Principals of Lending

PRINCIPALS OF LENDING FOR FINANCIAL INSTITUTIONS

The core function of commercial banks is lending and borrowing. Their deposits comprise mainly borrowed money from various customers on various accounts. It is the duty of banks to be careful while lending their depositors money. For this purpose banks follow certain rules as per detail given below:-

1. SAFETY: Whatever money the bank hold is that of their customer who have entrusted the banker with it only because of the confidence they have in the expert handling of money by bank. The banker must ensure that his depositor’s money is advance to safe hands and there is no risk of loss.

2. CHARACTER: A borrower’s character is the indicator of his intention to repay the advance, since his honesty and integrity is the primary importance. It is obligatory on the banker to ensure that his borrower is person of character and enough capacity to pay the borrowed money including interest thereon. This can be judged with the help of his past record, his experience in that particular line and lastly the amount of capital he himself has invested in his business. If the limit is commensurate with the capital invested in the business and with the preview of this framework, a banker can presume that his money is safe in the hands of such a customer.

3. CAPACITY: This is the ability of the management to access how successful a business has been in the past and what the future possibilities are. A businessman may not have vast financial resources but with sound management abilities including into a specific business he may make his business very profitable. On the other hand if a person has not insight into the particular there is more chance of loss to the banker.

4. CAPITAL: The money invested by the proprietors represents their faith in the business and its future. The role commercial is to provide short term capital for consumer and industry. Some time bank becomes partner with the businessmen.

5. LIQUIDITY: All the money advanced by the banker to customer is repayable in lump sum on demand. It means that banker can call the money back at any time. Liquidity means the possibility of recovering the advances in emergency. Banker must ensure that the money he lending is not blocked for an undue long time and the borrowers are in such a position as to pay back the entire amount on short notice. For this purpose it important for the banker to study his borrower’s assets to liquidity.

6. DISPERSAL: The banker must ensure that his funds are not invested in specific sectors like textile industry, heavy engineering or agriculture etc. He must see that from his available funds he advances them to wide range of sector like commerce, industry, farming, agriculture, small business, housing projects and various other financial concerns in order of priorities.

Dispersal of advances is very necessary from the point of security as well because it reduces the risk of recovery when something goes wrong in one particular sector or in one field.

7. REMUNERATION: A main source of banker’s income is the interest charged on the money borrowed by customer. The rate of interest to be charged for advances depends on the type of security offered to bank and the duration for which advance is allowed. When the security offered is sound and easily cashable, the banker may consider charging lower rate of interest. The banker should prefer a borrower who is willing to offer a higher rate of interest on a comparatively lesser risk.

8. SUITABILITY: Suitability means that advance should be allowed not only to the carefully selected and suitable borrowers but also in keeping with the overall national development plans chalked out by the authorities concerned. Before accommodating a borrower the banker should ensure that the lending is for a purpose in conformity with the current national credit policy laid down by the central bank of the county.