JAIIB Paper 2 – Principles & Practices of Banking

Unit 2: Lending Operations of Banks – Key Topics & Study Guide

Unit 2 of JAIIB Paper 2 – Principles & Practices of Banking focuses on lending operations, including loan products, credit appraisal, risk management, NPA classification, and loan recovery mechanisms. Understanding these concepts is crucial for banking professionals to assess loan proposals, minimize risks, and ensure effective credit management.

Below is a detailed breakdown of the most important topics, frequently asked concepts, and expert study tips for Unit 2 – Lending Operations of Banks.

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1. Basics of Bank Lending & Credit Principles

Bank lending plays a crucial role in financial intermediation and economic growth. Important areas include:

Objectives of Bank Lending – Profitability, liquidity, risk mitigation, financial inclusion

Principles of Sound Lending – Safety, liquidity, profitability, purpose, diversification, security

Credit Risk in Lending – Understanding credit risk, market risk, operational risk

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2. Types of Loans & Advances in Banking

Banks offer various types of loans and advances based on borrower needs. Key classifications include:

A. Fund-Based Loans

Term Loans – Long-term financing for capital expenditure, infrastructure, housing

Working Capital Loans – Short-term funding for business operations, cash credit, overdrafts

Retail Loans – Personal loans, home loans, auto loans, education loans

Agricultural Loans – Kisan Credit Card (KCC), crop loans, allied activity loans

B. Non-Fund Based Facilities

Letter of Credit (LC) – Financial guarantee for trade transactions

Bank Guarantees (BG) – Performance, financial, and advance payment guarantees

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3. Credit Appraisal & Loan Processing

Evaluating a borrower’s creditworthiness is a critical step in lending. Key factors include:

Loan Proposal & Documentation – Application, financial statements, business projections

CIBIL Score & Credit History Analysis – Role in loan approvals, creditworthiness assessment

5 Cs of Credit Appraisal – Character, Capacity, Capital, Collateral, Conditions

Loan Sanction & Disbursement Process – Verification, approval, documentation, disbursement

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4. Priority Sector Lending (PSL) & Government Schemes

Banks must lend a portion of their funds to priority sectors as per RBI guidelines. Key areas include:

Definition of Priority Sector Lending (PSL) – Agriculture, MSMEs, education, housing, renewable energy

Targets for PSL – Public, private, foreign banks’ obligations

Government Loan Schemes:

MUDRA Loans – For micro and small businesses

Stand-Up India Scheme – Loans for SC/ST and women entrepreneurs

PMEGP (Prime Minister’s Employment Generation Program) – Self-employment and business funding

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5. Loan Recovery & NPA Management

Managing non-performing assets (NPAs) is a key challenge in banking. Important topics include:

Definition of NPA – Classification: Sub-standard, doubtful, and loss assets

Asset Classification Norms – Standard, SMA-1, SMA-2, NPA categories

Loan Recovery Mechanisms:

SARFAESI Act, 2002 – Recovery of secured loans

Debt Recovery Tribunals (DRTs) – Special courts for loan disputes

One-Time Settlement (OTS) Scheme – Loan restructuring for distressed borrowers

Insolvency & Bankruptcy Code (IBC), 2016 – Corporate debt resolution

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6. Risk Management in Bank Lending

Identifying and mitigating lending risks is crucial for banking stability. Key concepts include:

Types of Risks in Lending:

Credit Risk – Default risk, borrower financial health assessment

Operational Risk – Fraud, documentation errors, cyber risks

Market Risk – Interest rate fluctuations, foreign exchange risk

Risk Mitigation Strategies:

Collateral & Security Requirements – Mortgage, hypothecation, pledge, lien

Loan Covenants & Monitoring – Post-sanction credit supervision

Provisioning Norms for NPAs – RBI’s prudential norms for loan loss reserves

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7. Loan Documentation & Legal Aspects

Proper documentation is essential for loan security and enforcement. Important aspects include:

Types of Loan Documentation:

Primary Documents – Loan agreement, sanction letter

Security Documents – Mortgage deed, hypothecation agreement

Charge Creation & Registration – Pledge, lien, assignment

Laws Governing Bank Lending:

Banking Regulation Act, 1949 – Loan approval guidelines

Contract Act, 1872 – Legal enforceability of loan agreements

Negotiable Instruments Act, 1881 – Dishonor of cheques, legal remedies

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8. Digital Lending & FinTech Innovations

Technology has transformed lending operations with digital loan processing and AI-based risk assessment. Key trends include:

Digital Lending Platforms & Paperless Loans – FinTech-driven loan approvals

AI & Machine Learning in Credit Risk Analysis – Automated loan screening

Role of Blockchain in Loan Agreements – Smart contracts, fraud prevention

RBI’s Guidelines on Digital Lending – Transparency, customer protection, data security

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Expert Tips to Crack JAIIB Paper 2 Unit 2

Focus on High-Weightage Topics – Loan types, PSL, NPA management, risk assessment

Use IIBF Study Material – The official books provide the best conceptual clarity

Practice MCQs & Case Studies – Solving previous years’ papers will improve accuracy

Stay Updated on RBI Guidelines – Follow changes in loan classifications, PSL targets, and NPA norms

Revise Key Banking Laws & Security Documents – Memorize important loan-related acts

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Conclusion

Unit 2 of JAIIB Paper 2 – Principles & Practices of Banking covers crucial lending operations, loan processing, credit appraisal, risk management, and loan recovery strategies. Mastering these concepts will help banking professionals handle loan portfolios efficiently and mitigate financial risks.

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