Credit Appraisal Glossary: 40 Banking Terms, Explained

TL;DR

• This glossary explains 40 terms Indian borrowers meet during credit appraisal, from CAM and DSCR to SMA bands, SARFAESI and pari passu, in plain borrower language.
• Each entry gives a one-line definition, why the term matters for your loan file, and a link to the deep guide where one exists.
• RBI rules are marked as rules, bank conventions as conventions, and history as history, so you know what you can demand and what you can only negotiate.

Your sanction letter reads like a different language because, in a way, it is one.

This page translates the 40 terms that decide your limit, your rate and your risk, each in plain words with a pointer to the full guide.

Which ratios does the bank quote on your loan file?

DSCR (Debt Service Coverage Ratio). DSCR measures whether your operating earnings cover all debt payments due in a year, computed as net operating income divided by total debt service. Banks use it to judge if the business can service the loan by itself, and term-loan sanctions often carry a minimum DSCR covenant you must maintain every year. Deep guide: DSCR, explained with examples

FOIR (Fixed Obligation to Income Ratio). FOIR is the share of your net monthly income already committed to fixed payments like EMIs and card dues, expressed as a percentage. It is a bank credit-policy convention, not an RBI rule, and many banks work within roughly 40 to 50 percent. A high FOIR shrinks your eligible loan amount or kills the file outright. Deep guide: FOIR, explained for loan applicants

Current ratio. The current ratio divides current assets by current liabilities and tells the bank whether you can pay short-term dues from short-term resources. It descends directly from the Tandon committee methods: the second method effectively demands a 1.33 to 1 floor, so a weak current ratio is the first sign your working capital structure needs fixing. Deep guide: term loan appraisal ratios

Debt-equity ratio. The debt-equity ratio compares what the business owes outsiders with what the owners have put in, measuring how thinly the promoters are capitalised. Banks read a high ratio as the owners risking little of their own money, and it often triggers a demand for more margin money or extra collateral. Deep guide: term loan appraisal ratios

Interest coverage ratio. The interest coverage ratio divides operating earnings by interest expense and shows how many times over you can pay interest from profits. Unlike DSCR it ignores principal repayment, so banks use it as the early-warning version of the same question: can the earnings comfortably carry the debt cost. Deep guide: term loan appraisal ratios

CIBIL score. Your CIBIL score is the three-digit number credit information companies compute from your repayment history, with DPD (days past due) fields recording exactly how late each payment was. Banks pull it before they read a single financial statement, and a low score can reject the file even when your bank statements look healthy. Deep guide: CIBIL score vs bank statement

Which documents will the bank ask you to file?

CMA data (Credit Monitoring Arrangement data). CMA data is the standard projected financial statement format Indian banks collect from borrowers above certain limits, with operating statement, balance sheet and fund flow projections. It grew out of RBI's Credit Monitoring Arrangement and is now a bank credit-policy requirement, not an RBI mandate. It is the single most rejected document in Indian SME lending, because projections rarely tie back to past performance. Deep guide: CMA data preparation

CAM (Credit Appraisal Memorandum). The CAM is the bank's internal note that recommends your loan: it records the appraisal, the risks, the mitigants and the terms, and travels up the sanction hierarchy for approval. You never see it, but every question the relationship manager asks you is really the CAM asking. Deep guide: CAM in banking

Provisional, projected and audited financials. Provisional financials are your unaudited numbers for the year just ended, projected financials are the CMA forecasts for coming years, and audited financials are the CA-signed final accounts. Banks cross-check the three against each other, and gaps between your projections and your audited actuals become questions in every renewal. Deep guide: provisional vs projected vs audited

Limit renewal. Working capital limits run on a review cycle, usually a year, and the bank re-appraises the file at each renewal: it can renew, enhance, reduce or hold you on ad-hoc cover. Miss the review by 180 days and the account can turn NPA even with interest paid on time. Deep guide: working capital limit renewal

Cash budget. A cash budget is a month-by-month forecast of cash receipts and payments that shows when the business will be short of cash and when it will be surplus. Banks use it to test whether your working capital ask follows your real cash cycle instead of your optimism. Deep guide: cash budget vs fund flow

Fund flow statement. A fund flow statement tracks where money came from and where it went over a period, separating long-term sources from short-term uses. The bank reads it to check that short-term borrowings are not funding long-term assets, which is a classic diversion signal. Deep guide: cash budget vs fund flow

How does the bank compute your working capital limit?

MPBF (Maximum Permissible Bank Finance). MPBF is the ceiling the bank sets on your working capital borrowing, computed from your current assets and liabilities rather than from what you ask for. Your sanctioned limit can never exceed MPBF, so understanding the computation tells you the maximum the bank can ever offer. Deep guide: the MPBF method

The Tandon, Chore and Nayak methods. These are the three RBI committee frameworks that still shape limit computation: Tandon (1974) gave the three MPBF methods with the borrower funding at least 25 percent from long-term sources, Chore (1979) pushed borrowers to the stricter second method with quarterly reporting discipline, and Nayak (1991) gave small borrowers the simpler turnover method. They are history, but your credit officer still thinks in their logic, so knowing them tells you why the bank asks for what it asks. Deep guide: the MPBF method

Working capital gap. The working capital gap is current assets minus current liabilities other than bank borrowings: the shortfall the business must fund from somewhere. It is the starting number of every MPBF computation, and inflating current assets to widen the gap is one of the oldest games banks watch for. Deep guide: the MPBF method

Margin money. Margin money is the borrower's own contribution to the working capital requirement, the part of the gap you must fund from long-term sources instead of the bank. Under the classic methods it is at least 25 percent, and banks treat a borrower who cannot bring margin as a borrower with no stake in the business. Deep guide: CMA data preparation · Deep guide: margin money, the borrower-side playbook

Drawing power. Drawing power is the amount you can actually draw from your cash credit limit on a given day, computed from your latest stock statement after applying the margin. Your sanctioned limit is the ceiling and drawing power is the tap, which opens and closes with your stock levels. Statements sometimes call it the drawing power limit; the idea is the same. Banks may also grant ad-hoc limits, temporary top-ups over the sanctioned limit at a higher rate, for genuine short-term needs. Deep guide: drawing power calculation

Stock audit. A stock audit is the bank's physical verification that the stock and receivables you declared in your stock statements actually exist. It is ordered for larger exposures, and a qualified stock audit report directly cuts your drawing power. Deep guide: what stock audits check

What regulatory language appears on your sanction letter?

SMA (Special Mention Account). An SMA tag means your loan has started slipping: SMA-0 for 1 to 30 days overdue, SMA-1 for 31 to 60 days, SMA-2 for 61 to 90 days. It is the RBI's early-warning ladder, and lenders must report SMA-2 accounts upward, so the tag itself changes how every bank treats you. Deep guide: RBI IRAC norms decoded

NPA (Non-Performing Asset). A loan becomes an NPA when interest or principal stays overdue for more than 90 days, the hard line in RBI's asset-classification norms. NPAs are further staged as substandard (up to 12 months as NPA), doubtful (substandard for 12 months or more) and loss (identified as uncollectible), and each stage raises the provisioning the bank must set aside against your account. Deep guide: RBI IRAC norms decoded

CRILC. CRILC is the RBI's Central Repository of Information on Large Credits, where banks report borrowers with aggregate exposure of 5 crore rupees and above. Once you are in CRILC, every bank sees your total borrowings and your SMA status, which is why multiple-banking borrowers can no longer hide limits from each other. Deep guide: CRILC reporting

CERSAI. CERSAI is the central electronic registry, operational since 31 March 2011 under the SARFAESI Act, where security interests on property are recorded. Before lending against your property, the bank searches CERSAI to check it is not already mortgaged elsewhere, which is how double-mortgage frauds get caught.

Credit information companies (CICs). CICs are RBI-licensed bureaus, CIBIL, Experian, Equifax and CRIF High Mark, that collect your repayment data under the Credit Information Companies Act, 2005. Your CIBIL score is their best-known product, but banks also read the raw DPD fields and enquiry history behind the number. Deep guide: CIBIL score vs bank statement

MCLR, EBLR and RLLR. These are the benchmark regimes for your loan interest rate. MCLR, the bank's internal marginal-cost benchmark, has applied to new loans since 1 April 2016. EBLR links your rate to an external benchmark, most commonly the RBI repo rate, and a repo-linked loan is called RLLR. EBLR has been mandatory for new floating-rate retail and MSME loans since 1 October 2019, with resets at least every quarter. Deep guide: RBI repo rate, October 2026

Repo rate. The repo rate is the rate at which the RBI lends short-term money to banks, and it is the anchor for every floating loan rate in the country. When the RBI's monetary policy committee moves the repo rate, EBLR-linked borrowers feel it within a quarter, which is exactly why the external-benchmark regime was created. Deep guide: RBI repo rate, October 2026

Priority sector lending. Priority sector lending is the RBI requirement that banks direct a share of credit, the headline target is 40 percent of adjusted net bank credit for domestic banks, to agriculture, MSMEs, housing and other listed sectors. If your business qualifies, banks have institutional reasons to lend to you, which can mean better attention and dedicated schemes. Deep guide: priority sector norms decoded

Which words on your file signal trouble?

Early warning signals (EWS). Early warning signals are the RBI's listed red flags, like bouncing cheques, delayed stock statements or funds moving to unrelated parties, that tell a bank to look harder at an account. One signal triggers enhanced monitoring, and a cluster of them is what gets an account red-flagged. Deep guide: RBI early warning signals list

Red flagged account (RFA). A red flagged account is a loan account the bank has formally flagged as showing fraud-risk signals under the RBI's fraud risk directions. The flag starts a time-bound investigation process and the borrower gets a show-cause notice before any fraud classification, so the flag is the moment to engage, not hide. Deep guide: what a red flagged account means

Fraud (under RBI directions). Under the RBI Master Directions on Fraud Risk Management of 15 July 2024, fraud is the formal classification a bank applies after investigation when the evidence shows deliberate deception. The classification carries reporting to RBI, a bar on further bank finance, and possible criminal proceedings, which is why the process gives you notice and a hearing first. Deep guide: RBI fraud risk directions decoded

Forensic audit. A forensic audit is the evidence-grade investigation the RBI requires once your account is red-flagged, tracing where the sanctioned money actually went. Auditors rebuild your money trail and their report becomes the file behind the fraud-or-clear decision, so your documents should be ready before they arrive. Deep guide: forensic audit in bank fraud cases

Wilful defaulter. A wilful defaulter is a borrower the bank classifies as deliberately not paying despite having the capacity to pay, or as having diverted or siphoned the funds, under RBI's wilful defaulter framework for exposures of 25 lakh rupees and above. The label brings lending bans and public naming, so banks use it only after a defined process with a hearing. Deep guide: what a red flagged account means

SARFAESI. The SARFAESI Act, 2002 lets banks enforce their security on loans that have become NPAs without going to court first. The bank must serve a 60-day demand notice under Section 13(2), and you can appeal to the Debt Recovery Tribunal under Section 17, but the power to take possession sits with the bank.

One-time settlement (OTS). A one-time settlement is a negotiated lump-sum payoff the bank may accept to close a stressed or NPA account, usually at a haircut to the total dues. It runs under RBI's compromise-settlement framework. It settles the debt, but the settlement flag stays on your credit history.

Who are the players and structures around your loan?

Credit appraisal. Credit appraisal is the bank's structured evaluation of your repayment capacity, character, collateral and business viability before it sanctions anything. Every term in this glossary is really one input to that appraisal, and the CAM is where the appraisal gets written down. Deep guide: credit appraisal, step by step

Term loan vs working capital. A term loan funds a fixed asset or project and is repaid in instalments over years, while working capital finance funds the day-to-day operating cycle and is renewed yearly. Banks appraise them differently, DSCR for the term loan and MPBF for working capital, so mixing the two is the first mistake borrowers make. Deep guide: term loan vs working capital

Cash credit. Cash credit is the classic Indian working capital facility: a running limit against hypothecated stock and receivables that you draw and repay as the business cycle demands. Interest is charged only on what you use, which is why drawing power, not the sanctioned limit, decides your real availability. Deep guide: the MPBF method

Hypothecation. Hypothecation is a charge on movable property, stock, machinery, receivables, where you keep possession and use of the asset while the bank holds the security right. The SARFAESI Act defines it this way, and it is the standard security for cash credit because the business cannot run if the bank locks up the stock.

Pari passu charge. A pari passu charge, Latin for equal footing, gives two or more lenders equal-ranking rights over the same asset instead of a first and second charge. On enforcement the sale proceeds are shared pro-rata to each lender's outstanding dues, which is why consortium lenders insist on it.

Consortium lending vs multiple banking arrangement. In a consortium, banks lend jointly under common appraisal, common documents and a lead bank, with a shared pari passu charge. In a multiple banking arrangement, each bank lends independently with its own sanction and security. RBI pushed information sharing between lenders after frauds exposed the gaps in multiple banking, so the two now differ less in oversight than they used to.

Sanction letter. The sanction letter is the bank's written offer: the limit, the interest rate and benchmark, the security, the covenants and the conditions before disbursement. Everything verbal the relationship manager promised is worthless until it appears here, so read it line by line before you sign. Read our deep guide to the bank loan sanction letter, clause by clause.

Collateral and primary security. Primary security is the asset the loan is directly secured against, like the stock under cash credit or the machine under a term loan, while collateral is the additional security backing the loan, like your factory building or a fixed deposit. Banks fall back on collateral when the primary security proves inadequate, which is why both appear on your sanction letter.

Sources

• RBI Master Directions on Fraud Risk Management in Commercial Banks (including RRBs) and AIFIs: RBI/2024-25/118, 15 July 2024. Primary source for the fraud classification, red-flagging and forensic audit entries.
• RBI circular RBI/2010-11/484 on setting up the Central Electronic Registry under the SARFAESI Act, 21 April 2011 (mirror of the RBI circular): the registry became operational on 31 March 2011; CERSAI incorporated to operate it.
• Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: Sections 2(1)(n) (hypothecation definition), 13 (enforcement, 60-day demand notice), 17 (DRT appeal) and 31 (exclusions). Statute citation; no paraphrase of operative clauses.
• RBI circular DBR.No.Dir.BC.67/13.03.00/2015-16, 17 December 2015: MCLR framework, effective 1 April 2016. RBI circular DBR.DIR.BC.No.14/13.03.00/2019-20, September 2019: external benchmark framework, mandatory 1 October 2019 for new floating-rate personal/retail and MSME loans, reset at least quarterly.
• Committee frameworks (Tandon 1974, Chore 1979, Nayak 1991) via IIBF/JAIIB banking literature: presented as historical frameworks that shaped current bank practice; period thresholds are not live norms. FOIR cut-offs are bank credit-policy conventions, not RBI prescriptions.
• Entries with deep guides reuse the engine's own published articles as the source of truth (SMA/NPA staging, CRILC threshold, DSCR, MPBF, drawing power, stock audit, EWS/RFA/fraud process, CAM/CMA, CIBIL, priority sector, repo rate, appraisal process, cash budget and fund flow, financial statement types).

Where this page says the RBI requires something, the underlying direction uses mandatory language. Where it says banks commonly do something, that is bank policy or market convention. Committee-era rupee thresholds are historical and flagged as such.

Frequently Asked Questions

Last updated: October 2026. RBI direction wording is as cited above; committee-era material is historical. Your sanction letter and your bank's credit policy decide your file.