GENERAL PRINCIPLES OF LENDING

Important considerations for good lending

A) Safety -
(i) 5 Cs of the borrower
Character – Willingness to repay – honesty, integrity, responsibility
and attitude / commitment of the borrower to repay
Capacity – Success of the borrower’s business as reflected in financial
condition and ability to repay through cash flow and earnings
Capital – The borrower’s stake in business as also his intrinsic
financial strength as reflected in his equity capital or net worth
Collateral – The borrower’s ability to offer quality assets to provide
adequate protection to the bank against default in repayment
Conditions – Recent trends in borrower's line of activity and changing
economic conditions that might impact his financial conditions and
thereby the ability to repay
(ii) Purpose
- Working capital finance
- Production & marketing finance
- Busy season finance
- Import and export finance
- Bridge finance, TODs
- Personal loans to entrepreneurs, technicians, self-employed

persons, artisans and professions

iii) Security

Whether Whether Whether stable Whether

marketable ascertainable transferable

M A S T
Marketability Ascertainability Stability Transferability

B) Liquidity

Self liquidating Easily realisable by sale Whether repayment could

be ensured at short notice

C) Diversification
 Small loans to a Diversified Different industries rather
than to one or one group
large number of borrowers securities rather than of industries. Region-wise,
rather than group-wise and industry-
any one type of wise distribution
big loans to a few
security

D) Expediency (Social necessity)

Whether Whether Whether Whether Whether Whether

promoting export supporting employment promoting a
national and an economic oriented production oriented in the small scale
public activity of wealth in backward industrial
interest is aimed at the form of areas sector or
involved generating goods or supporting
surplus services neglected
sector
1 2 3 4 5 6

E) Profitability

Yield should be Cost of funds and cost Other income accruing from
commensurate with the of operation should be business, anciliary business if
risk low the proposal is entertained.

F) Suitability

Source and Duration Purpose - Nature of Statutory Availability

mode of of loan – whether good security restrictions- RBI of lending
repayment short term or bad i.e. and directives resources
or long productive or amount of and the
term speculative loan prevailing
local
economic
conditions
1 2 3 4 5 6

G) Viability

Economic Technical feasibility Financial Managerial

feasibility - –raw materials feasibility – competence and
ensuring capacity, supplies, availability of
demand and government cost of needed personnel –
supply position, licensing, import production, and both technical and
cost of production, policies, transport profitability, cash skilled
sale prospects and bottlenecks, wage
price level levels, labour flow, estimated
situation, power and sources of funds
water supply,
availability of
machineries and
other civic facilities