Principles of Lending.Bankers have framed certain rules or principles, which they observe strictly while lending some amount to a party in order to avoided any loss.
10 Principles of Lending From Bank
- Principle of Safety:
Banks are profit oriented institutions, so that their first preference is to get the amount of loan back. If ‘-he loan is likely to be unsafe the bank would not favour such loan. It is true in’ saying that the safety of loan is always preferred over profit.
- Principle of Security:
Security is demanded to ensure the payment of loan with in the due time. Following qualities are essential for a good security:
- Easily Marketable
- Stable price
- Non-perishable
- Reasonable Margin
- Easily transferable
- Principle of Income:
The main object of a commercial bank is to earn profit. So, the granted loan should be a source of reasonable profit. Bankers try to lend their money at higher rates.
- Principle of Diversifications:
It means grant of loans to different sectors. Some one has truly said “All the eggs should not be in one basket”. If the advances are made to different persons instead of one party, or to many sectors, the risk is divided. Hence there is least chance of loss.
- Principle of Liquidity:
Liquidity means repayment of issued loan or its immediate conversion into cash at the time of need. Loan should be easily recoverable by the bank in case of emergency at short notice or on demand. While advancing Idan, the bank must observe its liquidity.
- Principle of Repayment:
Bank is not a non-trading concern. So, the bank must observe all l he aspects regarding the repayment of issued loan.
Some Limitations of Lending From Bank
In addition to the present principles regarding advancing loan, there are some precautions might be helpful in this connection.
- Safety of Loan:
Banks are profit oriented institutions, so their first preference is to get the amount of loan back. If the loan is likely to be unsafe the bank will not favour such loan. It is true in saying that the safety of loan is always preferred over profit.
- Reasonable Profit:
The main object of the commercial bank is to earn profit. So, the granted loan should be a source of reasonable profit. Bankers try to lend their money at higher rates.
- Diversifications of Loan:
It means grant of loans to different sectors. Some one has truly said “All the eggs should not be in one basket”. If the advances are made to different persons instead of one party, or to many sectors, the risk is divided. Hence there is least chance of loss.
- Liquidity:
Liquidity means repayment of issued loan or its immediate conversion into cash at the time of need. Loan should be easily recoverable by the bank in case of emergency at short notice or on demand. While advancing loan, the bank must observe its liquidity.
- Security of Loan:
Security is demanded to ensure the payment of loan with in the due time. Following qualities are essential for a good security:
- Easily Marketable
- Stable price
- . Non-perishable
- Reasonable Margin
- Easily transferable
- Custody of Security:
Security may be in shape of documents or property. It is favourable for the bank to take all the securities under its own custody.
- Joint Property:
Joint property might be a source of loss in case of non- payment, so the bank should avoid it. So the bank should obtain the consent of all owners in writing.
- Disputed Security:
The bank should not accept any disputed property as security for loan. It means the rights of ownership of security should be confirm and clear.
- Objective of Loan:
Loan granted for productive purposes are more useful for the banker as compared to non-productive loans.
- Amount of Loans:
Instead of granting loan of huge amount, the bank should try to give small loans a large number of people.
- Duration of Loan:
Loan should be issued for a possible minimum duration. Longterm loans should be avoided.
- Source of Payment:
The borrower should have a reasonable and adequate source for the payment of loan otherwise recovery would be impossible.
- Moral Character:
Personal character of the borrower should be considered. He should bear a good moral character.
- Capability of Business:’
Borrower’s capability of doing successful business should be observed well by the bank before granting the loan.
- Financial Position of Business:
Financial position of the borrower’s business would be a source of satisfaction for the banker. So audited Balance Sheet should be demanded.
- Assets Already Accepted as Security:
A bank should be very careful about the fact that the presented asset has not been already accepted as security.
- Increase in Value:
The value of security should be of increasing nature. This type of security is more favourable.
- Insured Security:
Merchandise, vehicles and building etc. should be insured if these are being kept as security against certain loans.