PRINCIPLES OF LENDING :

The business of lending, which is main business of the banks, carry certain inherent risks and bank cannot take more than calculated risk whenever it wants to lend. Hence, lending activity has to necessarily adhere to certain principles. Lending principles can be conveniently divided into two areas (i) activity, and (ii) individual.

(i) Activity:

(a) Principle of Safety of Funds

(b) Principle of Profitability

(c) Principle of Liquidity

(d) Principle of Purpose

(e) Principle of Risk Spread

(f) Principle of Security

(ii) Individual :

(a) Process of Lending

(b) 5 ‘C’s of the borrower = Character, Capacity, Capital, Collateral, Conditions

Sources of information available to assess the borrower

– Loan application

– Market reports

– Operation in the account

– Report from other Bankers

– Financial statements, IT returns etc.

– Personal interview

– Unit inspection prior to sanction

(c) Security Appraisal

Primary & collateral security should be ‘MASTDAY’

M – Marketability

A – Easy to ascertain its title, value, quantity and quality.

S – Stability of value.

T – Transferability of title.

D – Durability – not perishable.

A – Absence of contingent liability. I.e. the bank may not have to spend more money on the security to make it marketable or even to maintain it.

Y – Yield. The security should provide some on-going income to the borrower/ bank to cover interest & or partial repayment.

The traditional principles of bank lending have been followed with certain modifications. The concept of security has undergone a radical change and profitability has been subordinated to social purpose in respect of certain types of lending.