In credit analysis there are basic principles of good lending which can guide a bank in averting a possible moral hazard, they include; Purpose – The purpose of taking the loan should be properly analysed to see if … To help you understand what you can expect from us, we've made a commitment to follow the Standards of Lending Practice for business customers. The Lending Code applies to personal and small business customers, whilst the Lending Principles have been created for larger business customers. The business of lending, which is main business of the banks, carry certain inherent risks and bank cannot take more than calculated risk whenever it wants to lend. Principles of Liquidity A commercial bank offers two types of deposits Demand deposits which the bank has to repay on demand like a Savings Account and Time deposits which the bank has to repay after the expiry of a certain period The Safety of funds stand very important when the bank follows the procedure of lending because the money that banks lend, comes from the public, so safety is the first concern of all the banks that mandatorily takes place. Thus from the bank’s viewpoint, the nature of security is the most important consideration while giving a loan. Image Courtesy : blogs.reuters.com/india/files/2013/05/indus.jpg. But the bank is forced to liquidate a portion of them to meet its requirements of cash in cash of financial crisis. Every lending officer in a bank is taught the “C”s of lending. Effective loan procedures recognizes that beyond the application of sound bank principles whenever a loan is made, there is need for urgency in appreciating the point when loan begins to look doubtful arriving at a decision as to the appropriate action, and in taking that action. Safety means that the borrower must be in a position to repay the loan and interest at regular interval as per sanction terms. Banker must ensure that money is locked up for a long time. The principles of lending revolve mainly around the concepts of safety, profitability and liquidity of advance. Important Principles of Lending in Banking | Principles of Credit, Important Principles of Lending in Banking | Credit Principles. Bank lend public money which is repayable on demand by depositors so bank lends for a short period. If, for example, the borrower invests the money in an unproductive or speculative venture, or if the borrower himself is dishonest, the advance would be in jeopardy. 1.1 The Concept of Bank Lending Bank lending is the granting of credit facilities to borrowers (individuals and organizations) at an interest rate, based on collateral security to be repaid after a period of time. It should, therefore, invest it funds in the shares of reputed companies where the possibility of decline in their prices is remote. Traditionally commercial banks in India used to provide security oriented finance to trade and industry. A banker follow certain basic principles of lending while doing carrying out their lending and credit operations. ‘Bank Lending: Principles and Practice,’ discusses the practicality of bank lending and the challenges faced by the industry. This is because the resources of the central government are much higher than the state and local governments and of the latter higher than the industrial concerns. Political stability and peace and security are the prerequisites for this. Prohibited Content 3. It is largely the government securities of the centre, state and local bodies that largely carry the exemption of their interest from taxes. Content Filtrations 6. The client must be an honest, upright customer whose record of transaction with the financial institution or in the society is remarkable. Do not put all eggs in one basket – Bank follow this approach (principle of diversity) while creating its advances portfolio. So in making investments the bank should choose securities, shares and debentures of such governments, local bodies and industrial concerns which satisfy the principle of safety. Otherwise, they run to their full term of 10 years or more and changes in the market rate of interest do not affect them much. Notice: It seems you have Javascript disabled in your Browser. An effective lending therefore is one that maximized profit to shareholders and bank from collapsing. Commercial banks also engaged in extensive lending on mortgages. Principles of Lending in Banking. They, therefore, advance loans on the security of such assets which can be easily converted into cash at a short notice. Banks also incur expenses to maintain deposits such as rent, stationary, premises rent, provision for depreciation of their fixed assets, bad loans. FCA Devang Sadrani, 9586555997 2. Finance to trade and industry Offers, Review 2020 loan helps in determining level of risk and impact., and ( ii ) individual bulk of their interest from taxes meant by Helicopter -. Securities which was sure a fair and stable return on the security of such assets which easily. Liquidity • bank lending principles is an important principle of bank lending and the benefits! 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