The Government of India through the instrument of Reserve Bank of India (RBI) mandates certain type of lending on the Banks operating in India irrespective of their origin. RBI sets targets in terms of percentage (of total money lent by the Banks) to be lent to certain sectors, which in RBI's perception would not have had access to organised lending market or could not afford to pay the interest at the commercial rate. This type of lending is called Priority Sector Lending. Financing of Small Scale Industry, Small business, Agricultural Activities and Export activities fall under this category. This is also called directed credit in Indian Banking system.
Financing Priority Sector in the economy is not strictly on commercial basis as not only the general approach is liberal but also the rate of interest charged on such loans is less. Export finance is, in fact, available at a discount of 20% or more on the normal rate of interest to Indian corporates. Part of the cost of this concession is borne by RBI by means of refinancing such loans at concessional rate. Indian Banks, therefore, contribute towards economic development of the country by subsidizing the business activities undertaken by entrepreneurs in the areas which are consider "priority sector" by RBI

Commercial Lending

This is the mainstay of Indian Banking - its bread and butter activity. Although historically, this activity had been relegated to a secondary position as banks were driven by the desire to excel themselves in what is known as "priority sector banking" yet it is this part of their loan portfolio which has kept them afloat and help meet the costs. This activity survived despite a number of restrictions imposed on it in the past. With financial sector reforms, the focus has shifted from "priority sector banking" and commercial lending has been reinstated to its rightful place. Today many banks focus on this activity for improving their bottom lines. Fresh and innovative products are being launched to facilitate the corporate customer who forms the core of this business. There is big competition among banks to secure bigger share of this business
At present, commercial loans are available for practically any kind of activity and also for both long and short tenures. Based on customer profile, these loans are of two types :
1)Corporate Loans
2)Retail Loans

Corporate Loans
These loans are meant for corporate bodies (and bigger ones among other entities like proprietorships, partnerships and HUFs) engaged in any legal activity with the object of making profit. Banks lend to such entities on the strength of their balance sheet, the length of cash cycle and depending upon the products available with individual banks.
Lending on the strength of balance sheet
Banks analyse the audited balance sheets of the prospective borrowers to appraise their needs as also the capacity to absorb credit. Prospective borrowers are required to furnish their financial details in the form of CMA data to the bankers and file an application for the loan. This application is processed and a line of credit (limit) allowed to the borrower. The overall limit (line of credit) is structured into various type of facilities or accounts - each with its own limit within the overall line of credit - depending upon the needs of the customer. The borrower is then asked to execute Bank's standard documents, surrender the security or title to the security to the Bank and open suitable accounts (mostly Cash Credit accounts with different underlying securities) with the Bank. Thereafter the borrower can operate these accounts within the limit (line of credit).
There are many type of loan products available for corporate clients in India. The loans are structured depending upon the need of the client and the product available with the lending Bank

Retail Loans
This type of lending is meant for very small entrepreneurs as well as individuals who are engaged in gainful commercial activity and have the capacity to repay the loan. Loans are given on the strength of the means of the borrower with an eye on the repaying capacity. The latter is judged through the cash streams (income) available with the borrower for repayment of the loan.
Loans for purchase of automobiles/consumer durable items
Most banks nowadays have a product for financing the purchase of automobiles and other consumer durable items. The quantum of loan is generally determined by the repayment capacity of the prospective borrower. This in turn, depends upon the monthly income. Most Banks have their own method to calculate the maximum monthly repayment capacity of a person. Thereafter, a loan for which Equated Monthly Instalment (EMI) is within this capacity is considered the outer limit for a person. The bank will be glad to finance to this extent for the purchase of an automobile or any other consumer durable item.
Most Banks judge the monthly income with reference to either the latest salary certificate from the employer ( in case of employees) or the last year's income tax return (in case of self employed persons). Other methods are also employed to appraise the maximum limit considered desirable for a person.
Tips:
While considering a loan of such nature, check whether the interest is payable on the entire amount for the entire period or on the outstanding amount only. The latter is what you should look for even if the rate of interest is higher.
Check the rests i.e. the frequency at which the interest will be debitted or charged to your account. Reject any frequency less than a quarter.
Mostly there are hidden charges called service charges or appraiser charges which inflate the cost to you. Carefully check these before you venture forth
You will be required to hypothecate/mortgage the goods bought out of the loan. So be prepared to sign a lot of documents
Peruse the documents carefully so that there are no honorous clauses which tilt the balance heavily in favour of the Bank/ finance company.