Ommittee

1.
Principles of Lending: Introduction & Overview of Credit
ank

B
of a bank
most
IS
performs
also
major the
different
important functionstypes
of
functions. Lending of
of
commercial
sources of bank's bank. A majormoney to different kinds of borrowers is
income. However, portion of its fund is used for this one
lending is not possible without purpose andorne
range from individuals
activities, the location of to
Partnership, this
securities differ and their business, financial Companies, risk.
Institutions, Societies etc. The The
borrowers
process. Some of the degree of risks also stability, earning and repaying nature of tne
below: important considerations differ.
to be
Therefore, a banker must capacity,
take
purpose of advance
kept in mind by a banker proper precaution in
in this
respect are tnis
Safety: discussea

The
satety of funds lent is
to
repay the loan and another
important principle of lending,
interest in time
upon the
nature of security, the
at
regular intervals withoutSafety means that the
default, The
borrower should be ab
borrower. character of the
borrower, capacity to repayrepayment of the loan depenas
and financial standing ol
Like other
security. Securities
investments, bank investments also involve risk. But
And the
of the Central Government the degreeof
risk varies with the
securities
of State
Government
are safer than
those of the State type. o

Decause the resources

of the Central
and Local Bodies are
safer than those of the industrial Governments
and l0tdi

the latter Government are much higher than the State concerns.
higher than the industrial concerns. and Local Governments This
and
15
or

In fact, the
value of shares and debentures of
With the business industrial concerns are tied to their
of the
activity in the
country. The bank should also take earnings which may fluctuate
Governments while into consideration the debt repaying
for this. investing in their securities. Political stability, ability
peace and security are the prerequisites
It is
very safe to invest in the
Securities of a Government
The same is the
case withthe Securities of a rich having large tax revenue and high borrowing
prosperous region. So, in making investments Municipality or Local Body and State Governmentcapacity.
of a
the bank should choose Securities,
Governments, Local Bodies and Industrial Concerns which Shares and Debentures of such
satisfy the of principle safety.
Thus, from the Bank's point of view, the
of security is the most
nature
loan. Even then, bank
has to take into important consideration while giving a
consideration
character, capacity to repay, and financial
the creditworthiness of the borrower
which is governed by
technical feasibility and economic standing. Above all, the safety of bank funds depends upon the
viability of the project for which the loan is advanced.
Liquidity:
Liquidity is one of the important principles of bank lending. Bank lend for short
public money which can be withdrawn at any time by depositors. Banks periods only because they lend
of such assets which are easily marketable and therefore, advance loans on the security
convertible into cash at a short notice.
A Bank chooses such Securities in its Investment
bank to maintain cash on hand to meet the portfoli which possess sufficient liquidity. It is essential for
urgent requirements of its customers, it should be in a
some of the securities at a very short notice without position to sell
disturbing their market prices much. There are certain
securities such as Central, State and LOcal
Governments bonds which are easily saleable without affecting their
market prices.
The Shares and Debentures of large industrial concerns also fall in
this category. But the Shares and
of Debentures
ordinary firms are not easily marketable due to limited takers of these Shares and Debentures in the stock
market. So, the banks should make Investments in Governnent
Securities, Shares and Debentures of reputed
industrial houses.