Jun 06

Principles of bank lending

Over the years, the bankers are evolving some principles of lending. Broadly, these principles are: Character: The borrower must inspire confidence in his bank with his integrity and ability to run the venture. He must have adequate stake or capital in the venture. He should neither over trade nor indulge in speculative activities.

The venture: The venture of the borrower must be acceptable to the bank in terms of the policy guidelines and instructions of the government, the central bank of the country and of the bank itself. An acceptable venture must be viable; i.e. capable of generating profits.

The resources namely; the demand and time liabilities of the bank are of short term nature being demand deposits (current and savings) and medium term time deposits (fixed deposits etc.) Therefore, banks generally lend on short term basis; i.e. for meeting the working capital needs of their customers. Long term loans are also extended but only for certain specified purposes to certain categories of customers. The bank has to ensure that credit lent is well spent; i.e. the end use of the credit is in accordance with the terms of sanction.

A venture which is well managed by honest and professional person or persons is the ultimate security to a bank. However, even good ventures are known to fail for a variety of causes. Therefore, when a bank takes security for extending credit limits, it is taking an insurance against unforeseen events such as business failure, diversion of funds etc.,

As a bank lends on short term, it expects its loans and advances to be repaid or liquidated as per the terms of sanction. This is necessary since a bank has to keep its assets as liquid as possible to meet all possible demands or drawals of its depositors from time to time.

The principles of lending in fact involve a pre sanction appraisal and a post sanction follow up and control. The pre sanction approval determines the creditworthiness of the customer, the purpose for which he needs a credit facility and the need or quantum of the facility. The post lending control through periodical statements, inspections and reviews determine the end use of the credit facility. Should the periodical reviews show unhealthy symptoms such as misutilisation of the facility or non viability of the venture, the bank may seek to recall the facility or initiate necessary recovery proceedings.

This article has been compiled by Classof1; they offer Accounting Homework Help For assistance with your academic assignments, you can visit classof1.com


Leave a Reply