserves the right not to renew the credit limit and may recall the advance in cases of irregularities or violations of sanctioned terms.
2. Investments
Banks invest in a variety of financial instruments, including government securities, corporate bonds, and equity shares. These investments help diversify the asset portfolio and provide additional income streams.
3. Cash
In India, banks hold cash in multiple forms—cash on hand, balances maintained with the Reserve Bank of India (RBI), and balances with other banks and financial institutions. These are crucial for liquidity management and compliance with regulatory requirements.
4. Fixed Assets
Fixed assets refer to the long-term tangible resources used by a bank in its day-to-day operations. These include buildings, land, vehicles, office furniture, computers, and other equipment. Though not directly income-generating, these assets are essential for smooth functioning.
5. Other Assets
“Other assets” encompass items that do not fall under primary categories like loans or investments. They include:
- Accrued income
- Prepaid expenses
- Suspense accounts
- Inter-branch transaction items
- Intangible assets such as goodwill and trademarks
These items contribute to the bank’s operations and valuation.
Classification of Loans
Loans are categorized based on their tenure and nature:
- Demand Loans: Typically secured loans repayable on demand. Common securities include term deposits, National Savings Certificates (NSC), and Life Insurance Corporation (LIC) policies.
- Term Loans: Classified as short-term (up to 1 year), medium-term (1–3 years), and long-term (up to 10 years; extendable to 15 years in special cases). Examples include infrastructure loans and loans for plant and machinery. Home loans may extend up to 30 years, subject to the borrower’s age and repayment capacity.
Types of Loans
Secured Loans: These are backed by collateral. If the borrower defaults, the lender has the right to sell the secured asset to recover the loan amount. Due to the presence of collateral, these loans typically carry lower interest rates and higher borrowing limits.
Examples: Home loans, loans against term deposits, NSCs, LIC policies, and gold loans.
Unsecured Loans: These loans are not backed by collateral. They carry higher risk for lenders and therefore usually come with higher interest rates.
Examples: Personal loans, most student loans, and credit cards.
Asset Classification of Loans and Advances
Banks classify their loan and advance portfolios based on performance and credit risk. The standard classification includes:
- Standard Assets: Performing loans with timely repayments.
- Substandard Assets: Loans overdue for more than 90 days but less than 12 months.
- Doubtful Assets: Loans those remain substandard for 12 months or more.
- Loss Assets: Loans identified as uncollectible or with little chance of recovery.
Non-performing assets (NPAs) fall under the categories of Substandard, Doubtful, and Loss, depending on the extent and duration of non-repayment. This classification helps banks assess risk and allocate provisions for potential losses accordingly.
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