2. • Principles of Lending
• Form of Lending
Cash Finance
Overdraft
Loans (Term Finance)
Purchase and Discounting of Bills
Hire- Purchase and leasing Finance
Contents
3. Concept of bank lending
Bank lending is the granting of credit facilities to borrowers
(individuals &organizations )at an interest rate ,based on collateral
security to be repaid after a period of time. An effective lending
therefore is one that maximized profit to shareholders and liquidity
to depositors ,as well as, ensure societal economic development.
5. 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.
• The five elements of character, capacity ,capital,
condition and cash flow can help a banker in arriving
at a conclusions regarding the safety of funds allowed
by him as advance .
• For this purpose ,the banker will have to chose such
type of borrowers who are prompt in repayment of the
principle and interest amount .
6. Liquidity
• Liquidity is a company's ability to raise cash when it
needs it. There are two major determinants of a
company's liquidity position. The first is its ability to
convert assets to cash to pay its current liabilities
(short-term liquidity). The second is its debt capacity.
• The banker while making advances must see that
the money he is landing is not going to be locked up
for a long time, which should make his loans
&advances less liquid &more difficult to realize in
cases of emergency.
7. Dispersal
• 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.
• Dispersal of advances is very necessary from the
point of securities as well, because it reduces risk of
recovery.
8. Security
• The banker should ensure that the borrower has the
ability &will to repay the advances as per agreement.
• Before granting a secured advance the banker should
carefully consider the margin of safety offered by the
security concerned &possibilities of fluctuation in its
value, its repayment depends on the creditworthiness of
the borrower, that of the guarantor, wherever applicable .
9. Remuneration
• A major portion of the banker`s earnings comes from the
markup or return charged on the money borrowed by the
customers.
• The banker needs sufficient earnings to meet the following
besides others:
a) return payable to the money deposited with him;
b) To meet varios statutory monitery requirements under the
banking law,
c) Salaries and fringe benefits payable to the staff members;
d) An adequate sum to meet possible losses;
e) Payments of dividends to the shareholders.
10. Forms of lending
o Cash finance (cash credit)
o Overdraft
o Loans (term finance )
o Purchase and discounting of bills
o Hire-purchase and leasing finance
11. Cash finance (cash credits)
• A cash credit is very common form of borrowing by
commercial and industrial concerns ,and it is made
available either against pledge or hypothecation of good.
• In cash finance ,a borrower is allowed to borrow money
upto a certain limit, either at once or as and when required.
• The borrower prefer this form of lending due to the facility
of paying markup or service charges only on the amount he
actually utilized.
13. Overdrafts
• When a customer requires temporary adjustments, he may be
allowed to overdraw his current account .This arrangement like the
cash credit is advantageous as he is required to pay interest on the
amount actually used by him.
Secured overdraft (against collateral securities)
Clean overdraft (against personal securities)
• The main difference between cash credit &overdraft lies in the fact
that a cash finance is a bank finance used for long term by
commercial and industrial concerns on regular basis, while an
overdraft is a temporary accommodation occasionally resorted to
for a maximum period of 180 days.
14. Loans
• In case of a 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.
• The interest is charged for the full amount sanctioned whether he
withdraws the money from his account or not.
• The loan may be repaid in instalments or at the expiry of a certain
period. The loan may be made with or without security.
• A loan once repaid in full or in part cannot be withdrawn again by the
customer. In case a borrower wants further loan, he has to arrange
for a fresh loan.
15. Two categories of loan
• Unsecured loan :
unsecured loans are those loans which are
not covered by the security of tangible assets. Such loans are
granted to firms/institutions against the personal security of the
owner, manager or director.
• Secured loan;
secured loans are those which are granted
against the security of tangible assets ,like stock in trade and
immoveable property. Thus, while granting loan against the security
of some assets a charge is created over the assets of the borrower in
favor of the bank.
16. Participation loan or consortium advance
• Where single loan is granted by more than on financing agency, it is
termed as a participation of consortium loan.
• The assets or the securities of the borrower are charged jointly and
severally in the same ratio as the contribution or participating bank.
• This system is now been quite popular in Pakistan also.
17. Purchase &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 the balance is paid to the party.
18. Hire-purchase& 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 to hire purchase or lease the
needed goods .
