BANK LENDING

• Lending of funds to the constituents, mainly

agriculturists, individuals ,traders, business and
industrial enterprises, constitutes the main business
of the banking industry
• The major portion of a bank’s funds is employed

by way of loans and advances which is the most

profitable deployment of funds of the Bank
• Above all, Bank’s core business is accepting

deposits for the purpose of lending or investment

Bank Lending
 Lending has inherent risks. Banks have to be very
careful while lending because the funds they lend
are the money they borrow by way of deposits. The
Bank should follow principles of sound of lending in
order to minimize risks. In these days of cut throat
competition and survival of the fittest, technology
up gradation and marketing expertise, the bankers
tend to take risks which they normally would not
take, to beat the competitors and stay ahead.
 The basic thumb rule a banker should have is
“ business not at the cost of safety of funds “
Bank Lending
 Significance of Lending
 Lending by Banks and Financial Institutions plays a very
vital role in flow of the money capital in the country from
the savers or lenders to the borrowers or those who need
the money capital. This is called Financial Intermediation
 Through this intermediation, Banks pool the money and
lend it to different sections of the society in different ways
suiting the requirements of the borrowers while ensuring
safety of the fund deployed
Bank Lending
 Significance of Lending
 The Lending takes place in a planned manner through
 Policy of Government of India and the State Government
in which the Bank’s branches function
 Reserve Bank’s Policies and Guidelines
 The Loan Policy each Bank prepares annually keeping in
view the policies and guidelines of the Governments and
RBI
 The Loan Policy of each Bank is circulated among all its
offices and branches by Head Office
Bank Lending
 Significance of Lending
 The Governments policies and guidelines are framed to
ensure that all sections of the society - illiterate to
literate, poor to the wealthy, rural, urban and metro have
access to Credit from Banks
 This the Governments ensure by directing the flow of
credit to different sections, industries and sectors.
Targets are set and Banks are expected to meet the same
 This way the Government ensures that the flow of
credit is equitable and need based.
Bank Lending
 Significance of Lending
 The RBI frames guidelines and makes policies
taking into consideration the Government’s
directions to the Banking Industry
 These are circulated to all Banks for
implementation
 The Banks frame their Loan Policy considering the
Government’s and RBI’s policies and guidelines
Bank Lending
 Significance of Lending
 Savers money i.e., deposits should be utilised to generate
income expected by them and also be repaid
 This should be done without risking the deposits
 The lending process takes of care of the depositors
interest and also the bank’s interest –profitability
 It ensures recycling of funds for the economic
development of the country through lending to different
industries/sectors/sections of the country which in turn
contribute to the GDP of the nation
Bank Lending
 Principles of Sound Lending
 Safety
 Liquidity
 Profitability
 Purpose of the Loan
 Diversification of Risks
 National Policy and Objectives
 Bank’s credit policy
Bank Lending
 The most important element in any lending decision - big
or small is the borrower – proprietor/partner/promoter
 The fortunes of a business are in the hands of the
borrower and his employees
 The prospective borrower should have qualities of
leadership, organizing and coordinating skills, judgment,
decisiveness, expertise, and orientation towards results.
 He should also have managers who have the above
qualities in case of medium and large business as he
alone can not do justice to all aspects of the business
Bank Lending
 Principles of Lending
 Banks are in a buyers’ market and borrowers have
strong bargaining position exploiting “business at
all costs” mentality of banks. Hence credit decision
is not a simple exercise of determining the credit
needs of the borrower and then saying ‘ yes ‘ or ‘
no ‘ . It is complex and lot of information needs to
be gathered before a decision is taken
Bank Lending
 Principles of Lending
 Data/information is raised through
 Own sources – industry profile maintained,
enquiries with people or agencies like CRISIL,
fellow bankers and visit to the Unit
 Through the borrower – Structured application
form with enclosures, financial statements and any
other information the borrower may provide
Bank Lending
 Proposal for existing business
 Structured application format
 Financial Statements
 Visit to the Unit
 Managerial Competence
 Summary
Bank Lending
 Assessment of a credit proposal is normally done through eliciting
information about
 Proprietor/Promoter

 Character

 Involvement

 Financial resources

 Competence

 Initiative

 Intelligence

 Drive and Energy

 Self-confidence

 Frankness

 Patience
Bank Lending

 Technical Appraisal
 Project

 Product Details

 Manufacturing Process

 Technical Know-how

 Location

 Land

 Civil Works

 Plant and Machinery

 Environmental Aspects

 Other Clearances
Bank Lending

 Market Appraisal
 Indian Market Scenario
 Total Production
 Market Network
 The Unit’s Production
 Usage Pattern
 Exports Market
 Major Players
 Company’s Marketing Strategy
 Target Markets
 Past consumption in Target Markets
 Trends in Target Markets
 Sales Volume
 Marketing and Selling Arrangements
Bank Lending
 Financial Appraisal
 Capital cost of project
 Source of Finance
 Financial Projections
 Ratio Analysis
 Break-even point
 Discounted cash flow techniques
 Adequacy and validity of Collateral Security
 Assessment of Working Capital
Bank Lending
 Capital cost of project
 Land and site development
 Buildings
 Plant and Machinery
 Engineering and consultancy fees
 Miscellaneous fixed assets
 Preliminary and pre-operative expenses
 Provision for contingencies
 Margin money working capital
Bank Lending
 Sources of Finance
 Promoter’s contribution
 Issue of Shares and Debenture
 Internal accruals
 Unsecured Loans
 Term Loans
 Working Capital
 Subsidies
Bank Lending
 Financial Projections
 Profitability estimates –
 Sales realization
 Raw Materials and consumables
 Utilities (Power, fuel, water etc.)
 Repairs and Maintenance
 Wages and Salaries
 Rent, Insurance
 Administrative and Selling expenses
 Interest on term loans
 Depreciation
Bank Lending
 Financial Projections
 Cash flow estimates
 Projected balance sheets
 Sensitivity analysis
 Ratio analysis
 Break-even point
 Discounted Cash flow techniques
Bank Lending
 Appraisal of Management
 Chairman/Promoter
 Other Directors
 Technical Team
 Finance Team
 Marketing Team
 Others