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    Principles of Lending

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    Sagar Choudhary
    The key principles of lending that banks consider are: 1. Safety - Ensuring funds lent are safe and will be repaid through factors like character, capacity, capital, condition, and collateral of borrowers. 2. Security - Requiring borrowers to deposit approved security as insurance for repayment. 3. Purpose - Investigating the purpose of loans to ensure repayment, focusing on productive purposes that generate income. 4. Liquidity - Maintaining ability to meet demands for cash by keeping reserves and investing in liquid assets.

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    Principles of Lending

    Uploaded by

    Sagar Choudhary
    69 views11 pages
    The key principles of lending that banks consider are: 1. Safety - Ensuring funds lent are safe and will be repaid through factors like character, capacity, capital, condition, and collateral of borrowers. 2. Security - Requiring borrowers to deposit approved security as insurance for repayment. 3. Purpose - Investigating the purpose of loans to ensure repayment, focusing on productive purposes that generate income. 4. Liquidity - Maintaining ability to meet demands for cash by keeping reserves and investing in liquid assets.

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    The key principles of lending that banks consider are: 1. Safety - Ensuring funds lent are safe and will be repaid through factors like character, capacity, capital, condition, and collateral of borrowers. 2. Security - Requiring borrowers to deposit approved security as insurance for repayment. 3. Purpose - Investigating the purpose of loans to ensure repayment, focusing on productive purposes that generate income. 4. Liquidity - Maintaining ability to meet demands for cash by keeping reserves and investing in liquid assets.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    69 views11 pages

    Principles of Lending

    Uploaded by

    Sagar Choudhary
    The key principles of lending that banks consider are: 1. Safety - Ensuring funds lent are safe and will be repaid through factors like character, capacity, capital, condition, and collateral of borrowers. 2. Security - Requiring borrowers to deposit approved security as insurance for repayment. 3. Purpose - Investigating the purpose of loans to ensure repayment, focusing on productive purposes that generate income. 4. Liquidity - Maintaining ability to meet demands for cash by keeping reserves and investing in liquid assets.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 11

    IX Semester

    Banking and Insurance Law


    (Course Code BALLBE907/ BBALLBE907/BCMLLBE907)

    UNIT II: Principles of Lending


    Week 5

    BY: Ongmula Bhutia


    Assistant Professor
    JLU, School of Law
    Introduction
    Principles of Lending

    Safety Security

    Purpose Liquidity
    Safety:
    • Since a banker deals with money belonging to others,
    he has to assure the safety of funds that he lends out.
    • The Banker should ensure that the funds lent are safe
    and would be repaid by the borrower as per the terms
    of sanction.
    • To ensure the safety of lending the following factors
    may be considered:
    • Five Cs: Character/conduct, Capacity, Capital,
    Condition, Collateral.
    Security:
    • Banks usually support their loans by asking the
    borrower to deposit approved security as an insurance
    against unforeseen contingencies.
    • Tangible security does offer a cushion for safety but
    only upto a point.
    • In a falling market, the value of security depreciates
    very fast and may prove inadequate to cover the
    advance.
    Security offered by a person borrowing money is also
    important as, it is an insurance against non -repayment.
    Purpose:
    • It is the responsibility of a banker to investigate into the
    purpose for which money is being borrowed by a person.
    • Repayment of loans depends to a large extent on the
    purpose for which loans are taken.
    • In case of default, such loans are recovered by sale of
    assets so created.
    • When advances are granted for productive purposes
    resulting in the creation of income yielding assets, there is
    a guarantee of repayment.
    Liquidity:
    • Liquidity means a bank's ability to meet any claim on it for
    cash on demand.
    • It implies the readiness with which the bank can convert'
    its assets into cash at the time of emergency.
    • Since a banker does his business with borrowed money
    which is subject to repayment on demand, he has to
    ensure liquidity while lending money.
    • Depositors develop faith in bank on the basis of liquidity,
    Therefore, this principle is as important as that of safety.
    • A portion of the deposits should be kept with the RBI in
    the form of CRR and another sizeable portion as SLR
    should be invested in approved securities.
    Diversification :
    • Since every loan has a risk, it is better to give advances
    for different purposes and spread the risk.
    • It is dangerous to concentrate advances in any particular
    area or field or sector.
    • It is always good to have a wider spread in terms of the
    number of borrowers, number of sectors, geographical
    area and securities.
    • The basic idea behind this principle of lending is not to
    keep all eggs in one basket.
    Profitability:
    • A commercial bank is essentially a profit hunting
    organisation with the main objectives of making
    profits. The banker is in a position to earn profits
    through advances.
    • banker should not ignore the profit motive while
    granting loans.
    • A bank should ensure that the funds that are lent bring
    a reasonable good return. At the same time they
    should also possess liquidity.
    • Lending rate of interest must not only profitable but
    also be flexible In the context of social banking.

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