1. Meaning of Loan and Advance

• A loan is money provided by a bank or other lender to a borrower with an obligation to repay the amount according to agreed terms.
• An advance is a broader banking term used for credit facilities provided by banks. In banking examinations, “loans and advances” is commonly used as a combined expression for a bank's lending portfolio.
• The borrower normally pays interest or another applicable financing charge on the amount used or outstanding, depending on the facility.
• A credit facility may be sanctioned for a particular purpose, tenure, amount and repayment structure.
• Bank lending is an important source of income for banks because interest earned on advances is a major component of banking revenue.
• At the same time, lending creates credit risk: the borrower may fail to repay principal or interest as agreed.

2. Why Banks Give Loans

• Banks act as financial intermediaries by mobilising deposits and deploying funds through loans and investments.
• Lending supports consumption, housing, education, agriculture, trade, manufacturing, infrastructure and business activity.
• Loans can help households purchase assets or meet planned expenses.
• Business finance helps firms meet working-capital and investment requirements.
• A healthy loan portfolio generates interest income for the bank.
• Banks must balance profitability with liquidity, capital adequacy, asset quality and risk management.

3. Major Types of Bank Loans and Advances

Facilities can be further classified according to purpose, tenure, security, borrower type, repayment structure and regulatory treatment.

4. Term Loan

• A term loan is sanctioned for a specified amount and a specified repayment period.
• The borrower generally repays the principal over the agreed schedule, which may include periodic instalments.
• Interest may be charged at a fixed or floating rate depending on the product and applicable terms.
• Term loans are commonly used for capital expenditure, machinery, vehicles, housing, infrastructure and other medium- or long-term funding requirements.
• A term loan may be secured or unsecured depending on the product, borrower profile and bank's credit policy.
• The repayment schedule is normally established at the time of sanction.

Term Loan Memory Point

Term = Time-bound repayment. The key feature is the defined tenure and repayment schedule.

5. Demand Loan

• A demand loan is a loan that is repayable on demand according to the terms of the facility.
• Unlike a conventional term loan, the defining concept is not a fixed instalment schedule extending over a predetermined tenure in the same manner.
• Demand loans can be used for short-term or specific financing needs.
• The bank may require security, guarantee or other credit support depending on the facility.

6. Cash Credit (CC)

• Cash Credit is a working-capital credit facility commonly used by businesses.
• The bank sanctions a limit up to which the borrower can draw, subject to the terms of the facility.
• The drawing power may be linked to eligible stocks, receivables or other current assets after applying prescribed margins.
• Interest is generally linked to the amount actually utilised/outstanding rather than simply the entire sanctioned limit.
• Cash credit is commonly associated with stock and receivable-based working-capital finance.
• The bank monitors stock statements, receivables and drawing power where applicable.

7. Overdraft (OD)

• An Overdraft facility allows an eligible customer to withdraw more than the available balance in an account, up to a sanctioned limit.
• It is generally used to meet short-term liquidity requirements.
• Interest is normally charged on the amount actually utilised/outstanding according to the facility terms.
• Overdrafts can be secured or unsecured depending on the arrangement.
• Some overdraft facilities may be linked to salary, deposits, securities or other eligible collateral.

Cash Credit vs Overdraft

8. Working Capital Finance

• Working capital refers to funds required for the day-to-day operations of a business.
• Businesses need working capital to purchase raw materials, maintain inventory, pay wages, meet operating expenses and manage receivables/payables.
• Cash credit and overdraft are common bank facilities used for working-capital needs.
• Working-capital assessment considers the operating cycle, current assets, current liabilities, sales, inventory and receivables, among other factors.
• Working-capital finance is different from long-term project finance used to create fixed assets.

Gross and Net Working Capital

• Gross Working Capital: total investment in current assets.
• Net Working Capital: Current Assets − Current Liabilities.
• Current assets may include inventory, trade receivables and cash/bank balances.
• Current liabilities may include trade payables and other short-term obligations.

9. Secured vs Unsecured Loans

10. Collateral, Primary Security, Guarantee and Mortgage

Primary Security

• The asset or current asset directly financed by the bank or forming the principal security for the facility.
• Example: inventory financed through working-capital limits can constitute primary security.

Collateral Security

• Additional security provided to secure the credit facility.
• Example: a borrower may provide another property as collateral for a loan, subject to bank policy and legal documentation.

Guarantee

• A third party may undertake to meet the borrower's obligation if the borrower defaults, according to the guarantee terms.
• A guarantee is a credit enhancement/support mechanism; it is not the same as collateral security.

Mortgage

• A mortgage is a legal arrangement creating an interest in immovable property to secure repayment of a debt or performance of an obligation.
• Housing finance commonly involves mortgage-related security over the financed property.

11. Major Retail Loan Categories

Exact product eligibility, collateral, interest rates, tenure and repayment conditions differ across lenders.

12. Interest, EMI and Repayment

• Principal is the amount borrowed.
• Interest is the charge for the use of borrowed funds, subject to the loan contract.
• EMI means Equated Monthly Instalment.
• An EMI normally contains both a principal component and an interest component for an amortising loan.
• In the early part of many amortising loans, the interest component can form a larger share of the EMI; over time, the principal component generally rises as the outstanding principal falls.
• A floating-rate loan can change in cost when the benchmark/reference rate or applicable lending-rate mechanism changes.
• A fixed-rate loan generally keeps the agreed interest rate fixed for the specified fixed-rate period, subject to product terms.

Simple Loan Formula Concepts

• Principal: amount borrowed.
• Outstanding: principal still due at a point in time.
• Tenure: period over which the facility is scheduled to be repaid.
• Margin: borrower's contribution or cushion required against the value of an asset/security, depending on the facility.
• Amortisation: gradual repayment of a loan through scheduled payments.

13. Loan Sanction and Documentation

• Loan application: borrower provides information about the purpose, income, business, assets, liabilities and requested facility.
• Credit appraisal: bank evaluates repayment capacity, credit history, cash flows, purpose, risk and security where applicable.
• Sanction: bank approves the facility subject to specified terms and conditions.
• Documentation: borrower completes required agreements, security documents, declarations and other formalities.
• Disbursement: bank releases funds after applicable conditions precedent are satisfied.
• Monitoring: bank tracks repayment, end use, financial performance, security and other risk indicators.

Creditworthiness

• Creditworthiness means the borrower's ability and willingness to repay.
• Banks may assess income, cash flow, existing debt, credit history, business performance, collateral and other relevant factors.
• Credit information companies provide credit reports/scores based on available credit data; the exact scoring model depends on the bureau and product.

14. Loan Monitoring and Early Warning Signals

• Loan monitoring continues after disbursement; sanction is not the end of the credit process.
• Banks monitor repayment behaviour, account turnover, financial statements, stock statements, receivables, covenant compliance and security where relevant.
• Early Warning Signals (EWS) can indicate rising stress before an account becomes an NPA.
• Examples include persistent overdue amounts, declining sales/cash flows, frequent cheque returns, excessive utilisation, diversion of funds and deterioration in security value.
• Effective monitoring helps banks identify stress early and take appropriate corrective action.

15. Special Mention Account (SMA)

SMA means Special Mention Account. It is a regulatory early-warning classification used for stressed accounts before they become NPAs.

16. Non-Performing Asset (NPA)

• NPA means Non-Performing Asset.
• For many bank loan facilities, a term-loan account is generally classified as NPA when interest and/or instalment of principal remains overdue for more than 90 days, subject to applicable RBI rules and facility-specific criteria.
• For revolving facilities such as cash credit and overdraft, the applicable “out of order” test is used rather than simply asking whether one instalment is 90 days overdue.
• NPA recognition is based on objective repayment/recovery criteria, not merely on the value of collateral.
• An NPA affects a bank's income recognition, asset classification, provisioning and overall asset quality.

17. Asset Classification

Under prudential norms, stressed loan assets are classified into prescribed categories.

• Standard → Sub-standard → Doubtful → Loss is a useful sequence for exam revision.
• Classification depends on regulatory criteria and the record of recovery.
• The mere existence of security does not automatically prevent NPA classification.

18. Provisioning

• Provisioning means recognising an expense/allowance against expected or identified losses and credit risk according to applicable prudential rules.
• Higher-risk or weaker asset categories generally require higher levels of provisioning under applicable norms.
• Provisioning protects the bank's financial statements against expected credit losses under the relevant prudential framework.
• Provisioning is different from an actual cash payment to a borrower or customer.
• Write-off and provision are also different concepts: a provision recognises expected/identified loss, while a write-off removes an amount from the books subject to applicable accounting and recovery treatment.

19. Important Loan Comparisons

Loan vs Advance

Cash Credit vs Overdraft

Secured vs Unsecured

SMA vs NPA

20. Common Banking Exam Traps

1. Loan is not the same as deposit. Deposit is money raised by the bank; loan is money lent by the bank.
2. Cash credit is mainly a working-capital facility.
3. Overdraft allows drawing beyond available account balance up to a sanctioned limit.
4. Sanctioned limit is not the same as utilised amount.
5. Secured loan does not mean zero credit risk.
6. Collateral and guarantee are different.
7. Primary security and collateral security are different concepts.
8. SMA is not NPA.
9. For standard term-loan NPA questions, more than 90 days overdue is the key number.
10. CC/OD accounts use an “out of order” test.
11. Security value alone does not decide whether an asset is an NPA.
12. Provisioning is not the same as write-off.
13. Working capital is for day-to-day operations; project finance generally funds longer-term asset creation.
14. EMI contains principal and interest components in an amortising loan.
15. Demand loan is associated with repayment on demand under the facility terms.

21. Rapid Revision: 40 One-Line Facts

1. Loan = borrowed funds that must be repaid according to agreed terms.
2. Advance is a broad banking term for credit facilities.
3. Bank lending generates interest income but creates credit risk.
4. Term loan has a defined tenure.
5. Demand loan is repayable on demand according to its terms.
6. Cash credit is primarily a working-capital facility.
7. Overdraft permits drawing beyond available balance up to a sanctioned limit.
8. Working capital supports day-to-day business operations.
9. Gross working capital = total current assets.
10. Net working capital = current assets − current liabilities.
11. Secured loans have specified security support.
12. Unsecured loans generally have no specific collateral.
13. Collateral is additional security.
14. Primary security is directly linked to the financed activity/facility.
15. Guarantee involves a third party's promise under agreed terms.
16. Mortgage relates to security over immovable property.
17. EMI = Equated Monthly Instalment.
18. Principal is the borrowed amount.
19. Outstanding is the unpaid balance at a point in time.
20. Tenure is the scheduled loan period.
21. Amortisation is gradual repayment through scheduled payments.
22. Loan appraisal evaluates repayment capacity and risk.
23. Sanction means approval subject to conditions.
24. Disbursement means release of sanctioned funds after required conditions.
25. Loan monitoring continues after disbursement.
26. EWS = Early Warning Signals.
27. SMA = Special Mention Account.
28. SMA is an early-warning category.
29. SMA-1 corresponds to more than 30 and up to 60 days overdue for relevant non-revolving facilities.
30. SMA-2 corresponds to more than 60 and up to 90 days overdue for relevant non-revolving facilities.
31. NPA = Non-Performing Asset.
32. For relevant term-loan facilities, NPA generally starts at more than 90 days overdue.
33. CC/OD uses an out-of-order test.
34. Standard asset is not an NPA.
35. Sub-standard, doubtful and loss are stressed asset categories.
36. Provisioning recognises loss allowance according to applicable norms.
37. Write-off and provisioning are not identical.
38. Collateral does not automatically prevent NPA classification.
39. Asset classification is based on applicable prudential criteria.
40. Always check the latest RBI directions for live regulatory questions.

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23. Official Verification Sources

• Reserve Bank of India: RBI's Handbook on Regulations at a Glance provides the current regulatory overview of Income Recognition, Asset Classification and Provisioning (IRACP), including SMA and NPA criteria.
• Reserve Bank of India: RBI prudential-norm material explains NPA recognition, asset classification, provisioning and “out of order” treatment for revolving facilities.
• Current-rule warning: Lending rules, product conditions, interest rates, provisioning requirements and regulatory thresholds can change. Verify live questions against the latest RBI directions and applicable bank policy.

How to Study Loans & Advances for Banking Exams

• First memorise the five basic facilities: Term Loan, Demand Loan, Cash Credit, Overdraft and Bill/Invoice Finance.
• Then learn Secured vs Unsecured, Primary Security vs Collateral and Guarantee vs Mortgage.
• Understand working capital and why cash credit is associated with it.
• Memorise SMA-1, SMA-2 and the more-than-90-day NPA concept.
• Practise CC/OD “out of order” questions separately because they are frequently confused with simple overdue-day rules.
• Revise Standard → Sub-standard → Doubtful → Loss as the basic asset-classification sequence.
• Combine these static concepts with monthly Banking Awareness current affairs for questions involving RBI regulations and recent credit developments.