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Banking Terms - Loans and Debts

Banking terms important for bank exams. These terms are frequently used in Loans and debts departments :-

1. Reverse Mortgage

Reverse Mortgage also known as ‘Life time mortgage’, is a type of mortgage in which a home owner can borrow money against the value of his or her home. Thus it is a loan allowed to the sole owner of the house, and no repayment of wither the interest or the principal is required till the time the borrower is alive.

Such a loan is repaid when the borrower(s) die, or the house is sold, or the borrower no longer lives in the house as their place of primary residence.

2. Pre-sanction Appraisal


Pre-sanction Appraisal: i.e., pre-loan sanction credit appraisal, which essentially means undertaking appraising activities to ensure that the prospective borrower is credit worthy.

It is undertaken to ensure that the sanctioned loan will be performing and not turn bad/NPA.

Information like, purpose for taking the loan, work of the borrower, his income and profit, securities offered, collateral securities if any etc. among other things are appraised before the loan is sanctioned.

3. Restructured Loan


Restructured Loan Some times a new loan is made that replaces the outstanding balance (unpaid amount) on an older/earlier loan. This new loan has a longer term/ period of payment and usually comes with a lower installment amount – to make it easier for the borrower to pay the installments and to avoid the loan from becoming bad.

Loans are rescheduled or restructured to accommodate a lender who is in financial difficulty to avoid defaults in the account; thus it can also be called as re-scheduled loans.

4. Willful Default

Willful Default happens when a ‘borrower intentionally defaults in meeting payment/ repayment obligations’ – this is the proper banking language!

In other words, when a party (borrower) fails to pay installments, even though they have the capacity to pay, i.e., they have enough extra funds to pay the installment, but still does not pay – then willful default is being committed and the person is known as a willful defaulter.

Trivia: Mr. Vijay Mallya owned Kingfisher Airlines was recently declared as a ‘willful defaulter’ by United Bank of India (later other banks in the consortium followed).

5. Consortium Financing

Consortium Financing: when big companies like the erst-while Kingfisher airlines, Reliance, etc., need loans, the amount is always huge. When I say huge it means hundreds of lakhs or crores!

For one bank to be funding the whole thing could be risky and as we saw with the grounding of Kingfisher very damaging to a single bank – the bank would face closure too!

RBI does not allow any single bank to take on such huge risk by itself – thus, through ‘consortium financing’ – several participating banks come together to give the loan, each having their own risk exposure separately, which cannot exceed 15% of their capital fund.

6. Loan Syndication


Loan Syndication is like consortium finance where borrower is one but lending banks are multiple. But in syndication, the Bank with the maximum share of the loan amount is regarded as the lead bank..

A Managing Bank is appointed by the borrower and is responsible for negotiating terms of loan with the other banks willing to participate, known as the participating banks.

Where loan documentation is concerned, a ‘single common loan document’ is used for syndicated loan.

7. Infrastructure Sector Lending

Infrastructure Sector Lending lending to companies engaged in:
i. Power
ii. Telecommunications,
iii. Roads and Bridges,
iv. Railways,
v. Airports,
vi. Sea Ports,
vii. Industrial Parks,
viii. Water supply, sanitation, sewage system,
ix. Mining,
x. cold storage for storage of agricultural produce, marine products, meat etc.

8. Floating Interest Rates

Floating Interest Rates are interest rates which are susceptible to change due to change in anchor rate. Anchor rate or the bench-mark interest rate is the rate which is the underlying rate on the basis of which banks decide their floating rates.

Thus floating rates are linked to the benchmark rate; any change in the benchmark rate will affect the floating rate.

The bench mark rate could be interest rate on Govt. securities or money market rate etc.

9. Debt Recovery Tribunal

Debt Recovery Tribunal are Tribunals where banks can file suits for outstanding loans or Rs.10 lacs or more. DRT’s jurisdiction covers Bank Loans and loans of Financial Institutions

10. Asset Reconstruction Company


Asset Reconstruction Company: are companies which are engaged in the activity of financial asset reconstruction such as securitization, take over of management, sale of assets charged etc.
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