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Credit & Lending Basics

Banking / Economy Awareness · Banking System & RBI

Overview

Bank credit ranges from working-capital limits to term loans; pricing is linked to benchmarks and borrowers are assessed by credit history.

Key points

Term loans finance long-term assets; working-capital loans fund day-to-day operations.
Overdraft lets an account holder draw beyond the balance up to a limit; cash credit is a working-capital limit against stock or receivables.
MCLR replaced the base rate in 2016; most new retail floating loans are linked to an external benchmark such as the repo rate (from October 2019).
Priority sector lending target for domestic commercial banks is 40% of adjusted net bank credit.
Credit scores (e.g. CIBIL) range from 300 to 900; higher is better.

Explanation

Secured loans have collateral; unsecured loans do not.
EMI includes both interest and principal.
Priority sectors include agriculture, MSMEs, education, housing and weaker sections.
Moratorium means a temporary pause in repayment.

Step by step

Identify the institution, rule or instrument asked.
Recall its definition, year, limit or function from a table.
Eliminate options from similar institutions or older rules.

Examples

The priority sector target for domestic commercial banks → 40% of ANBC.
The benchmark that replaced the base rate in 2016 → MCLR.
A credit score range in India → 300 to 900.

Traps and advanced points

Trap: Mixing overdraft and cash credit.
Trap: Thinking MCLR is still used for all new retail loans.
Trap: Wrong PSL percentage.

Quick revision

PSL 40% ANBC.
MCLR 2016; external benchmark 2019.
CIBIL 300–900.

Practice MCQs

In banking/finance, what does “mutual fund” refer to most accurately?
1. risk that a borrower/counterparty fails to meet obligations
2. pooled investment vehicle managed according to a stated scheme mandate
3. Magnetic Ink Character Recognition
4. Real Time Gross Settlement
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Answer: (b) pooled investment vehicle managed according to a stated scheme mandate. Investors hold units of the scheme.
Which banking/finance term is best described as: Immediate Payment Service?
1. NABARD
2. cash flow
3. IMPS
4. capital adequacy
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Answer: (c) IMPS. Instant interbank electronic funds transfer service.
Which banking/finance term is best described as: Reserve Bank of India?
1. financial inclusion
2. balance sheet
3. RBI
4. RTGS
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Answer: (c) RBI. India’s central bank; monetary policy and banking-system functions are core exam areas.
Which banking/finance term is best described as: deposit withdrawable on demand subject to account terms?
1. CRR
2. demand deposit
3. cash flow
4. SIDBI
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Answer: (b) demand deposit. Current and savings accounts are common demand-deposit categories.
Which banking/finance term is best described as: signing/instruction used to transfer or negotiate an instrument where legally applicable?
1. DICGC
2. solvency
3. capital adequacy
4. endorsement
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Answer: (d) endorsement. Rules depend on the type of instrument and endorsement.
Which term-description pair is correctly matched for the concept “working capital”?
1. working capital — ability to meet long-term obligations / maintain financial viability
2. EMI — funds used for day-to-day operating needs
3. working capital — Equated Monthly Instalment
4. working capital — funds used for day-to-day operating needs
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Answer: (d) working capital — funds used for day-to-day operating needs. Working capital — funds used for day-to-day operating needs. Often analysed through current assets/current liabilities and operating cycle.
In banking/finance, what does “working capital” refer to most accurately?
1. Reserve Bank of India
2. ability to meet short-term obligations
3. funds used for day-to-day operating needs
4. risk of losses from adverse market-price movements
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Answer: (c) funds used for day-to-day operating needs. The correct answer is “funds used for day-to-day operating needs”. Often analysed through current assets/current liabilities and operating cycle.
Which banking/finance term is best described as: funds used for day-to-day operating needs?
1. reverse repo / liquidity absorption operations
2. PFRDA
3. working capital
4. operational risk
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Answer: (c) working capital. Working capital — funds used for day-to-day operating needs. Often analysed through current assets/current liabilities and operating cycle.
A loan to buy machinery for long-term use is a —
1. overdraft
2. call money
3. term loan
4. working-capital loan
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Answer: (c) term loan. Long-term assets.
Loans that fund day-to-day operations are —
1. term loans
2. working-capital loans
3. home loans
4. bonds
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Answer: (b) working-capital loans. Working capital.