2. INTRODUCTION Granting of advances is the primary function of a bank. A major portion of its funds is used for this purpose and this also the major sources of bank’s income . However, lending money is not without risk and ,therefore, a banker must take Proper precaution in this process. Some of the Important consideration to be kept in mind by a banker.
3. CONSIDERATION FOR SOUND LENDING While lending money the banker has to take into Account various consideration . SAFETY:- The borrower is in a position to repay the loan ,along with interest ,according to the terms of the loan contract. LIQUIDITY:-The banker must ensure that the borrower is able to repay the loan on demand or within a short period. PROFITABILIY:-they must employ their funds profitably so as to earn sufficient income .
4. PURPOSE:-Bank do not grant loans for each and every purpose , they ensure the safety and liquidity of their funds by granting loan for productive purpose. THE PRINCIPLE OF DIVERSIFICATION OF RISKS:-To safeguard his interest against unforeseen contingencies ,the banker follows the principle of diversification of risks.
5. BANK LENDING -POLICIES Lending policies and careful practices are Essential if a bank is to perform its credit Creation function effectively. As the bank grow in size and the number of banking personnel Involved in extending credit increase , it become essentials to put the lending policy on a formal footing.
6. OBJECTIVE OF LOAN POLICY To balance the conflicting requirement of liquidity and earning . To provide sound assets, protect depositors ‘funds and gives maximum return to shareholder. To ensure the achievement of socio-economic objective. To establish a standard for control purpose.
7. FACTOR AFFECTING LENDING POLICIES ASCERTANING TOTAL CREDIT REQUIREMENT OF THE CREDIT MARKET. APPRAISAL OF RESOURCES CAPITAL POSITION COMPETITIVE POSITION LOCAL AND NATIONAL ECONOMIC CONDITIONS. MONETARY AND FISCAL POLICY
9. CONTENTS OF A LOAN POLICY The Loan Policy of a bank must be definite and board based so that credit officers may not face any problem in evaluating the credit worthiness of loan applicants. The lending policy should prescribe specific guidelines with respect to such items as.
10. Loan territory:-loan policy must specify the regions to be served by the bank . Specification of territorial limits of lending business are essential in view of the limited resources of the bank and the limitation of the staff to supervise the entire loan territory. Size of Loan Portfolio:-the size of loan will differ from one bank to another . -credit demands of the community, - depositors ‘demand for funds - expertize and experience of bank staff’ - liquidity requirements etc.
11. Types of Loans to be made:-The spell out the different types of loans which will be made by the bank. The bank has to select best mix of different loan types. It will require the analysis of risks associated with various types of loans , the types of customers bank want to serve, relative profitability of different loan typologies, the need for diversification and the adequacy of capital fund.
12. Acceptable securities :-since loan are granted against security, policy statement as to the following will prove useful : - type of security that will be acceptable for each type of loan - whether account receivables will be acceptable as a security; Lending Criteria :-it has to be done on the basis of a define criteria. -Creditworthiness -Arrangement made for repayment of loan - purpose of loan
13. Loan liquidation :- to ensure safety and liquidity, a bank must have definite policy on loan liquidation. Loan commitment:- it is an agreement between a bank and the borrower whereby the bank commits an agreed amount of credit for a specified period. Loan Authority of Credit Officials:-it will help avoid duplication and overlapping.
14. LOAN PRICING Loan pricing means ‘the setting up of interest rates ,loan fees and compensating balances’. Rate of interest ; Loan Fees:-factors affecting loan pricing -the cost of fund raised. -the cost of making and servicing different kinds of loans. - the degree of risk involved - the maturity of loan - reasonable margin of profit.
