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BANKING CONCEPTS
LOANS AND ADVANCES(CREDIT)
January 1, 2016
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  LOAN AND ADVANCES ( CREDIT)

 

All loans are shown as ‘asset’ in the balance sheet of the bank. Interest earned on loans is the major source of income for the banks. However, as the banks make all their loans from the money received as deposits from the public, they have to be very judicious in making loans and have to ensure timely recovery of loans.

 

FIXED RATE OF INTEREST

When the loan are sanctioned at a rate which will not change during the tenure of the loan.

 

FLUCTUATING I FLOATING RATE OF INTEREST

The interest rate which may increase or decrease in the coming times. In other words, it is opposite of fixed rate of interest.

EM I: Equated Monthly Installment refers to monthly installment fixed for repayment of any term loan, where part of interest is also included in the installment.

 

BALLOON PAYMENT

The last installment of a term loan paid to finally close the account. It may be larger or smaller than the regular EMI

CHECK OFF FACILITY

It is a system where the employer agrees to deduct the amount of EMI of the loan taken by its employees, from the salary of the employee and deposits it directly with the loan giving bank.

 

TEASER RATE OF INTEREST

Interest rate that is low initially, but keeps on increasing gradually. Usually it is applied to housing loans as they have a long term.

 

ESCROW ACCOUNT

A special account opened for a borrower to receive all his incomes and inward receipts. Later on, bank decides as to what amount has to be shared with the borrower and balance is appropriated towards repayment of bank dues and other statutory dues.

 

 

SUB-VENTION

It is a kind of subsidy announced by government on interest payable to banks by the borrowers. Unlike subsidy which is given in the beginning, the subvention portion of interest has to be recovered by the bank from the government. For example, at present, subvention of 2 %is available on export loans, and rate of interest happens to be 7%, the bank will charge calculate interest @ 7%, but will charge only 5% to the borrower and recover 2 %from the government. Further, subvention of 3 is available of farm loans up to Rs. 3 lacs if the loan is paid in time. A subvention of 1% is available housing loans of up to Rs. 15 lacs, provided the total cost of house does not exceed 25 lacs.

 

RETAIL LOANS

Refers to various popular loans today such as housing loan, car loans, bike loans, education loan, personal loan etc. Basically, these are comparatively small amount loans made to individuals.

 

DOCUMENTATION

Process of obtaining necessary agreements, documents for recording the terms and conditions of various loans is called documentation. It is done in accordance of legal requirements to enable the bank to file a claim in the courts of law. If documentation is incomplete/defective, the bank’s claim will not be valid in the eyes of law.

Most of the documents are valid for a period of three years only from the date of execution and thus they have to be renewed or revived before three years otherwise they become invalid or time barred / expired.

 

FINANCIAL STATEMIENTS

 

Various statements that record financial health and transactions of any business organization, such as balance sheet, profit and loss account, funds flow, cash flow statements.

 

CREATING A CHARGIE

It refers to the legal process of establishing banks interest in a security which is offered to the bank for securing a loan. It may be noted that even after creating a charge, ownership of assets charged remains with the borrower. Further, except in case of pledge, possession of the item also remains with the borrowers. Charges are of three main types as under:

REVERSE MORTGAGE

A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan. This product is particularly suitable for elderly people who have no source of income but have some good property in their name. They can mortgage the property with the bank and bank will pay them monthly installments till the agreed period. At the end of the loan term, total sum of the installments paid along with interest due will be recovered from the borrowers or in case of death of borrower, from the sale proceeds of the property.