Definition of a Bank

A bank is a financial institution which performs the deposit and lending function. A bank allows a
person with excess money (Saver) to deposit his money in the bank and earns an interest rate.
Similarly, the bank lends to a person who needs money (investor/borrower) at an interest rate.
Thus, the banks act as an intermediary between the saver and the borrower.
The bank usually takes a deposit from the public at a much lower rate called deposit rate and lends
the money to the borrower at a higher interest rate called lending rate.
The difference between the deposit and lending rate is called ‘net interest spread’, and the interest
spread constitutes the banks income.

Essential Features/functions of the Bank

Financial Intermediation

The process of taking funds from the depositor and then lending them out to a borrower is known as
Financial Intermediation. Through the process of Financial Intermediation, banks transform assets
into liabilities. Thus, promoting economic growth by channelling funds from those who have surplus
money to those who do not have desired money to carry out productive investment.
The bank also acts as a risk mitigator by allowing savers to deposit their money safely (reducing the
risk of theft, robbery) and also earns interest on the same deposit. Bank provides services like
saving account deposits and demand deposits which allow savers to withdraw money on an
immediate basis thus, providing liquidity (which is as good as holding cash) with security.

Importance of Banking Sector in a Country

The banking system of a country has the capability to heavily influence the development of a
country’s economy. It is also instrumental in the development of rural and suburban regions of a
country as it provides capital for small businesses and helps them to grow their business. The
organized financial system comprises Commercial Banks, Regional Rural Banks (RRBs), Urban Co-
operative Banks (UCBs), Primary Agricultural Credit Societies (PACS) etc. caters to the financial
service requirement of the people. The initiatives taken by the Reserve Bank and the Government
of India in order to promote financial inclusion have considerably improved the access to the formal
financial institutions. Thus, the banking system of a country is very significant not only for economic
growth but also for promoting economic equality.

● Banking is an integral part of the whole financial sector. It affects the country’s economy by
providing investment, credit, and infrastructure.
● The banking sector plays a significant role in the economic growth and development of any
country.
● The global banking sector is estimated to be over USD 20 trillion. It includes trade, finance,
insurance, and investment activities of banks.
● With the advent of computers and microprocessing machines, now most banks have been
automated. Financial transactions have been made easier and quicker. With the easy
availability of funds, entrepreneurs can get more funds for their businesses.
● The Banking Sector has also helped poor farmers in developing countries by providing them
with credit facilities.
● The banking sector has also been criticized for not providing people with sufficient access to
funds, a lack of transparency, too big of a size, and its role in the global economy.
Structure of the Indian Banking System
Reserve Bank of India is the central bank of the country and regulates the banking system of India.
The structure of the banking system of India can be broadly divided into scheduled banks, non-
scheduled banks and development banks.
Banks that are included in the second schedule of the Reserve Bank of India Act, 1934 are
considered to be scheduled banks.
All scheduled banks enjoy the following facilities:
● Such a bank becomes eligible for debts/loans on bank rate from the RBI
● Such a bank automatically acquires the membership of a clearing house.
All banks which are not included in the second section of the Reserve Bank of India Act, 1934 are
Non-scheduled Banks. They are not eligible to borrow from the RBI for normal banking purposes
except for emergencies.
Scheduled banks are further divided into commercial and cooperative banks.

Scheduled, Non-Scheduled Banks and Development Banks-

Commercial Banks
The institutions that accept deposits from the general public and advance loans with the purpose of
earning profits are known as Commercial Banks.
Commercial banks can be broadly divided into public sector, private sector, foreign banks and
RRBs.
● In Public Sector Banks the majority stake is held by the government. After the recent
amalgamation of smaller banks with larger banks, there are 12 public sector banks in India
as of now. An example of Public Sector Bank is State Bank of India.
● Private Sector Banks are banks where the major stakes in the equity are owned by private
stakeholders or business houses. A few major private sector banks in India are HDFC Bank,
Kotak Mahindra Bank, ICICI Bank etc.
● A Foreign Bank is a bank that has its headquarters outside the country but runs its offices as
a private entity at any other location outside the country. Such banks are under an obligation
to operate under the regulations provided by the central bank of the country as well as the
rule prescribed by the parent organization located outside India. An example of Foreign Bank
in India is Citi Bank.
● Regional Rural Banks were established under the Regional Rural Banks Ordinance, 1975
with the aim of ensuring sufficient institutional credit for agriculture and other rural sectors.
The area of operation of RRBs is limited to the area notified by the Government. RRBs are
owned jointly by the Government of India, the State Government and Sponsor Banks. An
example of RRB in India is Arunachal Pradesh Rural Bank.

Cooperative Banks
A Cooperative Bank is a financial entity that belongs to its members, who are also the owners as
well as the customers of their bank. They provide their members with numerous banking and
financial services. Cooperative banks are the primary supporters of agricultural activities, some
small-scale industries and self-employed workers. An example of a Cooperative Bank in India is
Mehsana Urban Co-operative Bank.
At the ground level, individuals come together to form a Credit Co-operative Society. The individuals
in the society include an association of borrowers and non-borrowers residing in a particular locality
and taking interest in the business affairs of one another. As membership is practically open to all
inhabitants of a locality, people of different status are brought together into the common
organization. All the societies in an area come together to form a Central Co-operative Banks.
Cooperative banks are further divided into two categories - urban and rural.
● Rural cooperative Banks are either short-term or long-term.
○ Short-term cooperative banks can be subdivided into State Co-operative Banks,
District Central Co-operative Banks, Primary Agricultural Credit Societies.
○ Long-term banks are either State Cooperative Agriculture and Rural Development
Banks (SCARDBs) or Primary Cooperative Agriculture and Rural Development Banks
(PCARDBs).
● Urban Co-operative Banks (UCBs) refer to primary cooperative banks located in urban and
semi-urban areas.
Development Banks

● Development banks are financial institutions that provide long-term credit for capital-intensive
investments with long payback periods, such as urban infrastructure, mining and heavy
industry, and irrigation systems.
● Such banks frequently lend at low and stable interest rates in order to encourage long-term
investments with significant social benefits.
● Term-lending institutions and development finance institutions (DFIs) are other names for
development banks.

Features of Development Bank

The following are the primary characteristics of a development bank:
● It is a type of financial institution.
● It provides business units with medium and long-term financing.
● Unlike commercial banks, it does not accept public deposits.
● Its motivation is to serve the public good rather than to make a profit. It works in the best
interests of the country as a whole.
● It is fundamentally a development bank. Its primary goal is to promote economic
development in developing economies by encouraging investment and entrepreneurial
activity. It promotes new and small businesses and seeks balanced regional growth.
● It provides financial assistance not only to private-sector enterprises but also to public-sector
enterprises.
● It aims to instill the habit of saving and investing in the community.
● It does not compete with traditional financial channels, i.e., finance already made available
by banks and other traditional financial institutions. Its primary function is that of a gap-filler,
filling in the gaps in existing financial facilities.

Objectives of Development Bank

The development banks' primary goals are as follows:
● to encourage industrial development,
● to develop regressive areas,
● to increase the number of job opportunities,
● to boost exports and encourage import substitution
● to promote technological advancement and modernization,
● to encourage more self-employment initiatives,
● to resurrect sick units,
● to improve large-industry management through training,
● to eliminate regional disparities or imbalances,
● to encourage the advancement of science and technology in new areas by providing risk
capital,
 ● to improve the country's capital market

Development Important information regarding DFI

Bank/DFI

IFCI ● It is India's first DFI. The Industrial Corporation of India was founded
in 1948.
● This was later renamed as Industrial Financial Corporation of India.
● The IFCI was the first specialized financial institution set up in India to
provide term finance to large industries in India. It was established on
1st July, 1948 under the Industrial Finance Corporation Act of 1948.
● It operated under the jurisdiction of the Ministry of Finance,
Government of India.
● Functions of IFCI:
○ For setting up a new industrial undertaking.
○ For expansion and diversification of existing industrial
undertakings.
○ For renovation and modernization of existing concerns.
○ For meeting the working capital requirements of industrial
concerns in some exceptional cases.
ICICI ● The World Bank's initiative resulted in the establishment of the
Industrial Credit and Investment Corporation of India Limited in 1955.
● In 1994, it established its subsidiary company, ICICI Bank Limited.
● ICICI Limited was merged into ICICI Bank Limited in 2002, making it
the country's first universal bank.

IDBI ● The Industrial Development Bank of India was established in 1964 by

the Reserve Bank of India and was granted autonomy in 1976.
● It is in charge of ensuring an adequate flow of credit to various
sectors.
● In 2003, it was transformed into a Universal Bank.
IRCI ● In 1971, the Industrial Reconstruction Corporation of India (IRCI) was
established.
● It was established to resurrect weak units and provide financial and
technical assistance.

SIDBI ● Small Industries Development Bank of India (SIDBI) was set up under
an Act of Parliament in 1990. Though it was a wholly owned
subsidiary of Industrial Development Bank of India, presently the
ownership is held by 33 Government of India owned / controlled
institutions. It is headquartered in Lucknow.
● Functions:
○ To initiate steps for technological upgradation and
modernization of existing units.
○ To expand the channels for marketing the products of SSI
sector in domestic and international markets.
○ To promote employment oriented industries especially in semi-
urban areas to create more employment opportunities and
thereby checking migration of people to urban areas.
EXIM Bank ● The Export-Import Bank of India (Exim Bank) is a public sector
financial institution created by an Act of Parliament, the Export-import
Bank of India Act, 1981.
● The business of Exim Bank is to finance Indian exports that lead to
continuity of foreign exchange for India.
● The Exim Bank extends term loans for foreign trade.
●
NABARD ● The National Bank for Agriculture and Rural Development (NABARD)
was founded in July 1982.
● It was founded on the Shivraman Committee's recommendation.
● NABARD is the apex institution in the country which looks after the
development of the cottage industry, small industry and village
industry, and other rural industries.
● It is completely owned by Government of India
● It is the most important institution in the agricultural and rural sectors.
● It serves as a refinancing institution.

NHB ● The National Housing Bank (NHB) was founded in 1988.

● The institution owned by the Reserve Bank of India was established to
promote private real estate acquisition. Now it is owned by the
Government of India.
● The NHB is regulating and re-financing social housing programs and
other activities like research etc. Its vision is promoting inclusive
expansion with stability in housing finance market.
● It is the most important institution in the housing finance industry.
Role of banking sector in economic development

Indian banking plays a big role in the development of the economy of India. It is the backbone of
any country’s economy, and its well functioning is essential for nation-building. Banking is an
important aspect of any country’s economy. The banking system of any country is critical to its
economic development because it serves as a formidable financial intermediary. Following are
some examples of why a sound banking system is important for developing countries like India

The banking system of a country performs functions like:

Advancement of Credit: Indian banking sector is one of the most active sectors in advancing loans
to individuals and institutions. It plays an important role in providing funds to different priority sectors
like Agriculture, Small scale industries, trading enterprises, real estate, etc.

Business Development: Indian banking sector helps a lot in business development by developing
strong ties with foreign countries through establishing branches. Indian banks also facilitate trade
and commerce by providing payment facilities to various local and international business houses.

Financial Security: Indian banking system provides financial security to the people by providing
loans at competitive rates, paying reliable remittance services, etc. It helps people save their money
and invest it in different financial instruments like Government securities, long-term bonds, etc.

Cash Management: Cash management plays a crucial role in the banking system. It allows banks
to provide quick cash and money transfer. It helps banks manage money transfers carried out by
various business houses and a large number of industrial units.

Financial stability: The Indian banking sector provides safe and secure financial services through
Money orders, Cash deposits, and cash card services.
Differentiated Banks-Small Finance Banks & Payment Banks

There are two kinds of banking licenses that are granted by the Reserve Bank of India – Universal
Bank Licence and Differentiated Bank Licence. Differentiated Banks (niche banks) are banks that
serve the needs of a certain demographic segment of the population. Small Finance Banks and
Payment Banks are examples of differentiated banks in India. The differentiation could be on
account of capital requirement, the scope of activities or area of operations. As such,
they offer a limited range of services/products or function under a different regulatory
dispensation.
Custodian Banks and Wholesale and Long-Term Finance banks (WLTF) are newly proposed
differentiated banks.
The concept of differentiated banks is not entirely new. In fact, and in a sense, the Urban Co
Operative Banks (UCBs), the Primary Agricultural Credit Societies (PACS), the Regional Rural Banks
(RRBs) and Local Area Banks (LABs) could be considered as differentiated banks as they operate in
localized areas.
But the present concept of differentiated banks can be said as first discussed in 2007. Thereafter,
the concept was once again discussed in a Paper “Banking Structure in India – The Way Forward”,
brought out by the Reserve Bank in August 2013. RBI granted in-principle approvals to 11 entities for
setting up payments banks (PBs) in August 2015 and 10 for Small Finance Bank (SFB) in September
2015.

Small Finance Banks (SFBs)

● They are niche banks that focus and serve the needs of a certain demographic
segment of the population.
● The objectives of setting up of small finance banks will be to further financial inclusion
by (1) the provision of savings vehicles (2) supply of credit to small business units;
small and marginal farmers; micro and small industries; and other unorganised sector
entities, through high technology-low cost operations.
● SFBs was recommended by the NachiketMor committee on financial inclusion.

Scope of activities of SFBs

● The small finance banks shall primarily undertake basic banking activities of
acceptance of deposits and lending to unserved and underserved sections including
small business units, small and marginal farmers, micro and small industries and
unorganised sector entities.
● There will not be any restriction in the area of operations of small finance banks.

Criteria for setting up SFBs

● Individuals/professions with 10 years of experience in finance, Non-Banking Financial
Companies (NBFCs), micro finance companies, local area banks are eligible to set up
SFBs.
● The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
 ● The promoter’s minimum initial contribution to the paid-up equity capital of such small
finance bank shall at least be 40 per cent and gradually brought down to 26 per cent
within 12 years from the date of commencement of business of the bank.
● The foreign shareholding in the small finance bank would be as per the Foreign Direct
Investment (FDI) policy for private sector banks as amended from time to time.
● The small finance banks will be required to extend 75 per cent of its Adjusted Net Bank
Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL)
by the Reserve Bank.
● SFBs have to maintain Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) as
per RBI norms.
● At least 50 per cent of its loan portfolio should constitute loans and advances of up to
Rs. 25 lakh.

What can Small Finance Banks do?

● Sell forex to customers.
● Sell mutual funds, insurance and pensions.
● Can convert into a full-fledged bank.

What Small Finance Banks can’t do?

● Extend large loans.
● Cannot float subsidiaries and deal in sophisticated products.

Payment Banks

● The objectives of setting up of payments banks will be to further financial inclusion by

providing (1) small savings accounts (2) payments/remittance services to migrant
labour workforce, low-income households, small businesses, other unorganised sector
entities and other users.
● They will not lend to customers and will have to deploy their funds in government
papers and bank deposits.

Scope of activities
● Acceptance of demand deposits-Payments bank will initially be restricted to holding a
maximum balance of Rs. 100,000 per individual customer.
● Issuance of ATM/debit cards-Payments banks, however, cannot issue credit cards.
● Payments and remittance services through various channels.
● Business Correspondents (BC) of another bank, subject to the Reserve Bank guidelines
on BCs.
● Distribution of non-risk sharing simple financial products like mutual fund units and
insurance products, etc.
● The payments bank cannot undertake lending activities.

Criteria for setting up Payment banks

 ● Existing non-bank Pre-paid Payment Instrument (PPI) issuers; and other entities such
as individuals / professionals; Non-Banking Finance Companies (NBFCs), corporate
Business Correspondents (BCs), mobile telephone companies, supermarket chains,
companies, real sector cooperatives; that are owned and controlled by residents; and
public sector entities may apply to set up payments banks.
● Promoter/promoter groups should be ‘fit and proper’ with a sound track record of
professional experience or run their businesses for at least a period of five years in
order to be eligible to promote payments banks.
● The minimum paid-up equity capital for small finance banks shall be Rs. 100 crore.
● Maintains minimum 75% of deposits in Government bond and maximum 25% deposits
with other scheduled commercial banks.
● The promoter’s minimum initial contribution to the paid-up equity capital of such
payments bank shall at least be 40 per cent for the first five years from the
commencement of its business.
● The bank should have a high powered Customer Grievances Cell to handle customer
complaints.
● The operations of the bank should be fully networked and technology driven from the
beginning, conforming to generally accepted standards and norms.

What can Payment Banks do?

● Offer internet banking, sell mutual funds, insurance and pensions.
● Have business correspondents and ATMs.
● Offer bill payment service for customers
● They can enable transfers and remittances from a mobile phone.
● They can offer forex services at charges lower than bank
● They can provide forex cards to travellers, usable as debit or ATM card all over India.
● They can also offer card acceptance mechanism to third parties such as “Apple Pay”.

What Payment Banks can’t do?

● Offer credit cards
● Extend loans
● Handle cross-border remittances
● Accept NRI deposits
 Small Finance Banks Payments Bank

Definition – Small Finance Banks are financial Definition – A Payments Bank is like any other
institutions that intend to fund the financial bank, but operating on a smaller scale without
needs of the underprivileged sections through involving any credit risk. It can carry out most
basic banking activities banking operations but can’t advance loans or
issue credit cards.
Objectives: Objectives:

These have been set up to further financial The primary objective of setting up payments
inclusion by: banks will be to further financial inclusion by
providing:

● supply of credit to small business units;

small and marginal farmers; micro and ● small savings accounts
small industries; and other unorganised ● payments/remittance services to
sector entities migrant labour workforce, low-income
households, small businesses, other
unorganised sector entities

How many Small Finance Banks are in India? How many Payments banks are in India?

As of December 2021, there are 11 Small As of December 2021, there are 6 Payments
Finance Banks in the country: Bank in India:

1. Au Small Finance Bank Ltd. 1. Airtel Payments Bank Ltd

2. Capital Small Finance Bank Ltd 2. India Post Payments Bank Ltd
3. Fincare Small Finance Bank Ltd. 3. FINO Payments Bank Ltd
4. Equitas Small Finance Bank Ltd 4. Paytm Payments Bank Ltd
5. ESAF Small Finance Bank Ltd. 5. Jio Payments Bank Ltd
6. Suryoday Small Finance Bank Ltd. 6. NSDL Payments Bank Limited
7. Ujjivan Small Finance Bank Ltd.
8. Utkarsh Small Finance Bank Ltd.
9. North East Small Finance Bank Ltd
10. Jana Small Finance Bank Ltd
11. Shivalik Small Finance Bank Ltd

Capital Requirement: Capital Requirement:

The minimum paid-up equity capital for small The minimum paid-up equity capital of the
finance banks is Rs.100 crore payments bank is Rs.100 crore

Scope of Activities: Scope of Activities:

● Take up all primary banking activities ● ATM/Debit cards can be issued

only in the underserved section ● Credit cards cannot be issued
● Mobile banking available
Time Deposit: Time Deposit:

Time Deposit such as Fixed Deposit (FD) and These do not accept time deposits like FD and
Recurring Deposit (RD) are both accepted RD

They can offer small loans They cannot offer loans

There is no restriction in the area of operations The payments bank cannot set up subsidiaries
of small finance banks to undertake non-banking financial services
activities

Capital Small Finance Bank, launched in 2016 Airtel Payments Bank, introduced in 2016,
was India’s first Small Finance Bank became India’s first entity to receive a
payments bank license from RBI
Virtual Banking
Definition: The Virtual Banking is the provision of accessing the banking and related services online
without actually going to the bank branch/office in person. Simply, availing the banking services
through an extensive use of information technology without any requirement for the physical walk-in
premises is called as virtual banking. This means a customer can make account inquiries, get loans,
pay bills online, and even withdraw and deposit money whenever the customer pleases. It is
sometimes also referred to as remote banking, Internet banking, online banking, and phone
banking.
Some common forms of virtual banking are, ATMs, use of magnetic ink character recognition code
(MICR), Electronic clearing service scheme, electronic fund transfer scheme, RTGS, computerized
settlement of clearing transactions, centralized fund management schemes, etc.

Virtual Banks vs. Online Banking

All transactions in a virtual bank are handled entirely online, whereas "online banking"
is an Internet-based option offered by regular banks. Broadly speaking, virtual banking denotes the
provision of banking and related services through extensive use of information technology without
direct recourse to the bank by the customer.

The advantages of virtual banking services are many, such as:

(1) Virtual banking has the advantage of having a lower cost of handling a transaction via the virtual
resource compared to the cost of handling the transaction via the branch.
(2) The increased speed of response to customer requirements under virtual banking vis-a-vis
branch banking can enhance customer satisfaction and, ceteris paribus, can lead to higher profits
via handling a larger number of customer accounts. It also implies the possibility of access to a
greater number of potential customers for the bank without the concomitant costs of physically
opening branches.
(3) The lower cost of operating branch network along with reduced staff costs leads to cost
efficiency under virtual banking.
(4) Virtual banking allows the possibility of improved quality and an enlarged range of services
being available to the customer more rapidly and accurately and at his convenience.
What Is Retail Banking?
Retail banking, also known as consumer banking or personal banking, is banking that provides
financial services to individual consumers rather than businesses. Retail banking is a way for
individual consumers to manage their money, have access to credit, and deposit their money in a
secure manner. Services offered by retail banks include checking and savings accounts,
mortgages, personal loans, credit cards, and certificates of deposit (CDs).
Retail banks are also an important source of credit for individuals. They offer consumers credit to
purchase large-scale items such as homes and cars. This extension of credit can take the form of
mortgages, auto loans, or credit cards. This extension of credit is an important facet of the economy
as it provides liquidity to the everyday consumer, which helps the economy grow.
The retail banking objectives of any bank would mainly focus on the following:
1. Generating superior returns on assets.
2. Acquiring sufficient funding
3. Enhancing risk management
4. Understanding customers and regaining their trust.
5. Coping with increased demands regarding product transparency and overall service levels.
6. Achieving multi channel excellence with fully integrated banking channels.
7. Moving toward higher levels of industrialization

Types of Retail Banks

Retail Banks can be categorized into the following types:
1. Savings account for senior citizens at a higher rate of interest
2. Large Banks: These are the banks whose names one must have heard at homes and the
ones you’re familiar with. Large banks have branches across the city.
3. Community Banks: Also known as small banks, these banks have a smaller share than large
banks. They operate at multiple locations and grant loans easily.
4. Online Banks: As the name says, these banks don’t have physical branches. However, the
goal is to minimize fees.
5. Regional Rural Banks: These banks are the ones established in rural areas to cater for the
demands of the low-income groups. These banks provide retail banking services and loans
to such groups.
6. Private Banks: These are usually the banks that operate in urban areas and cater to the
demands of the high-level income groups
7. Post Offices: There are regions where people do not have access to regular banks. In such
regions, the National Postal System offers basic banking services like account opening,
savings, recurring deposits, and more
Advantages of Retail Banking
1. It provides an alternative for banks as well as individual customers.
2. The importance of retail banking lies in the advantages of the various services offered by
banks.
3. Retail banking focuses on small units and individuals for earnings.
4. It has significantly increased earnings and businesses for banks.
5. In addition, it has also reduced operational costs and thus helped banks in creating a strong
brand image in the market among the general public.
6. It has enabled banks to develop customer relationships with their clients which has
strengthened the customer base.
7. The retail sector contributes to the revenue earned by banks as well as economic
development.
8. It also reduces the risk for banks if they depend on loans for their incomes.
9. Most importantly, it provides a safe way to keep one’s savings and capital secure.

Services Provided by Retail Banks

● Savings Bank Accounts
● Current Account
● Debit Card
● Credit Card
● Loans
● Term deposit account
● Fixed deposit
● Recurring deposit account
● Zero balance salary accounts, etc.
Reserve Bank of India

RBI is an institution of national importance and the pillar of the

surging Indian economy. It is a member of the International Monetary
Fund (IMF).
● The concept of Reserve Bank of India was based on the
strategies formulated by Dr. Ambedkar in his book named “The
Problem of the Rupee – Its origin and its solution”.
● This central banking institution was established based on the
suggestions of the “Royal Commission on Indian Currency &
Finance” in 1926. This commission was also known as Hilton
Young Commission.
● In 1949, the Reserve Bank of India was nationalized and became a member bank of the
Asian Clearing Union.
● RBI regulates the credit and currency system in India.
● The chief objectives of the RBI are to sustain the confidence of the public in the system,
protect the interests of the depositors, and offer cost-effective banking services like
cooperative banking and commercial banking to the people.

Objectives of RBI
Being the backbone of the financial state of the country, RBI has various objectives as mentioned in
the RBI preamble. Some of them are listed below:
● Primary Objectives: The primary objectives of RBI includes:
● Addressing the issue of Banknotes
● Maintaining monetary stability in the country
● To operate the credit system and currency in the country to its own advantage
● Remain independent of the political influence: In order to maintain financial stability and
promote economic growth, RBI should be free from any political pressure and refrain from
corrupted activities
● Fundamental objectives: RBI should serve as a central authority and serve as:
– Bank of all the other Commercial banks
– Only authority who has note issuing power
– Bank to the Government of India
● Promote Economic Growth: RBI, along with maintaining price stability, should also design
policies which promote economic growth within the framework
● Issue Currency Notes: The issue and printing of currency notes are one of the primary
functions of the RBI. The Reserve Bank of India prints notes of all denominations except 1
rupee and that’s because the one rupee note is issued by the Indian Ministry of Finance. The
issue and printing of currency notes in India are regulated under the Minimum Reserve
System (MRS). As per the MRS, the RBI keeps a reserve asset of Rs 200 crore out of which
INR 120 crore would be in form of Gold and the rest in the form of foreign currency. Also, the
addition of any new denomination or discontinuation of any existing denomination is being
done by RBI. For example, during demonization, RBI discounted old 500 rupee notes and
added new 2000 and 500 rupee notes.
● Acting as a Central Bank for other Banks: The Reserve Bank of India acts as a parent
bank to all the primary banks operating in India. However hereby RBI plays a role lender that
lends money to the primary banks of India on certain interests. Also, it keeps an eye on the
financial transactions of the banks so that amount of account holders remain secured in the
banks.
● Keeping a Track of Foreign Exchange: Buying and selling foreign currencies and thus
making sure a stable foreign exchange in India comes into RBI’s account. RBI holds the right
to buy and sell foreign currencies in the international foreign exchange market. Also, RBI
makes sure that turbulence in the foreign exchange market does not affect the economy of
the nation.
● Acting as a Bank to the Government: The RBI acts as a banker to the central and the state
governments of India and fulfills all the banking necessities of the government. Also, RBI
plays a crucial role as an advisor to the central government of India and assists the
government in framing economic policies for the nation.
● Controlling Credit Flow: The credit made by the primary commercial banks of India is being
controlled by the RBI. Also, RBI is responsible for regulating the flow of money in the market.
RBI adopts both quantitative and qualitative methods to regulate the cash flow in the market.
RBI increases or decreases the repo rate to control inflation and regulate the cash flow in the
market.
● Other Important Functions: The RBI acts as a representative of India in the IMF
(International Monetary Fund), and also in many other major international financial
organizations. The RBI is also responsible for looking after government treasures, available
securities, foreign reserves, etc. The RBI also plays a major role in the development
program run by the central government of India and finances some of these programs. Also,
other activities like presenting the economic data of the nation, GDP growth, and the inflation
rate are also done by the RBI.
What is a Demand Deposit?
A demand deposit is money deposited into a bank account with funds that can be withdrawn on-
demand at any time. The depositor will typically use demand deposit funds to pay for everyday
expenses. For funds in the account, the bank or financial institution may pay either a low or zero
interest rate on the deposit.
The maximum a person may withdraw can be up to a certain daily limit or up to the limit of their
account balance. Common examples of demand deposits would be amounts in a checking account
or savings account. Note that demand deposits are different from term deposits. Term deposits
require depositors to wait a predetermined period before making a withdrawal.

Types of Demand Deposits

1. Checking account
A checking account is one of the most common types of demand deposits. It offers the greatest
liquidity, allowing cash to be withdrawn at any time. The checking account may earn only zero or
minimal interest since demand deposit accounts involve minimal risk. Interest paid may vary based
on the financial provider.

2. Savings account
A savings account is for demand deposits held at a slightly longer duration compared to the short-
term use of the checking account. Funds in the savings account offer less liquidity; though, for an
extra fee, money may be transferred to the checking account.
Savings accounts often come with a minimum required balance. As larger balances are held for
extended periods in a savings account, it pays a slightly higher interest rate than a checking
account.

3. Money market account

A money market account is for demand deposits that follow market interest rates. Market interest
rates are impacted by the central bank’s responses to economic activity. The money market
account will, therefore, pay interest either more or less than a savings account, depending on how
the market interest rate fluctuates. Traditionally, money market accounts offer a competitive rate to
savings accounts.

Importance of the Demand Deposit

1. Consumer spending
Demand deposits are important in consumer spending, as they hold the funds used to pay for
everyday expenses. The expenses may include groceries, transportation costs, personal care
items, and more. Demand deposits are, therefore, advantageous due to their liquidity and ease of
access.
With the on-demand feature of demand deposits, people can withdraw money at any time without
the need to give the bank prior notice. Additional funds may be withdrawn from an ATM, debit
cards, the bank’s teller, or through written checks.

2. Bank reserves
Demand deposits are important for institutions, as the total amount held in deposit accounts
determines the bank reserves that must be kept on hand. Bank reserves are held in the vault or on-
site at the bank and are essential in the case of large unexpected withdrawals.
The more money a bank holds in demand deposits, the more money it must keep in its bank
reserves. The money not kept in bank reserves is called excess reserves. Excess reserves are then
loaned out by banks, contributing to the money creation process.

3. Money supply
Demand deposits are an important part of the money supply of a country, defined within M1 money.
M1 money consists of currency plus demand deposits. Demand deposits make up a significant part
of the money supply in many countries.
During a financial crisis, many people together will make large withdrawals from the bank. The
withdrawals will lead to a decline in demand deposits and a decrease in the money supply, with
banks left with less money to loan out.

What Are Time Deposits?

Time deposit accounts are savings accounts that require one to keep money in the account for a set
time frame. They can also be called term deposit accounts or term deposits since the bank can
specify the term that the money must stay in place.
If one likes to withdraw money before the term ends, the bank may allow that. However, they will
likely charge a penalty fee. They may also be required to give them a certain amount of advance,
either in writing, in-person, or over the phone. Once open a time deposit account, one typically can’t
add any additional funds at a later date.
While the money is in the deposit, it earns interest. Once the deposit matures,one can do one of two
things:
• Roll the principal and interest earned into a new time deposit with different terms
• Withdraw the principal and interest earned
If one takes money out of the time deposit before it matures, the bank will likely impose an early
withdrawal penalty. This penalty usually involves forfeiting some of the interest earned. The size of
the penalty can vary depending on how early one withdraws the money and the length of the time
deposit.
CASA stands for Current Account Saving Account. This is a unique feature which banks offer to
their customers to make them keep their money in their banks. The account combines the benefits
of savings account and checking accounts.
The account pays negligible or no interest on the current account and an above-average return on
the savings accounts. CASA is mostly popular in the West and Southeast Asia. CASA is a non-term
deposit account which means that it can be used for everyday banking requirements of the
customer.

How does it work?

CASA combines both the features of a current account and a savings account and the funds can be
utilized any time. It provides flexibility to the customers and thus has a lower interest rate than a
term deposit. CASA is a cheaper way for the banks to raise money than issuing term deposits which
offers higher interest rates to customers. Financial institutions also encourage use of CASA as it
helps generate a higher profit margin.

CASA Ratio

CASA Ratio is the ratio of deposits in current account and savings account to the total deposits of
the bank. A higher CASA ratio means that the bank has a higher share of deposits in current and
savings accounts. A higher CASA ratio also indicates a better operating efficiency of the bank. In
India, this ratio is used as one of the metrics to determine the profitability of the banks.

CASA Ration = CASA Deposit/Total deposits

Recurring Deposit -
A recurring deposit, also known as an RD, is a term-deposit that provides customers with the
flexibility to invest an amount of their choice each month and save money with ease. Recurring
deposit accounts are offered by most banks and NBFCs in India with tenures ranging from 6
months to 10 years. However, it is essential to know that RDs are different from Fixed Deposits/FDs
. RDs are flexible in most aspects. An RD account holder can choose to invest a fixed amount each
month while earning decent interest on the amount. RDs are an ideal saving-cum-investment
instrument. However, the interest rate, once determined, does not change during the tenure; and on
maturity, the individual will be paid a lumpsum amount which includes the regular investments as
well as the interest earned.

The RD Interest Rates for Regular & Senior Citizens for the Top Banks are as follows:
The interest rate usually ranges from 3.00% - 7.50% per annum for general citizens. Senior citizens
are offered additional interest in the range of 0.50% to 0.80% on all deposit tenures.

Advantages of Investing in RD
● Safe Investment
● Lump-sum Pay-Out
● Online Access
● Loans Against RDs
● Higher Interest Rates for Senior Citizens
What is Auto-Sweep Account ?
Auto Sweep is a facility which interlinks saving bank account with a Fixed Deposit account. In Auto
Sweep account, amount in the bank above a limit is automatically transferred to Fixed deposits
and earns a higher rate of interest. If balance of saving account becomes low and there is a need
then Fixed Deposit will be broken and the amount will be moved back to Saving Account. Auto
Sweep account provides the combined benefits of a Savings Bank account and Fixed Deposits.
Most of the Banks offer interest at the rate of 4% p.a. (some offer 6% – 7% interest on savings
account). While Fixed Deposit for 1 year is around 8%. Every time, the FD gets broken, there are
usually two transactions in the statement.
● How much of FD was broken (and deposited in savings)
● How much interest was earned?

Example of How Auto Sweep Account works

For example, Shyam has an auto sweep account with minimum balance of Rs. 5,000 threshold limit
of Rs 40,000 and interest on saving bank account is 4%. On 1 May 2014 He has 30,000 Rs in his
account.
● As he has 30,000 Rs which is less than limit of Rs 40,000 So it remains in saving account
and earn regular interest i.e 4%.
● Suppose on 5-May-2014 he deposits a cheque of Rs 50,000. Now balance in his account is
Rs 90,000 which is above limit of Rs 40,000. So 50,000 will be put in Fixed Deposit and
remaining 40,000 will continue to remain in the bank account. So for Rs 50,00 he will earn
higher interest as it is in FD. For Rs 40,000 in saving bank account he will continue to earn
4%.
● On 12-May-2014 he withdraws 20,000 from his account. Balance in his account becomes
Rs 20,000 and Fixed Deposit of Rs 50,000 remains intact.
● On 17-May-2014 he drops in a cheque to withdraw Rs 25,000 from his account. Balance in
Saving Bank account is Rs 20,000. But bank will not dishonour his request. It will break the
FD for Rs 10000 and move the amount to Saving Bank. He is able to withdraw the amount
he requested, Balance in his account becomes 5000. Amount in his FD becomes Rs 40,000.

Terms associated with Auto Sweep Account

Some typical terms associated with Auto Sweep Account are as follows:
● Threshold Limit : Amount above which the surplus money in the saving bank account is
converted into Fixed Deposit. Note this amount is different from the minimum balance that
banks define for a savings account.
● Sweep OUT : when the money above a threshold automatically moves to an FD.
Sometimes just called as Sweep,
● Sweep IN : when the money from an FD is moved IN to the savings account to honour
withdrawals. Sometimes it is also called Reverse Sweep. The funds to be transferred as a
 reverse sweep to Savings Bank/Current Account will also meet the requirement of
maintaining minimum balance. Usually only the principal amount of the Term Deposit is
considered for the Sweep-In facility.
● Tenor or Period of the FD: Time for which FD is opened Some banks offer only 1 year
deposits as part of auto sweep facility. Some banks do offer flexible maturity periods of
deposit .
● LIFO or FIFO: These are methods adopted by banks while breaking FDs . In LIFO last in
first out method the linked FD units created most recently will be closed first for transfer to
the Saving Bank Account. In FIFO (first in first out) the first FD created will be broken first. It
is preferable to have LIFO.
● Pre closure penalty: Penalty for breaking the Fixed Deposit before its full tenor.
What are Retail Loans in India?
A Retail loan is generally provided to an individual by a certified financial institution, a commercial
bank or a credit union to purchase property, vehicles or other assets such as essential electronics,
etc.

Retail loans are provided to individuals with a decent credit score. Banks and financial institutions
want to ensure timely repayment of such loans; hence having a good repayment history and credit
score plays a very important role in availing a Retail loan. Interest is to be paid monthly or annually
as per the pre-determined terms and conditions of the financial institution.

People primarily opt for retail loans in case they want to make an immediate purchase but lack the
funds to pay for it. One of the most common types of Retail loans is a Housing Loan. Buying a
house is an expensive affair, and an average middle-class individual in India can barely afford to
pay for a house in lumpsum. So, in such a case, the bank agrees to lend the amount, and the
borrower agrees to pay the money back bit by bit along with the interest amount over a period of
several years.

WHAT ARE THE TYPES OF RETAIL LOANS IN INDIA?

1.Housing loans:

2.Educational loans:

3.Vehicle loans:

4.Personal loans:
Retail Lending Cycle

Different Types of Bank Loans in India

Loans can be utilised for various things in today’s world. It can be used for funding a start-up to
buying appliances for your newly purchased house. Let us talk about the different types of loans
available in the market and their specific characteristics that make these loans useful to the
customers.

Personal Loans:
Most banks offer personal loans to their customers and the money can be used for any expense like
paying a bill or purchasing a new television. Generally, these loans are unsecured loans. The lender
or the bank needs certain documents like proof of assets, proof on income, etc. before approving
the personal loan amount. The borrower must have enough assets or income to repay the loan. In
case of personal loans, the application is 1 or 2 pages in length.
Home Loans:
When one wishes to purchase a house, applying for a home loan can help to a great extent. It
provides the financial support and helps buy the house. These loan generally come with longer
tenures (20 years to 30 years). The rates offered by some of the top banks in India with their home
loans start at 8.30%. The credit score is checked before the loan request is approved by the lender.
Home loans are primarily taken for buying new homes. However, these loan can also be used for
home renovations, home extensions, purchasing land property, under-construction houses, etc.

Car Loans:
A Vehicle Loan is a loan that allows to purchase two and four wheelers for personal use. Typically,
the lender loans the money (making a direct payment to the dealer on the buyer’s behalf) while the
buyer must repay the loan in Equated Monthly Instalments (EMIs) over a specific tenure at a
specific interest rate.
Car loans are secured loans. If one fails to pay the instalments, the lender will take back the car and
recover the outstanding debt.

Education Loan
Education loans are basically a form of monetary assistance availed by students to meet the
expenses associated with their studies. Education loans can be taken by means of funding,
scholarships, financing and rewards, and are granted in cash, which has to be repaid to the lender
along with a rate of interest. Students who wish to avail education loans are advised to borrow
based on their needs as the repayment periods for these loans can vary to a great extent
depending upon the lender and the amount borrowed by the student.

Different Types of Education Loan

There are a number of different education loans which are offered for different types of education
programmes. Based on the type of the education that one wants to pursue, there are student loans
for diploma and certificate courses, student loans for skill-based courses, student loans for studying
abroad, and so on.
Whatever the course may be, there are two wide categories of the education loans on the basis of
location.
1. Domestic Education Loan – For educational courses within the geographical limits of the
country.The borrowers have to meet various eligibility criteria and the lenders will approve
the loan if the student has got a secured seat in an institute that meet the requirements of the
lenders.
2. Study Abroad Education Loan - For educational courses outside the geographical
boundaries of the country.Like domestic education loan, the borrower should get a secured
seat in a college or university among the list of the eligible educational institutions to approve
the loan.
Gold Loan:
A gold loan can be used to raise cash to meet emergency or planned financial requirements, such
as business expansion, education, medical emergencies, agricultural expenses, etc. The loan
against gold is a secured loan where gold is placed as security or collateral in return for a loan
amount that corresponds to the per gram market value of gold on the day that the gold has been
pledged. Any other metals, gems, or stones that are in the jewelry will not be calculated when
determining the value of the gold loan.

Gold loan is a secured loan; therefore, its interest rate is low in comparison to unsecured loans such
as a personal loan. The interest rates levied on gold loan varies from one lender to another and
depends on various factors such as gold loan tenure, loan amount, etc. It also relies on where one
is taking the gold loan – a bank or an NBFC? Banks usually charge lower gold loan interest rate
than NBFCs. Most lending institutions lets one pay only the interest amount each month and the
principal amount at the end of the loan tenure. One can also choose to pay gold loan through EMIs
(Equated Monthly Instalments), which will include both the principal and interest component of the
loan.
What is MCLR?
Marginal Cost of Funds based Lending Rate (MCLR) is the minimum lending rate below which a
bank is not permitted to lend. MCLR replaced the earlier base rate system to determine the lending
rates for commercial banks. The MCLR is used by the banks that come under the RBI to define the
minimum interest rates applicable to the different types of loans.
The MCLR ensures that the lender cannot charge interest rates beyond the margin prescribed by
the RBL one of the prime regulators of the banks and financial institutions. Hence, it is the minimum
lending rate below which a bank is not permitted to sanction loans
RBI implemented MCLR on 1 April 2016 to determine rates of interests for loans. It is an internal
reference rate for banks to determine the interest they can levy on loans. For this, they take into
account the additional or incremental cost of arranging an additional rupee for a prospective buyer.
MCLR depends on
1. Tenor premium,
2. Operating costs of the bank,
3. Negative carry on Cash Reserve Ratio, and
4. Marginal cost of funds.

The Outcome of MCLR implementation

After the implementation of MCLR, the interest rates are determined as per the relative risk factor of
individual customers. Previously, when RBI reduced the repo rate, banks took a long time to reflect
it in the lending rates for the borrowers.
Under the MCLR regime, banks must adjust their interest rates as soon as the repo rate changes.
The implementation aims at improving the openness in the structure followed by the banks to
calculate the interest rate on advances.
It also ensures the prospect of bank credits at the interest that is true to the consumers as well as
the banks.
MCLR Base Rate
● MCLR or marginal cost of funds based lending rate ● The minimum rate of interest
has been introduced so that end borrowers can at which banks offer loan to
enjoy the benefits associated with repo rate cuts their customers is called the
by the Reserve Bank of India (RBI). This has been base rate.
implemented to make banking system even more ● Base rate depends on
transparent. different factors like profit,
● MCLR depends on factors like CRR (Cash bank deposit rates, bank
Reserve Ratio), marginal cost of funds, tenor costs, etc.
premium, and operating cost. ● It is not dependent on the
● It is dependent on the repo rate changes made by repo rate set by the Reserve
the RBI. Bank of India.
● Marginal cost of funds based lending rate can be ● Banks can choose to change
different for different loan tenures. the base rate quarterly.

What is the need for MCLR?

The Marginal Cost of Funds Based Lending Rate has been implemented by the RBI for the
following reasons:

● The RBI changes the repo and other rates occasionally but the banks are not quite quick to
change their interest rates as per the RBI's rates.
● Most commercial banks do not change their lending rates for customers.
● Ultimately, the bank customers do not receive the benefits as aimed by the Reserve Bank of
India.
● Until 2016, the RBI had been verbally instructing the commercial banks to change their
lending rates with every repo rate change.
Hence, the RBI introduced MCLR for the benefit of the customers.
What Is Repayment of loan?
Repayment is the act of paying back money previously borrowed from a lender. Typically, the return
of funds happens through periodic payments, which include both principal and interest. The
principal refers to the original sum of money borrowed in a loan. Interest is the charge for the
privilege of borrowing money; a borrower must pay interest for the ability to use the funds released
to them through the loan. Loans can usually also be fully paid in a lump sum at any time, though
some contracts may include an early repayment fee.
Common types of loans that many people need to repay include auto loans, mortgages, education
loans, and credit card charges. Businesses also enter into debt agreements which can also include
auto loans, mortgages, and lines of credit, along with bond issuances and other types of structured
corporate debt. Failure to keep up with any debt repayments can lead to a trail of credit issues
including forced bankruptcy, increased charges from late payments, and negative changes to a
credit rating.

Types of Loan Repayment Methods

Listed below are some of the loan repayment options; however, the loan repayment option may
depend upon your lender and the type of loan that’s issued:
1. EMIs –Equated Monthly Installments or EMIs, are the most popular loan repayment option.
Every installment involves a part of the principal and a part of the interest, which is scheduled is pay
every month over a fixed tenure.
That said, some banks allow their borrowers to pre-pay the loan after a certain number of
instalments have been made. Some banks may charge a pre-payment fee, if you want to pre-pay
your loan. Pre-payment can be done in two ways:
● Partial or Part Pre-Payment: This is when one pays off the loan in part, it helps reduce the
principal. This saves money on interest as the interest is applied on the new reduced
principal.
● Full Pre-Payment or Pre-Closure: This is when one completely pays off your loan before the
loan tenure.
2. Bullet Repayment / Loan Foreclosure
Some loan products may allow to repay the loan through bullet loan repayment method. In this
option, one needs to pay only the interest component every month. When the loan tenure ends,
there is a need to make one bullet repayment that pays off the entire principal loan.

What Factors Affect EMI?

The factors affecting an EMI are as follows
● Principal borrowed: This is the total loan amount borrowed by the individual.
● Rate of interest: This is the interest rate charged on the borrowed amount.
 ● Tenure of the loan: This is the loan repayment timeframe agreed between the borrower and
the lender.
● Fixed or floating type of loan: If the interest rate is floating, the ‘Rest’ component affects the
EMI.

What is the amortization schedule?

The amortization schedule is a comprehensive table that outlines the complete loan details and the
breakup of the EMI payments. It shows you how much of each EMI amount goes towards paying
the principal and interest until you pay off the loan.

How does an EMI (Equated Monthly Installment) Work?

There are two ways of calculating the EMI. They are:

1. Flat Rate Method

In this method, the principal loan amount and the interest on the principal are added. The sum is
then divided by the loan tenure, then multiplied by the number of months in a year.

Example of Flat Rate EMI

Assume you have a home loan of ₹10, 00,000, which is the principal loan amount, at an interest
rate of 8% for 10 years. Your EMI using the flat-rate method is calculated as follows:
(₹10, 00,000 + (₹10, 00,000 x 10 x 0.08)) / (10 x 12)
The EMI amount is ₹15,000

2. Reducing Balance Method

The formula to calculate EMI using the reducing balance method is as follows:
(P x I) x ((1 + r)n)/ (t x ((1 + r)n)- 1)
P is the principal amount borrowed, I is the interest rate (annual), r is the periodic monthly interest
rate, n is the total number of monthly payments, and t is the number of months in a year.

Example of Reducing Balance EMI

Let’s keep the same example for calculating the EMI using the reducing balance method.
((₹10, 00,000 x (0.08)) x (1 + (0.08 / 12)) 120) / (12 x (1 + (0.08/12)) 120 – 1).
The EMI amount is ₹12,133
Note: The EMI amount in reducing balance is lower than in the flat rate method. In the EMI flat rate
calculation, the principal loan amount is constant throughout the loan tenure. On the other hand, in
the reducing balance method, the EMI is calculated on the monthly reduced principal. This suggests
that reducing balance may be a more cost-friendly option for borrowers.
What Are The Different Types of Loan Interest Rates?
There are two types of interest rates
1. Fixed interest rate
2. Floating or variable interest rate
What is a Moratorium Period?
A moratorium period is a period during which the borrower is not obligated to make payments. In
other words, during a moratorium period, the borrower is permitted to halt their payments. It is
commonly incorporated in home loans – called an equated monthly installments holiday – and
educational loans.

Understanding a Moratorium Period

A moratorium period is illustrated below:

A moratorium period typically commences once a loan is granted. It is primarily extended to give the
borrower adequate time to sort out finances and prepare for loan repayment. A moratorium period
can also occur during the mid-life of a loan. It would be the case if the lender allows the borrower to
stop making payments over a specified period for a specific reason – for example, due to financial
hardship. It should be noted that interest on the loan generally accrues over the moratorium period.

Is a Moratorium Period Beneficial?

The ability to defer payments into the future offers greater financial flexibility. However, it is
important to recall that interest generally accrues over the moratorium period, resulting in a higher
total loan amount payable.
Unless the borrower is under financial distress – i.e., unable to make payments – the financial
flexibility of a moratorium period is largely offset by the additional interest charge.

Moratorium Period vs. Grace Period

A moratorium period is commonly confused with a grace period. It is important to note that a grace
period is a set length of time after payment is due, where a payment can be made without penalty.
In other words, a borrower is expected to make a payment over the grace period or face
penalization – such as a late fee, credit rating downgrade, etc.
On the other hand, over a moratorium period, a borrower is not required to make a payment over
the period. In addition to the distinct difference as outlined above, a moratorium period length can
range from weeks to months, whereas a grace period length is usually 15 days.

What are the Benefits of a Loan Moratorium?

● Better repayment plan
 ● No negative impact on credit score
● Helps during a liquidity crisis

What are the Drawbacks of a Loan Moratorium?

● No interest waiver
● Sudden burden
● Increase in loan tenure
Delinquency
Payment delinquency is commonly used to describe a situation in which a borrower misses their
due date for a single scheduled payment for a form of financing, like student loans, mortgages,
credit card balances, or automobile loans, as well as unsecured personal loans. There are
consequences for delinquency, depending on the type of loan, the duration, and the cause of the
delinquency.
For example, assume a recent college graduate fails to make a payment on their student loans by
two days. His loan remains in delinquent status until they either pay, defer, or forebears their loan.

What is the Delinquency Rate?

The delinquency rate refers to the percentage of loans that are past due. It indicates the quality of a
lending company’s or a bank’s loan portfolio.
The delinquency rate is commonly used by analysts to determine the quality of the loan portfolio of
lending companies or banks. It compares the percentage of loans that are overdue to the total
number of loans. A lower rate is always desirable, as it indicates that there are fewer loans in the
lender’s loan portfolio that are paying outstanding debt late.
In the industry, lenders typically do not label a loan as being delinquent until the loan is 60 days
past due. However, the figure is not absolute and varies from lender to lender. For example, one
lender may consider a 30-day overdue loan as delinquent while another lender may only consider a
45-day overdue loan as delinquent.
When a loan is labeled as delinquent, lending companies generally work with third-party collection
agencies to recover the loan. If the delinquent loan is unable to be recovered after an extended
period of time, it is written off by the lender.