Lending, Credit & Interest Rates

Recommended prerequisites: Module 01 - Money & Banking Foundations; Module 05 - Deposits & Bank Accounts.

Purpose of this module: Lending is the core asset-side activity of a bank. Deposits tell us where banks obtain a large part of their funding; lending tells us how banks deploy that funding while managing credit risk. This module explains the full logic of credit: why banks lend, how a loan is appraised and sanctioned, what collateral and security mean, how pledge differs from hypothecation and mortgage, what fund-based and non-fund-based facilities are, how loan rates are benchmarked, and how credit information and credit scores influence lending decisions.

What you will learn

By the end of Module 06, you should be able to:

1. explain the difference between a loan, advance and credit facility;
2. describe the full bank credit process from application to closure;
3. distinguish sanction, documentation, disbursement, monitoring and recovery;
4. explain the basic principles of credit appraisal;
5. distinguish secured and unsecured lending;
6. distinguish primary security from collateral security;
7. explain pledge, hypothecation, mortgage, lien and assignment;
8. distinguish cash credit, overdraft, term loan and bill finance;
9. distinguish fund-based from non-fund-based credit;
10. explain letters of credit and bank guarantees at a conceptual level;
11. distinguish financial guarantees from performance guarantees;
12. understand fixed-rate, floating-rate and hybrid loans;
13. explain Base Rate, MCLR and external benchmark lending;
14. understand why retail and MSME floating-rate loans use external benchmarks;
15. distinguish benchmark rate from spread and final lending rate;
16. understand KFS, APR, penal charges and fair lending practices;
17. explain floating-rate EMI reset risks and borrower options;
18. understand why banks use credit information reports and credit scores;
19. distinguish a credit score from a credit rating;
20. name the major RBI-registered Credit Information Companies; and
21. explain why a credit score is an input to underwriting rather than an automatic loan-approval guarantee.