To individuals, banks provide overdrafts against salaries and fixed deposits, education loans for educating children (usually technical, medical or management), home loans to own a house to live in, auto or car loans to buy a car to ride in, personal loans for special events like daughter’s wedding or financing a holiday abroad with family, and so on. Banks also provide credit cards wherein purchases made within a one-month period is billed for payment within the next 15-20 days (thereby providing a maximum credit period of up to 50 days). The billing cycle along with the billing date and the due date remain almost the same every month. Interest is charged only if the entire outstanding is not repaid on or before due date.

To businesses, banks provide term loans (TL) to part-finance projects (factory and office buildings, plant and machinery, furniture and fixture, ERP, etc.) and working capital (WC) assistance in the form of cash credit facility (or unsecured overdraft – only small value exposures) (to purchase stocks (for manufacturers) and stocks-in-trade (for traders)) as well as bill purchasing facility (on fund receivables from debtors). Banks also provide non-fund-based assistance in the form of letters of credit (to procure raw materials (for manufacturers) and stocks-in-trade (for traders)) and of bank guarantees (can be used as bid bonds or pure financial guarantees or performance guarantees). WC assistance is provided for a period of one year, and reassessed or renewed every year. TL assistance is reviewed every year during its entire tenure (usually anything between 3 to 10 years).

When a lender disburses a loan sanctioned to a borrower, it is usually done after creating charge on some tangible securities. Primary securities are those assets which are created out of the loans disbursed. E.g., fixed assets are primary securities for term loans and current assets are primary securities for working capital loans. Collateral securities, on the other hand, are additional securities which the lender may fall back on in case the account becomes an NPA and recovery is required to be made out of these assets too charged to the lender. E.g., shares in the name of the promoters pledged to the lender or equitable mortgage of the promoters’ residential properties are collateral securities.

Credit risk, or probability of default of an existing or new loan application, is usually an aggregation of scores gauged on four or five different sets of parameters. For working capital exposures, these are: promoter or management risk, industry risk, business risk and financial risk. For projects or term loans: project risk is added to the initial four. The higher the aggregate score as per the lender’s parameters, the lower the probability of default, therefore risk.

Export oriented units enjoy subsidised working capital finance, with a view to make pricing of our exports more competitive in international market. Pre-shipment finance is referred to as Export Packing Credit (EPC) and post-shipment finance is referred to as Foreign Bill Discounted or Purchased (FBD / FBP). While EPC and FBD / FBP are offered in INR (Indian Rupees), pre-shipment and post-shipment credit may also be offered in Foreign Currency as Packing Credit Foreign Currency (PCFC) and Post Shipment Credit Foreign Currency (PSFC).