The operational aspects of loan account cover the practical, day-to-day procedures that a bank follows from the moment a loan is approved until it is fully repaid. Proper handling of these operations is critical to ensure the loan is secure and performs well.
The Loan Account Lifecycle
The operational aspects can be understood by following the four main stages of a loan account’s life.
1. Loan Sanction and Disbursement
This is the stage where the loan is approved and the money is given to the borrower.
- Issuing the Sanction Letter: Once the loan is approved after appraisal, the bank issues a Sanction Letter to the borrower.
- This is a formal document that details all the terms and conditions of the loan, including the loan amount, interest rate, repayment period (tenor), and required security.
- Acceptance by Borrower: The borrower must sign a copy of the sanction letter as a token of acceptance of the terms.
- Disbursement: This is the process of giving out the loan amount.
- It should only be done after all the required documents have been signed and the security has been created.
- For loans like home or car loans, the money is often paid directly to the seller or builder, not to the borrower. This is to ensure the funds are used for the stated purpose.
2. Documentation
This is a legally critical stage. Proper documentation ensures that the bank has a legal claim over the borrower and the security if things go wrong.
- What it is: The process of getting the borrower to sign the correct set of loan agreements and security documents.
- Key Documents:
- Loan Agreement: The main contract between the bank and the borrower.
- Demand Promissory Note: A promise by the borrower to pay the money back on demand.
- Security Documents: Documents to create a charge on the asset (e.g., a mortgage deed for a home loan).
- Importance: In case of a default, these documents are the primary evidence the bank uses to recover the money in a court of law.
3. Monitoring and Follow-up
The banker’s job is not over after giving the loan. They must continuously monitor the account to ensure it does not become an NPA.
- Post-Disbursement Inspection: The bank must physically verify that the asset for which the loan was given has been purchased and is in good condition (e.g., inspecting a factory’s new machinery).
- Checking for Early Warning Signals: A banker should look for signs of financial distress, such as:
- Frequent cheque bounces in the account.
- Delay in paying interest or installments.
- A sudden downturn in the borrower’s industry.
- Account Statement Review: Regularly reviewing the transactions in the borrower’s account to ensure the business operations are running smoothly.
4. Loan Closure
This is the final stage when the borrower has repaid the entire loan amount.
- Issuing a No-Dues Certificate (NDC): The bank provides an official certificate to the borrower stating that all dues have been cleared.
- Release of Security: The bank cancels its charge on the collateral.
- Example: For a home loan, the bank will return the original property documents to the borrower. For a gold loan, the gold jewelry is returned.
- Updating CIBIL: The bank must report the closure of the loan to the credit bureaus like CIBIL, so the borrower’s credit report is updated to show a zero balance.
Summary
The operational management of a loan account is a continuous process that spans the entire life of the loan. It begins with the formal sanction and careful disbursement of funds, followed by legally sound documentation. The most crucial part is the ongoing monitoring of the account to detect any early signs of trouble. Finally, upon full repayment, the process ends with a formal closure and the release of the borrower’s security. Following these steps diligently is key to maintaining a healthy loan portfolio.
Quick Revision Points
- Sanction Letter: Contains all the terms and conditions of the loan.
- Disbursement: Giving out the loan money, often paid directly to the seller.
- Documentation: The legal foundation for loan recovery. Must be done before disbursement.
- Monitoring: The ongoing process of checking the loan’s health and looking for early warning signals.
- Loan Closure: Involves issuing a No-Dues Certificate (NDC) and releasing the security.
- CIBIL Update: Informing credit bureaus about the loan closure is a mandatory step.