Bank Lending
Contents
• Principles of Lending
• Form of Lending
– Cash Finance (Cash Credit)
– Overdraft
– Loans (TermFinance)
– Purchase and Discounting ofBills
– Hire-purchase and Leasing Finance
PRINCIPLES OF SOUND LENDING
Safety
Liquidity
Profitability
Security
Diversification of
risks
Remuneration
SAFETY
• When a loan or investment is made, the banker will
have to ensure that the money advanced is returned
by the borrower along with interest within the
predetermined period.
8-10% Bank will pay
interest to Depositors
General Public
keep money in
Bank. They have Banks get money
lot of confidence Borrower
in form of
in Bank. taking Loans
Deposits.
10-12% Interest charged
by Bank to the Borrowers
LIQUIDITY
An asset is said to be liquid when it can be converted
into cash within a short notice, without loss. As the
bank is investing or lending the depositors’ money, it
has to take more precaution while doing so. The
depositor may demand his/her money at any time &
the bank must be in a position to repay the same.
SECURITY
• The banker should ensure that the borrower has
the ability & will to repay the advances as per
agreement.
DIVERSIFICATION OF RISKS
• The banker should aim at spreading the advances
as widely as possible over different industries &
different localities.
• This would enable him to compensate any losses
which might arise as a result of unexpected
factors adversely affecting particular industries
and/or particular localities.
Remuneration
• The banker need sufficient earnings tomeet
the following besides others:
– Return payable to money deposited withit
– To meet various statutory monitory requirements
under the banking law.
– Salaries and benefits payable to staffmembers.
– Payment of dividends to shareholders.
Forms of Lending
o Cash Finance (Cash Credit)
o Overdraft
o Loans (Term Finance)
o Purchase and Discounting ofBills
o Hire-purchase and LeasingFinance
Cash Finance (CASH CREDIT)
• A Cash Credit is a very common form of borrowing
by commercial and industrial concerns, and it is made
available either against pledge or hypothecation of
good.
OVERDRAFTS
• When a customer requires temporary adjustment,
he may be allowed to overdraw his current
account.
• The main difference between cash credit &
overdraft is the latter is supposed to be a form of
bank credit to be made use of occasionally & the
former is used for long terms by commercial &
industrial concerns doing regular business.
LOANS
• In case of loan, the banker advances a lump sum for a
certain period at an agreed rate of interest.
• The entire amount is paid on an occasion either in cash
or by credit in his current account which he can draw at
any time.
Two categories of loan
Unsecured Secured
• Unsecured loans are • Secured loans are those
those loans which are which are granted
against the security of
not covered by the tangible assets, like
security of tangible stock in trade and
assets. immovable property.
TERM LOAN
• Where a loan is granted for a period exceeding
one year & is repayable according to a
schedule of repayment, as against on demand
& at a time is known as ‘term loan’.
• Where the period exceeds one year but not, 5
to 7 years, it is known as ‘medium term loan’.
• A loan with longer repayment schedule is
known as ‘long term loan’.
PARTICIPATION LOAN or CONSORTIUM
ADVANCE
• Where single loan is granted by more than one
financing agency, it is termed as a participation
or consortium loan.
• The assets or the securities of the borrower are
charged jointly and severally in the same ratio
as the contribution of participating bank.
• This system is now been quite popular in
Pakistan also.
Purchase and Discounting of bills
• The banker advances money on the security of
bills of exchange after deducting a certain
percentage, technically known as ‘discount’, from
the face value of the bill.
– Documentary bills of exchange
– Clean bills of exchange
– Demand bills of exchange
– Usance bills of exchange
• When discounting , the banks deduct amount at
mentioned discount rate and balance is paid to the
party.
Hire-purchase and Leasing Finance
• Sometimes an intending purchaser has no
money sufficient to purchase a certain
transport vehicle, machinery, computers or
other durable consumer goods.
• Therefore, banks provide finance tohire
purchase orlease the needed goods.
1.Paid up capital
2.Reserves
3.Deposits
4.Borrowings from Reserve Bank of India
5.Participation certificates
6.Undistributed profit
7.Refinance loans from various institutions
Credit
Information
Bureau
(India) Limited
(CIBIL)
TransUnion CIBIL Limited is a credit information company operating
in India. It maintains credit files on 600 million individuals and 32 million
businesses.
1.Pre- screening of loan application
2.Checking past track record
3.Analyzing credit report
4.Analyzing financial statements
5.Physical verification of assets
Loan evaluation process
As a part of lending policy, bankers always
advance loans against some security or other
Securities
for lending
Personal Collateral
security security
hypothecation
pledge
mortgage
Hypothecation occurs when an asset is pledged as collateral to
secure a loan, without giving up title, possession or ownership
rights.
A mortgage is a loan in which property or real estate is
used as collateral. The borrower enters into an agreement
with the lender (usually a bank)
Types of collateral securities
1.Stock exchange securities
2.Goods and title to goods
3.Bills of exchange
4.Life insurance policy
5.property
1. Availability of capital funds
2. Earnings potential of bank
3. Nature and types of deposit accounts( deposit profile)
4. State of the economy
5. Monetary policy of central bank
6. Ability of the bank
7. competition
