What is lending ? explain the principal of lending .

When a lender gives money to an individual or entity with a certain guarantee or based on trust that the recipient will repay the
borrowed money with certain added benefits, such as an interest rate, the process is called lending
LENDING PRINCIPLES :Lending should be given to borrowers in such a manner that the bank is in a position to meet
unexpected demands. The Banker has to take utmost precaution in lending, for he deals essentially with the funds of others.
The funds have to be repaid on demand.
1.Safety
Banker should always be very careful and cautious in taking investment decisions. Since a banker deals with money belonging
to others, he has to assure the safety of funds that he lends out. If money is lent to people who do not possess adequate
capacity to repay money borrowed from a bank, the banker would be in a difficult position, for he will not be in a position to
honour the claims from his depositors. Depositors keep money with banks in good faith. If a banker is unable to honour their
claims of withdrawals, the whole banking business would be in trouble. It needs to be ensured that the advance granted not
only appears to be safe at the time it is released but continues to be safe until it is repaid. Therefore, he must see that the funds
are safe
2. Liquidity
Liquidity is the quality of an asset that make it easily convertible into cash with little or no risk of loss.
A bank is said to be liquid when it has sufficient cash and other liquid cash and also the ability to raise funds quickly from other
sources, in order to meet its payment obligations and financial commitments at the certain short duration.
Factors that determine the liquidity of cash balance to be maintain by a banker are-
a.Reserve Requirement Prescribed by law- higher is cash reserve ratio requirement are fixed by law and lower is the liquidity
with the bank . they are fixed as a percentage of bank’s deposits.
b. Banking habits – if banking habits are developed most of the payment are made and received through cheques. In this case
bank can manage with low cash reserves because funds are transferred without the use of cash .
c. Business and economic condition - The changing business and economic conditions will change the demand for loans. For
example, during depression, banks maintain large cash reserves for fear of withdrawal of large amounts by customers.
Moreover, demand for loans from banks is low, hence reserves accumulate during depression.
d. Clearing House Facilities: The existence of clearing house. reduces the need to hold large amount of cash because most of
the payments to be made or received through the cheques wil be settled through the clearing house.
e. Nature of Accounts: The type of deposits (i.e. current accounts, savings bank accounts and fixed deposits) and the size of
deposits also determine the amount of cash balances.
3. Profitability:
Banks are established normally by collecting capital through shares. So it is necessary to pay dividends to share-holder.
Depositors who keeps their deposits with the bank, must also be paid interest on these deposits. In addition to this, a bank has
to incur its day-to-day expenditure. All these expenses (Like office maintenance, salaries of employees, rent, various bills, taxes
etc.) have to be met from the profit which banks make from various types of investments. So the main objective of a
commercial bank is making profits. Profit is earned by way of making advances and investments. Profits of a bank depend upon
the interest income earned on the advances made; therefore, banker should not ignore profit while granting loans,
A bank should ensure that the funds that are lent bring a reasonably good return. At the same time they should also possess
liquidity. Lending rate of interest must not only be profitable but also be flexible in the context of social banking.
4. Diversification of Risk: Since every loan has a risk, it is better to give advances for different purposes and spread the risk.
Risk should be minimized by diversifying investment. The concentration of investment in any single field should always be
avoided. It is dangerous to concentrate advances in any particular area or field or sector.
a. Sector Wise: it is desirable to distribute loans in various fields such as small and large scale industries, inland trade,
international trade, etc. This ensures the recovery of loans.
b. Different Periods of Maturity: There should be a balance in the loans advanced from the point of the period. That means
some should be short-term loans, some medium-term and a few long-term loans.
(c) Variety of Securities: If all the loans are advanced on the security of gold, and if the government takes a decision to dispose
of gold stocks, and as a result of this, gold prices collapse, banks may be in difficulties, to a large number of borrowers and
business concerns.
5. Other Principles of Lending:
(a) Purpose: Repayment of loans mainly depends on the purpose for which loans are taken. When advances are granted for
productive purposes resulting in the creation of income yielding assets, there is a guarantee of repayment. In case of default,
such loans are recovered by sale of assets so created.
b. Security: Another guiding factor in bank advance is security. A banker avoids lending to a borrower without any security.
c. Income Generating Potentiality of the Project: The banker to generate income, banker will do not hesitate to grant the loan.
d. Term of Loan: A banker prefers to grant short-term loans as it cannot lock up its funds by granting loans for a long period.
e. Public Interest: The banker should grant advances to those industries which bring development in the countries planning
programme.
Balance sheet of a bank
The balance sheet of the bank is a statement prepared to show its financial position on a certain date . section 29 of the
banking regulation act, 1949 required banks to prepare balance sheet on an annual basis in a format specified in the Third
Schedule to the act .
Capital and Liabilities:
1. Capital: The bank has to obtain permission to collect the required capital.
(a) Authorised Capital is the maximum amount, for which suchpermission is obtained from the requisite authority .
(b) Paid-up Capital is the amount of the shares which have actually been sold and the value of which has been recovered.
2. Reserve Fund and other Funds: Reserve Fund is the amount that the bank accumulates over the years out of undistributed
profits. It is obligatory for every bank to keep a reserve fund to be used to meet unforeseen contingencies. Under the Banking
Regulation Act, banks are required to transfer a certain percentage of their net profits to the reserved fund before declaring
any dividend to the shareholders.
3.Principal/Subsidiary State Partnership: Bank has to show Principal/Subsidiary State Partnership share capital held by the
banks in the following sectors (1) Central Co-operative Banks (i) Primary agricultural credit societies (iii) Other societies
4. Deposits: The largest item of liabilities of a bank is its liability to the public depositors. It is shown by Fixed Account Deposits,
savings account deposits and current account deposits. These Deposits represent the bulk money supply in the economy. Every
bank in India must have to show the value of Money held under the deposits.
5. Borrowing from Central Bank and Other Bank and Agencies etc.: This item represents a bank's borrowings from central
bank, other banks, agents, etc. A bank may borrow from other banks in times of need.
Bank issue drafts or bills payable to the customers are shown on the liability side of the balance sheet.
6. Bills for Collection Being Bills Receivable as Per Contra: Bank performs various important secondary functions on behalf of
their customers collecting bills, cheque, etc. When a bank receives a bill for collection, it is an asset because it has to collect
money on the bill from the acceptor. But, since the bank has to pay the proceeds to the customer, it is a liability also. Hence it
appears on both sides of the balance sheet.
7. Branch Adjustments: Adjustments in branch accounts are of utmost importance to know the correct financial and revenue
positions of each branch. It is necessary to maintain coordination of branch accounts with Head Office accounts,
8.Overdue Interest Reserve :Total of the amounts shown under the separate columns in the loan ledgers would be interest
receivable in respect of non-performing advances and it would get reflected as such on the 'assets' side of balance sheet with a
corresponding item on the liabilities side of the balance sheet as 'Overdue Interest Reserve'.
9. Interest Payable: Interest payable is the interest expense that has been incurred but has not been paid as of the date of the
balance sheet. Interest payable does not include the interest for periods after the date of the balance sheet.
10. Other Liabilities: It includes miscellaneous liabilities incurred by a bank in the course of its business, e.g. unclaimed
dividends, insurance fund etc. They may be shown together under this head or may be shown under separate heads.
Property of asset:
1.Cash: Every bank has to keep a certain amount of cash to meet the day to day demands of depositors and its own expenses.
The bank also has to keep a certain percentage of its total deposits in the form of cash balances with the central bank of the
country
2. Balances with Other Banks: Banks also keep cash balances with other commercial banks in the form of demand deposits and
time deposits. In this section of the balance sheet Cash balances with the other Banks in the form of (1) Current deposits, (ii)
Savings bank deposits, (iii) Fixed Deposit are included.
3. Money at Call and Short Notice: This item on the balance sheet represents overnight or very short period loan by a bank to
other banks, discount market or to the stock exchange. Such amounts are repayable on demand or on short notice.
4. Investments: Banks invest their surplus money in various types of shares, debentures, government securities, etc.
Investments enable banks to earn on their funds.
5. Investments out of the Principal Subsidiary State Partnership Fund: Any amount to the credit of a Principal State
Partnership Fund or a Subsidiary State Partnership Fund shall not form part of the assets of the Apex Society or the Central
Society, as the case may be.
6.Loans and Advances: Providing credit facilities to the customer is a primary function of the banks. Besides the normal cash
advances by banks, they extend other loans in the form of cash credit, overdraft facilities and so on.
7. Interest Receivable: Banks provide loans and advances the interest earning by the banks may be not yet received by the
banks. These amount of interest that has been earned, but which has not yet been received in cash is considered and shown
under interest receivable.
8. Bills receivable being bills collection as per Banks discount bills of exchange and keep with them the bills till they fall due. The
bills also appear on the liabilities side as they are meant for collection only.
9. Premises, Furniture and Fixtures less Depreciation: Banks have their own premises and furniture to carry out their banking
operations. These are also shown in the balance sheet.
10. Other Assets: Any other asset with the banks must have to show in the balance sheet
11. Profit and Loss: Lastly bankers must have to add Profit and loss
Negotiable instrument
In business world, negotiable instruments are important instruments of credit Negotiable instruments like cheques, bills of
exchange and promissory notes play an important role for making payments and discharging business obligations. A negotiable
instrument is a transferable document.
Characteristics of negotiable instrument
1. Easy and Free Transferability: A negotiable instrument may be transferred by delivery if it is a bearer instrument or by
endorsement and delivery if it is an instrument payable to order. A negotiable instrument can be transferred any number of
times till it is discharged.
2. Good Title to Transferee: The transferee, who takes the instrument bonafideand for valuable consideration, obtain a good
little despite any defects in the title of the transferor .A negotiable instrument gives absolute and good title on the transferor
3. Entitlement to Sue: The holder can sue in his own name. Holder in due course possesses the right to sue upon the
instrument in his own name though original title may be defective.
4. Must be Written: All negotiable instruments must be in writing.
This includes handwritten notes, printed, engraved, typed,etc
5. Time of Payment must be certain: If the order is to pay when convenient then such an order is not a negotiable instrument.
Here the time period has to be certain even if it is not a specific date
6. Payee also must be certain: The person to whom the payment is to be made must be a specific person or persons. Also,
there can be more than one payee for a negotiable instrument. And "person" includes artificial persons as well, like body
corporates, trade unions, chairman, secretary etc.
7. Payable to one or more payees: A negotiable instrument is a contract for the payment of money. A negotiable instrument
may be made payable to two or more payees jointly, or it may be made payable in the alternative one or two, or some several
payees.
8. Presumptions: The following presumptions shall be made in case of all negotiable instruments:
- Consideration: The instrument was made or drawn for consideration
- date : every instrument was drawn on a date which is appearing on it .
- acceptance before maturity
- transfer before maturity
- order of endorsement
- stamping of the instrument
- holder ids holder is due course
- proof of dishonor
Promissory notes
The term Promissory note has been defined under Section 4 of the Negotiable Instruments Act, as under:
"A promissory note is an instrument (not being a bank note or a currency-note) in writing containing an unconditional
undertaking, signed by the maker to pay a certain sum of money only to, or to the order of a, certain person, or to the bearer of
the instrument.
For example: (a) X signs an instrument stating, "I promise to pay Y or order 2500
Characteristics
1. A promissory note must be in the form of writing. It may be handwritten, typed or printed.
2. It must contain an undertaking by the maker or promise to pay. It should be signed by the maker of the promissory note;
otherwise, it is not valid.
3. It must contain an express promise or clear undertaking to pay.
4. The promise to pay must be unconditional. The promise should not be dependent upon a contingency.
5. The promise must be to pay a definite sum of money.
6. The payee must be a definite person. It must indicate with certainty the parties to the instrument.
7. The time of payment of a promissory note must be certain. It should be payable on demand or at a fixed or determinable
future time.
8. The document must be duly stamped under the Indian Stamp Act 1899.
Bill of exchange
A bill of exchange is regarding as a 'self-liquidating paper' (ie. it is easily converted into cash). It is a 'shiftable asset' it can be
discounted and is a 'safe' instrument. A bill of exchange is an instrument used for financing a transaction in goods that takes
some time to complete.
Drawer: The maker of a bill of Exchange is called a 'drawer
Drawee: The person who is directed by the drawer to pay money
Payee: The person named in the negotiable instrument, to whom the money is directed to be paid is called the 'payee'.
Acceptor: The person who accepts the bill on behalf of the drawee after he has given his assent is known as 'acceptor'.
Endorser: The person who endorses the instrument to another person
Endorsee: The person to whom the instrument is endorsed – holder ,- acceptor of honour, - drawee in case of need
Characteristics of a Bill of Exchange:
1. Writing: It must be in writing. It can be in any language or form
2. Order to Pay: It must contain an express order to pay and must be signed by the drawer.
3. Unconditional: The order must be unconditional. A bill of exchange with conditional order cannot be made payable
4. Certain Drawee: The order to pay 'must be directed to a certain person. Certainty of drawee is necessary for payee for
presentation of bill.
5.Signed: A bill must be signed by the drawer.
6.Money: The amount to be paid should be certain. The amount must be in terms of money and not in goods.
7. Payable: It may be payable on demand or after a specific period of time.
8.Stamping: A bill of exchange is subject to the stamp duty, as applicable to in the state by stamp Act, except bill on demand.
Types of bills of exchange bill of exchange can be classified on the basis of place ,purpose, document, parties, and time
On the basis of place – inland bill , foreign bill
On the basis of purpose – trade bill , accommodation bill
On the basis of document – documentary bill , clean bill
On the basis of parties – demand bill ,bearer bill
On the basis of time - demand bill , usance bill
Cheque
A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise on demand (Section 6,
Negotiable instruments Act). In other words, it is a bill drawn on a banker which is payable on demand. A cheque is always
drawn on a particular banker.
Characteristic of a cheque
1. Instrument in Writing: Cheques which are handwritten, typed or printed are legally valid. In practice banks do not pay
cheques written in pencil because alterations can be easily made.
2.Unconditional Order: A cheque must contain an unconditional order. It is not necessary that the word 'order' or its equivalent
be used in the cheque.
3. Drawn on a Specified Banker Only: A cheque should be drawn on a specified banker. For this purpose, each office of a bank
is treated as a 'banker.
4. Specified Sum of Money: A cheque is an order to pay a sum of money. The sum of money to be paid must be certain.
5. Specimen Signature: The signature of the customer on the cheque tallies with specimen signature of the same customer as
kept in the records of the bank.
6.Payable on Demand: A cheque is intended for speedy payment. It must be an order to pay a certain sum of money on
demand.
7. May be ante-dated or post-dated: A cheque may be antedated or post-dated i.e., it may bear a date earlier than the date on
which it is actually drawn, or a subsequent date.
Types of cheque
1. Bearer cheque A bearer cheque is the one in which the payment is made to the person bearing or carrying the
cheque. These cheques are transferable by delivery, that is, if you are carrying the cheque to the bank, you can be
issued the payment to.
2.Order cheque: an order cheques is one in which is expressed to be payable to order like pay to Mr. ABC Or order .
such a cheque can be made payable to a particular person only.
3.crossed cheque : A crossed check is any check that is crossed with two parallel lines, either across the whole
check or through the top left-hand corner of the check. This double-line notation signifies that the check may only be
deposited directly into a bank account.
Some other types are
4.Ante dated cheque : An ante dated cheque is one which contain a date prior to the date of issue.
5.Post dated cheque : If a cheque bears a date later then the date of issue, it is termed as post dated cheque
6. stale cheque : if a cheque is presented for thr payment after six months from the date of the cheque .it is called
stale cheque .
7. BLANK CHEQUE : A cheque on which the drawer puts his signature and leaves all other columns blanks is called
a blank cheque .
8. counter cheque : a check available to a bank customer to add their account number to make a withdrawal from
their account
Dishonour of cheque: In an ideal situation, the payer's bank transfers the funds from the payer's account to the
payee. However, there are times when the payer's bank or the payee's bank refuses to honour this commitment. The
reasons for this 'decline' may vary. In such a case, the cheque bounces and is called a 'dishonoured cheque' .
Endorsement
The word 'endorsement' in its literal sense means, a writing on the back of an instrument. But under the negotiable instruments
Act it means, the writing of one's name on the back of the instrument or any paper attached to it with the intention of
transferring the rights therein. Thus, endorsement is signing a negotiable instrument for the purpose of negotiation. The person
who effects an endorsement is called an 'endorser and the person to whom negotiable instrument is transferred by
endorsement is called the 'endorsee'.
Rules of valid endorsement
An endorsement is a very important step in the process of negotiation of an instrument. In order to be effective, the
endorsement must be regular and valid
1. Endorser's Signature: The endorsement must be written on the instrument or a slip annexed to it and must be signed by the
endorser or that of any other person who is duly authorized to endorse on his behalf.
2. Endorsement: The endorsement must be made by the holder of the instrument.
3. Spelling: The payee must sign his name in the same spelling as appearing on the face of the instrument. The endorser should
spell his name in the same way as it appears as on the cheque or bill as payee of the bill or endorsee of the cheque or bill.
4.Additions/Omissions of Initials: No initial of name should
either be added or omitted from the name of the payee or endorsee from the name appearing on the cheque.
5. Prefixes and Suffixes: The prefixes and suffixes of the names of the payee or endorsee need not be included in the
endorsement. For example, Mr., Mrs., Miss, Smt, Shree, Dr., Prof., etc. might appear before the names of the cheques but they
need not be written by the endorser. Similarly, suffixes like advocate, solicitor, surgeon etc. must be deleted. Otherwise it will
be an endorsement.
6. Endorsement in Ink: An endorsement in pencil or that by a rubber stamp is usually not accepted by banker. According to the
convention, the endorsement must be in ink only.
7. Forms of Regular Endorsement: Different forms of endorsement have been evolved through custom for different types of
customers. Endorsement is completed only by delivery, actual or constructive.
8. Endorsements are presumed to have been made in the order in which they appear on the instrument or on the back thereof.
9. The endorser may revoke the endorsement cancelling it before delivery of the instrument.
Types of Endorsement
1.General or black endorsement: According to Section 16 (1) of Negotiable Instrument Act 1881, an endorsement is called a
blank or a general if the payee or endorsee merely signs his name on the back of the instrument without stating the name of
endorsee.
2.Full or special Endorsement : When in addition to the signature, the endorser adds some words by way of direction to pay
the amount mentioned in the instrument to, or to the order of a specified person, the endorsement is said to be. Endorsement
in full.
3.Restrictive Endorsement : A restrictive endorsement is a conditional guaranty of a transfer of a negotiable instrument. That
is, an endorsement that takes effect only on the occurrence or non-occurrence of another act or event.
4.Partial Endorsement: An endorsement is said to be a Partial endorsement, if the endorser purports to transfer to the
endorsee only a part of the amount payable. In simple terms, endorsement which allows transferring to the endorsee a part of
the amount payable is known as partial endorsement.
5. Conditional Endorsement: An endorsement where the endorsee limits or negatives his liability by putting some condition in
the instrument is called a conditional endorsement. A condition imposed by the endorser may be a condition precedent or a
condition subsequent.
Precaution in using technology in banking
1. Don't Save Cards While Shopping Online: Do not save debit/credit card details on merchant websites, computers, or laptops
for quicker payments in the future. However, try to avoid this practice and delete card information as soon as you have
completed online purchase.
2. Don't Share Customer Passwords: Set a complicated password and keep changing it regularly.
3. Change Customer password regularly and ensure it's a strong one: It is important to keep account safe and helps maintain
confidentiality. Don't share password details with anyone.
4. Use One-Time Password Instead: During online payments, Buyer may get an option to either enter secure password, ATM
pin or OTP.
5. Don't Access Unknown Messages or Emails: Do not click on any unknown message or email that is similar to what bank
might send, check its email address.
6. Use Private Window for Transactions: Always log out after completing online transactions and use a private/virtual browser
for increased financial security.
7. Always use genuine anti-virus software: To protect Customer computer from phishing, malware, and other security threats.
8. Avoid Using Public Wi-Fi or Use VPN software: The biggest threat of an open Wi-Fi network is that the hacker can sit in
between the end user and the hotspot and can trace all the data
without any.