Bank Credit

Management
S. Murali
FCMA, ACS, CAIIB, LL.B., MFM, M.Com., Ph. D.
Adjunct Professor, ICFAI Business School,
Director, Enhance Your Competence
and
Formerly Assistant Vice President and ING Vysya Bank, Bengaluru.

K.R. Subbakrishna
M.A., CAIIB, LL.B., B.Sc.
Adjunct Professor, ICFAI Business School (Retired),
Director, Enhance Your Competence,
and
Formerly Associate Vice President, ING Vysya Bank, Bengaluru.

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First Edition : 2008

Second Revised Edition : 2012
Reprint : 2013, 2015, 2017
Reprint : 2018
Third Revised Edition : 2019

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 Foreword

Credit administration has been evolving and now more than a century old. In
Europe, it is more than three centuries. Banks in India followed their own principles and
practices until globalization in economic front including financial sector reforms were
initiated in 1990s.
In 1988, the Committee for International Banking Supervision, Basel (Switzerland)
evolved risk-weighted approach and capital adequacy known as Basel II. In 1998, Basel II
was recommended. The main aspects of Basel II are: (i) more risk-sensitive, (ii) develop
risk measurement and risk management techniques and (iii) align regulatory capital to
economic capital. Risk management has assumed high degree of importance. Of the three
types of risks, namely credit, market and operational, emphasis is on Credit risk.
Deregulation and globalization of financial services together with growing sophistication
of financial services make banking and risk profiles more complex. Banks in India have to
implement Basel II not later than 31.03.2009. All these developments and the fact credit
portfolio both on and off-balance sheet constitutes substantial composition, there is
absolute need for bankers to understand the revised processes and systems that are
different from traditional or pre-liberalisation approach to credit function.
The book on “Bank Credit Management” encompasses all the developments with
adequate lucidity the credit management in banks. It has captured the latest developments
including Recovery Management as well as Micro Credit. I have no doubt that the book
will be a useful guide to bankers and students of banking.
I congratulate Sarvashri S. Murali and K.R. Subbakrishna for their pioneering work.
Banking is dynamic throughout the world. It is necessary that those involved keep
themselves abreast of the developments and stay updated.

M.S. Sundara Rajan

Chairman and Managing Director,
Indian Bank.
 Preface to Third Revised Edition

We are glad to note that this book has completed one decade since its first edition.
We take this opportunity to thank all the readers of the book for their support and
feedback.
After the release of Second Edition in the year 2012, lots of changes have taken place
in the banking sector, and in particular, credit management area. Hence, we have brought
out the following changes in this edition to capture the major changes:
» Chapter 4 – Policy Rates and RBI Guidelines (CRR Maintenance, Monetary
Policy Committee)
» Chapter 5 – Prudential Norms (Basel III Guidelines, Prompt Corrective Action)
» Chapter 7 – Types of Borrowers (Guidelines regarding Charge Creation Post
Companies Act, 2013)
» Chapter 13 – Priority Sector Lending (Latest Norms)
» Chapter 19 – Recovery Management (Insolvency and Bankruptcy Code 2016)
» Chapter 20 – Micro Finance and Financial Inclusion (Jan-Dhan Yojana and
MUDRA Scheme)
We thank Mr. G.N. Venkataraman, Practicing Cost and Management Accountant,
and a Qualified Insolvency Professional, for his inputs on the Insolvency and Bankruptcy
Code and Mr. D. Murugesan for reviewing the Chapter on Foreign Exchange. We, once
again, thank all those who have contributed a few chapters and provided inputs for our
earlier editions.
We are grateful to our publishers M/s Himalaya Publishing House Pvt. Ltd. for the
efforts taken in popularising this book and bringing out this edition.
We hope this revised third edition will also be received by our readers with same
enthusiasm as hitherto.
We welcome suggestions from the readers which we would address in our next
edition.

Bengaluru S. Murali
[[email protected]]
K.R. Subbakrishna
[[email protected]]
 Preface to First Edition

Banks deal with public funds as they accept deposits from those who have surplus
and lend them to the needy in the form of Advances. Depositors have to be paid interest.
To meet the interest cost and the overheads (expenditure), a bank has to earn income in
the form of interest on money lent and fee for other services rendered. Banks cannot just
keep the money received as idle deposits. The same has to be lent to such persons who are
in a position to service the loans on time. If there is any laxity in the selection of
borrowers or at the time of disbursement of the loan or follow-up of the money advanced,
the probability of the account becoming Non-Performing is greater. Hence, ‘Credit
Management’ gains vital importance in the functioning of any bank.
Not many books are available exclusively covering Credit Management in Banks.
This book contains in detail the various steps in Credit Management – right from
prospecting a client to the proposal sanction, monitoring and follow-up of advance. It also
has a chapter on the Recovery Measures – Legal and Non-legal in the event of an account
turning NPA despite all efforts taken by the bank. Risk Management has been gaining lot
of importance since the last couple of years and more so with the implementation of Basel
II norms. A chapter is dedicated to Risk Management. ‘Microfinance’ is fast catching up as
a means of effective lending for the rural mass and also enabling banks to achieve their
Priority Sector targets. An exclusive chapter deals on this topic.
The book has been written in a very simple language and we have tried to share our over
25 years’ experience in the banking industry by our specific comments/suggestions at relevant
places.
We are sure this book would be of great help to students who are doing their MBA,
M.Com., BBM and other similar courses and also those who would be entering the Credit
Department of the Bank for the first time.
We thank Mr. S. Sridhar, Competence Development Facilitator of ING Vysya Bank
CDC for having contributed the Chapter on ‘Credit Policy in Banks’ and Mr. P.S.
Kulkarni, Management Consultant and formerly AGM, Canara Bank and Chairman,
Chitradurga Grameena Bank for contributing the chapter on “Microfinance”.
We also thank our parents, other family members and friends who have directly or
indirectly helped us in bringing out this book.
We will be failing in our duty if we do not thank our publishers M/s. Himalaya
Publishing House Pvt. Ltd. for having brought out this book in such a nice form.
We welcome suggestions for improving the contents of this book which we would
address in our future editions.

Bengaluru S. Murali
[[email protected]]
K.R. Subbakrishna
[[email protected]]
 Contents
1. Overview of Lending Activity 1–8
– Primary and Secondary Functions of a Bank
– Directed Lending and Normal Lending
– Wholesale and Retail Banking
– Requirements for Effective Lending

2. Principles and Objectives of Credit Management 9 – 28

– Objectives of Credit Management
– Qualities of a Good Borrower
– 6 Cs of Credit
– Credit Information Companies
– Cardinal Principles of Bank Lending
– An “Ideal Advance”
– Stages in a “Credit Cycle”
– Client/Customer Acceptance Criteria
– Modes of Credit Disbursement
– Checklist for SSI Entrepreneurs
– Checklist for Branch Managers
– Fair Practices Code

3. Credit Policy in Banks 29 – 40

– Meaning of Credit Policy of a Bank
– Four Types of Credit Culture
– Objectives of a Sound Credit Policy
– Regulatory Requirements under Credit Policy
– Credit Policy as a Risk Management Tool
– Case Study

4. Policy Rates and RBI Guidelines 41 – 52

– Cash Reserve Ratio (CRR)
– Methodology for Maintenance of CRR
– Statutory Liquidity Ratio (SLR)
– Approved Securities for SLR
 – Penalty for Non-maintenance of CRR/SLR by Banks
– Bank Rate, Repo and Reverse Repo
– Prime Lending Rate and Base Rate
– Monetary Policy Committee
– Case Study

5A. Prudential Norms on Capital Adequacy and

Credit Risk Management 53 – 82
– Basel I, Narasimham Committee and Basel II Committee
Recommendations
– Approaches Proposed by Basel II Committee for Computing Credit Risk
– Tier-1, Tier-2 and Tier-3 Capitals
– Meaning of Risk-weighted Assets
– Mode of Computing the Capital Adequacy Ratio of a Bank
– Various Risks Faced by the Banks

5B. Basel III Capital Regulations 83 – 101

– Salient Features of Basel III Capital Regulations
– Composition of Regulatory Capital – Relevance and Need for Risk Rating
– Credit Risk Mitigation
– Calculation of Capital Requirement

5C. Prompt Corrective Action 102 – 105

– What is Prompt Corrective Action (PCA)?
– Trigger for PCA
– Different Capital Measures
– Risk Thresholds
– Benefits of PCA
– Mandatory and Discretionary Actions by RBI

6. Income Recognition, Asset Classification (IRAC) and

Provisioning Norms 106 – 121
– Income Recognition and Asset Classification norms
– Meaning of Standard Asset, Sub-standard, Doubtful and Loss Assets
and Special Mention Accounts
– Norms for Treating an Advance as Non-performing
 – Provisioning Norms for Various Class of Assets
– RBI Guidelines on Apportionment of Recoveries
– Concept of ENPA
– Case Studies

7. Types of Borrowers 122 – 142

– Various Types of Borrowers
– Special Features of Each Type of Borrower
– Salient Points to be Noted While Dealing with Minors
– Limited Company as a Borrower – Formalities for Creation of Charge
– MCA21 – E-filing of Returns of Limited Companies
– Hindu Undivided Family as a Borrower – Precautions to be Taken

8. Analysis of Financial Statements 143 – 179

– Meaning of Financial Statements
– Directors’Responsibility Statement
– Users’Information Needs
– Qualitative Characteristics of Financial Statements
– Quantitative Tools of Financial Statement Analysis
– Comparative Financial Statement Analysis
– Common Size Financial Statement Analysis
– Ratio Analysis
– Funds Flow Analysis
– Cash Flow Analysis
– Limitations of Financial Statement Analysis
– Creative Accounting/Window Dressing

9. Credit Evaluation — Working Capital Finance 180 – 198

– Meaning of Working Capital
– Kinds of Working Capital
– Operating Cycle
– Factors Affecting the Level of Working Capital
– Assessment of Working Capital
- Methods of Assessment of Working Capital
– Tools of Financial Statement Analysis
– Case Studies
10. Credit Evaluation of Term Loans 199 – 232
– Meaning of Term Loan
– Deferred Payment Guarantee
– Factors to be Considered While Considering a Term Loan Proposal
– Technical, Economic and Financial Feasibility of a Project
– Use of Break-even Analysis, Sensitivity Analysis, Leverage, Interest
Coverage and Debt Service Coverage Ratios
– Case Study

11. Dynamics of Foreign Exchange 233 – 246

– Foreign Trade Policy in India
– Foreign Exchange Rates
– Pre-Shipment and Post-shipment Credit
– Meaning and Types of Letter of Credit
– Common Documents Used in International Trade
– EEFC: Exchange Earners Foreign Currency Accounts
– External Commercial Borrowing (ECB)

12. Types of Credit Facilities 247 – 258

– Types of Facilities
– Overdraft, Cash Credit, Bills Facility and Term Loans
– Drawing Power and Drawing Limit
– Fund-based and Non-fund-based Facilities
– Bank Guarantee (BG)
– Format of BG
– Case Study on BG
– Letter of Credit (LC)

13. Priority Sector Lending 259 – 267

– Understand the Background before Introduction of Priority Sector
– Meaning of Priority Sector
– Activities Classified as Priority Sector
– Targets under Priority Sector
– Other RBI Guidelines Regarding Priority Sector
14. Corporate Funding 268 – 288
– Consortium Lending, Syndication and Lending by Multiple Banks
– Use of Leasing as a Mode of Financing
– Factoring and its Nuances

15. Infrastructure Lending 289 – 297

– Meaning of Infrastructure
– Importance of Infrastructure
– Meaning of Public Private Partnership (PPP)
– Various Models of PPP
– Key Issues in Bank Financing

16. Supply Chain and Channel Financing 298 – 310

– Meaning of Channel Financing
– Differences between Channel Financing and Conventional Financing
– Benefits of Channel Financing
– Supply Chain Concepts
– Financial Supply Chain
– Benefits of Supply Chain Financing
– Differences between Supply Chain Financing and Channel Financing

17. Documentation 311 – 344

– Meaning and Importance
– Evidence
– Steps Involved in Documentation
– Procedure for Execution of Documents
– Attestation
– Registration of Documents
– Time Barred Documents
– Renewal of Documents
– Documents Normally Obtained from Borrower (Constitution-wise)
– Types of Charges
 Hypothecation, Pledge, Lien, Assignment

– Different Types of Mortgages

– Do’s and Don’ts of Documentation
– Caselets on Documentation
18. Monitoring and Follow-up 345 – 367
– Meaning
– Importance of Monitoring
– Pre-disbursement and Post-disbursement Care
– Off-site and On-site Monitoring
– QIS Returns
– Unit Inspection
– Early Warning Signals
– Unfair Practices Normally Adopted by Borrowers

19. Recovery Management 368 – 390

– Legal and Non-legal Recovery Measures
– Debt Recovery Tribunal (DRT)
– Asset Securitisation and Asset Reconstruction
– SARFAESI Act – Provisions Applicable to Bank Recoveries
– Notices to be Issued to Borrowers under SARFAESI Act Insolvency
and Bankruptcy Code 2016

20. Micro Finance and Financial Inclusion 391 – 414

– Financial Problems Faced by Rural People in India
– Meaning of Micro Finance
– Origin and Growth of Micro Finance in India and Abroad
– Self-help Groups and their Formation
– Role of NABARD in Micro Finance
– Assessment of Micro Finance Lending Proposal
– Grading of MFIs and NGOs
– Meaning and Significance of Financial Inclusion
– Financial Inclusion Models Followed by Banks
– MUDRA Loans

21. Effective Funds Management through E-banking 415 – 420

22. Comprehensive Case Study 421 – 426

Overview of
1
Lending Activity Chapter
Learning Objectives

After going through this chapter,

you will learn:
1. Primary and Secondary
Functions of a Bank
2. Difference between Directed
Lending and Normal Lending
3. Meaning of Wholesale and
Retail Banking
4. Requirements for Effective
Lending Activity in a Bank
2 Chapter - 1 Bank Credit Management

Banks are institutions which mobilize savings from the public

and channelize the same to the various sectors of the economy.
INTRODUCTION Banks have been in existence in India since Vedic times. Sec.
5(b) of the Banking Regulation Act, 1949 defines ‘Banking’
as:
“ACCEPTING, FOR THE PURPOSE OF LENDING OR INVESTMENT, OF DEPOSITS OF
MONEY FROM THE PUBLIC, REPAYABLE ON DEMAND OR OTHERWISE AND
WITHDRAWABLE BY CHEQUE, DRAFT, ORDER OR OTHERWISE”.
Thus, Banks cannot just accept deposits and sit quite. For the deposits mobilized, they are required
to pay interest. In addition, the Bank has to meet various expenses in running the business like
establishment expenses, rent, lighting and other overheads. For taking care of the interest payment on
deposits and meeting overheads, the Bank has to effectively deploy the funds mobilized. The deposits can
be deployed in two ways as defined under the Banking Regulation Act, viz., lend as loans and advances
to the needy persons at a rate of interest which is normally more than what the bank pays for its deposit
customers or investment in some interest-yielding securities. (Note: The difference in the rate of interest
that a Bank charges on the amount lent and the rate it pays to the depositors is technically called
‘Spread’). It is important to note at this stage, the fact that from the ‘Spread’ Bank has to not only meet
all its overheads and interest on deposits but also provide for ‘Non-performing Loans’ or ‘Non-performing
Assets’ (NPAs).

Primary and Secondary Functions of a Bank

Functions of a Bank

PRIMARY SECONDARY

Accepting Lending or Collection of Issuance of

Deposits Remittances Cheques/Bills
Investment BGs/LCs/DPG

Cross Selling Safe Deposit Safe Custody

Vault

The activities that a banker performs in tune with the definition given in the Banking Regulation Act is
termed as ‘Primary Functions’, viz., accepting of deposits and lending of money (loans and advances). The
income that a Bank derives from the primary function is normally called as ‘Interest’.
Overview of Lending Activity Chapter - 1 3

The modern day banker does render a host of services which are not forming part of the primary functions
detailed above. These are known as ‘Secondary’ or ‘Ancillary’ functions. Some of the ancillary functions that a
bank performs are:
 Collection of Cheques and Bills of Exchange.
 Undertaking remittance facilities for the customers – Issuance of Demand Drafts or effecting
transfer of funds via TT, RTGS or NEFT (Telegraphic Transfer, Real Time Gross Settlement or
National Electronic Funds Transfer).
 Provision of Safe Deposit Lockers to customers to enable them to keep their belongings in a
safe and secure place.
 Safe Custody of articles, securities, Will and other important documents. Here, a sealed box or
closed cover is handed over to the banker by customers with a request to return him whenever
he demands. The box/cover would be kept in the Safe Vault of the Bank and will be under dual
custody and control of the Bank.
 Non-fund facilities – Issuance of Bank Guarantees, Letters of Credit or Co-acceptance of Bills
of Exchange (popularly called Deferred Payment Guarantee).
 Selling of Third Party products – Cross Selling – Insurance and Mutual Fund products,
Government Securities, etc. In fact, this function of bank is gaining vital importance because
of its ability to generate income without any further investment and need to provide any
additional capital or risk capital.
 The income that a Bank earns by performing ancillary functions is technically called ‘Fee-based
income’ or ‘CEB income’ (Commission, Exchange and Brokerage). All the banks are
concentrating more and more on increasing the share of fee-based income as the bank does not
take much risk in doing this business.

Banks cannot exist without performing the vital function, viz.,

lending. This is just like a human being cannot sit idle without
BUSINESS OF moving out of the house, even though he has all the facilities to
LENDING spend his time. Though banker can earn income by investing in
securities, the returns would comparatively be low and fraught
with more risks.
In India, the lending can be categorized into:
 Retail Lending and Wholesale Lending
 Directed Lending and Normal Lending
4 Chapter - 1 Bank Credit Management

Lending

Size of Advance Regulated Lending

Retail Lending Wholesale Lending Directed Lending Normal Lending

Retail and Wholesale Lending

Retail lending refers to the lending by banks to non-corporate borrowers, i.e., individuals and small
and medium businessmen. The ticket size of these advances would be small but the number of accounts
would be high. The advantages of retail lending are:
 The yield is normally high.
 The risk for the bank is diversified.
 Advancing to a greater number of customers and helping them in increasing their standard of
living.
 The level of NPA is generally very low.
 Ease of processing the loan proposals.
Wholesale lending is financing of corporate customers and institutional finance. Here, the size of
advance is large and the number of borrowers is relatively small. The products under this sector are quite
complicated and customized/structured to meet the specific needs of the client. Main advantages of
wholesale lending are:
 The follow-up is easier since the number of customers is small.
 Cost of maintenance is low.
 Since the ticket-size is big, personalized attention can be given to customers by attaching a
Relationship Manager for a group of accounts.
Though wholesale lending has above advantages, it suffers from serious deficiencies like:
 The risk for the bank is very high.
 The yields are low.
 The borrowers are highly demanding and in this era of competitive banking, many a time banks
are lending to this sector much below the cost of funds and not taking care of the prudent
principles of lending.
 Encourages concentration of wealth in the hands of a few.
Overview of Lending Activity Chapter - 1 5

Directed and Normal Lending

This type of classification of lending is very peculiar to developing countries. The banks are
commercial organizations and they would normally lend only to activities which are safe and yield good
returns. Due to various economic factors, the developing countries would like the banks to lend to sectors
which are important for social upliftment as well as economic growth or for generating foreign exchange.
In India, the central bank of the country, Reserve Bank of India, issues directives to commercial
banks in the area of lending. The sectors which were once-neglected but important for the development
of the Indian economy are designated as ‘Priority Sectors’. Banks are required to lend 40% of the Net
Bank Credit to these sectors. Here, the yield is comparatively low and the default risk is high. Lending
to these priority sectors and other areas on the basis of the directives of RBI or other government
departments is termed as ‘Directed Lending’. (Discussed in detail under the Chapter 4 on Regulatory
Framework).
Loans and advances of banks other than directed lending is termed as ‘Normal Lending’. Here,
banks have liberty in selection of the industries, sectors to be financed, etc.

Requirements for Lending

Just as any trader requires commodities in his stores for effecting sales, a banker requires funds for
lending.
Sources of Funds
 The primary source of funds for any business is owner’s capital. For banks too, the share capital
forms a source of fund. Unlike other industries, in banks this source constitutes a very small
portion. Before the Basel I norms, this constituted a very miniscule portion of the bank’s
resources (1-2%). Now, banks are required to maintain at least 9% of their risk-weighted
assets as capital. Post-implementation of Basel I norms, we do find that on an average, banks
have a capital of 10-11%.
 The main sources of funds for a banker comes from the deposits it mobilizes from the public.
From the point of view of cost of deposits, it would be better if CASA (Current and Savings
Accounts) constitute a sizable portion of the deposits. Almost all banks are focusing in the area
of improving the share of CASA.
 One other source is the ‘Reserves’ and ‘Undistributed Profits’.
 The next source of fund could be ‘Borrowings’. In view of the huge cost involved, this constitutes
a small portion of a Bank’s Balance Sheet (Less than 5% of the total funds).
Good Systems and Procedures: The bank should have good systems and procedures in place.
Updated manual of instructions giving details about various aspects of lending would be handy for fresh
recruits as well as those who work in the credit department first time.
Credit Policy: Every bank should have its own credit policy which should be in tune with the
credit policy of RBI, statutory requirements of the government, credit appetite of the bank and its
exposures to various sectors.
6 Chapter - 1 Bank Credit Management

Delegation of Powers: The bank should have an approved ‘Delegation of Powers’ document from
the Board. This should clearly give the details of the sanctioning/approval powers of various authorities
at the Branch and Administrative Offices.
Trained Manpower: Lending is both a science and an art. It is science insofar as there are various
rules and procedures that have to be strictly adhered to before granting an advance. It is an art because
the dealing officials are in constant touch with customers and have to be very tactful while transacting
the business. The credit officials cannot go by rule-book always. They should be very considerate to the
financial problems a businessman has and suggest solutions within the broad framework of credit policy
and guidelines of the bank. It is said that the banker is one who can nurture a successful entrepreneur by
supporting him at the times of need. To quote in a lighter vein:
‘Banker should not be the one who lends umbrella when it is shining and takes away when it is raining’.
If one wants to be a friendly and helpful banker, the officials should have right attitude. Hence, in
addition to imparting training in the areas of skills for building proposals, the dealing officers should be
trained in ‘attitude’ and other soft skill areas.

What is Credit Creation?

As already seen, banks accept deposits and lend a portion of it as credit or advances. As per normal
understanding, if a banker accepts deposits of say, ` 1 lakh, he should be able to lend up to a maximum
of ` 1 lakh as credit. Since, he has to keep a certain portion of it to take care of the demands of depositors,
his lending capacity is restricted by that amount. If, we take into account, that by past experience, the
banker is able to judge that about 20% of the amount collected as deposits would be required to meet
the daily requirements, the maximum lendable resources would be ` 80,000 (` 1,00,000 – 20,000).
Though, in the above cited illustration, the banker can lend upto a maximum of ` 80,000, in reality,
he can lend much more. Think that the banker lent ` 80,000 and this money was paid to the supplier of
goods to the borrower and the supplier deposits the cheque into another bank. The second banker, after
keeping 20% cushion, i.e., ` 16,000, lends ` 64,000 to his customer who issues cheques to his supplier.
This third customer deposits with his banker ` 64,000 and his banker lends ` 51,200 after keeping the
cushion of ` 12,800 (20%) and the process is continued, the amount of credit that a bank can lend would
be 5 times the original deposit of ` 1 lakh, i.e., ` 5 lakh. This is found by using the following formula:
Maximum credit creation = 1/cushion% * Original Deposit
= 1/0.20 * 1,00,000
= ` 5 lakh.
Are there any factors that restrict the amount of credit creation by banks?
YES. The capacity of credit creation depends on:
 The amount of cash required for day-to-day operations.
 Maintenance of Cash Reserve Ratio as per statutory requirements (In India, at present it is 6%
of NDTL). (Monetary policy of the central bank of the country).
 Investment in Statutory Liquidity Ratio (at present it is 24% of NDTL).
* NDTL - Net Demand and Time Liabilities.
Overview of Lending Activity Chapter - 1 7

 Level of banking culture among the people – Higher the level, lower the cash requirement and
greater the power of credit creation
 Non-continuance of Chain of Credit Creation, i.e., if the banks do not extend credit up to the
maximum potential (80% of the amount of deposits in our illustration) and/or any of the
parties in the chain not depositing the entire amount in a bank and wishes to hold as Physical
Cash.

Flow Chart of a Credit Creation Cycle

Customer A deposits
` 1 lakh with Bank A

Bank A lends ` 80,000/-

to Customer M

Customer M issues cheques

to his Supplier N

Supplier N deposits the cheque

of ` 80,000/- with his Bank B

Bank B lends to Customer O

` 64,000/-

Customer O issues cheques

to his Supplier P

Supplier P deposits the cheque

of ` 64,000/- in Bank C

Bank C gives loan of

` 51,200/- to Customer Q

And so on …. and if process is continued

Total Credit Creation would be ` 5 lakh
8 Chapter - 1 Bank Credit Management

Summary
 Bank is accepting f or the purpose of income” – Commission, Exchange and
lending or investment of deposits of money Brokerage.
from the public, repayable on demand or  Lending activity of a bank can be either
otherwise. Directed Lending or Normal Lending.
 Primary function of a banker is accepting of Directed Lending is as per some directions
deposits and lending of funds/investment in of the Government or Central Bank of the
profitable securities. country. Another classification is “Wholesale”
 In addition to primary function, a banker and “Retail” lending depending on whether
offers several other services called Ancillary it is for Corporates or Non-corporates.
Services or Secondary functions. Some of  For activity of lending, a bank requires funds
them are remittance facilities, Safe Deposit (main source being deposits), good systems
lockers, collection of cheques, cross selling and procedures in place, delegation of powers
of insurance, mutual fund products, etc. explicitly stated, trained manpower, etc.
 Income from primary function is ‘Interest”
and that from subsidiary services “Fee-based

Review Questions
1. How is banking defined under Banking Regulation Act, 1949?
2. What are the main functions of a Bank?
3. What are the subsidiary functions of a Bank?
4. What is Directed Lending and Normal Lending?
5. Distinguish between Wholesale Lending and Retail Lending.
6. What are the sources of funds available to a Bank for lending?
7. Other than funds what other things are needed for the activity of lending?

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