BASIC PRINCIPLES OF LENDING

Objectives of Lending The basic objectives of lending are to grant credit facilities to the entities: i. ii. For a defined purpose. To deploy the Banks resources in a profitable manner and to achieve the statutory and regulatory norms.

Basic Principles To achieve these objectives, the Bank has to follow a prudent policy and conduct the business on the basis of sound principles of lending namely, Safety, Liquidity and Profitability. These aspects are further elaborated below.

Safety Safety of the funds lent has to be ensured with respect to: i. Borrower The Borrower should have the means, ability and willingness to repay the advance along with interest as per the terms of finance. These depend on factors like tangible assets, income generating potential, operational efficiency and integrity of the borrower. It is therefore imperative to make a thorough investigation into the means, character, antecedents, respectability and capacity of the borrower before allowing them any credit facilities and by keeping a close watch on their dealings and on the operations in their accounts during the period of advance. Character - Indicating the borrowers honesty, integrity, business ethics, regularity, dependability, reputation and promptness to keep promise. ii. Profitability Notwithstanding the socio-economic objectives of lending, the fact remains that banks are profit making institutions. They have to be run on commercial considerations to meet the expectations of the shareholders and ensure their healthy growth. The Bank should, therefore, have a proper mix of credit portfolio which would earn sufficient income to enable it to defray the cost of funds, meet establishment and other expenses, provide for contingencies and risky assets, build reserves and pay dividend to the shareholders.

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Liquidity As the funds lent mostly belong to the depositors and as the Bank should always be in a position to meet the demands of the depositors, it is essential that the loans and advances are recoverable in full on demand or within a reasonable period. It is, therefore, necessary to ensure that the funds lent are backed by securities that are easily marketable and realisable. Matching of Assets and Liabilities is very critical from this point of view.

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Security Though repayment in the ordinary course must come out of the surplus from business of the borrower, the security aspect cannot be neglected. Security serves as a cushion or comfort to fall back upon in the event on the borrowers failure or default in the repayment of advance. Adequate tangible security ensures safety of advance. The assets purchased out of the credit facilities are obviously the first to be taken. It is a safeguard against disposal/alienation of such securities. Wherever necessary, the advances could also be secured by obtaining collateral securities.