This document discusses key principles for banks to consider when lending money. It outlines factors like safety, liquidity, purpose, profitability, security, and diversity. Specifically, it notes that banks must lend in a safe manner by investing in sound securities to maintain depositor confidence. Loans should also be for productive purposes that ensure repayment ability. Additionally, banks aim to earn profits from interest received on loans exceeding interest paid on deposits. Overall, the document provides guidance on responsibly assessing borrower capacity and purpose to make secure, profitable loans while maintaining depositor trust.
2. LENDING
To give or allow the use of temporarily on the condition
that the same or its equivalent will be returned.
To provide (money) temporarily on condition that the
amount borrowed be returned, usually with an interest fee.
4. SAFETY
A bank lends what it receives from the public as deposits. The
success of a bank depends upon the confidence of the
depositing public.
Confidence could be infused in the depositors by investing the
money in safe and sound securities
Advances should be expected to come back in the normal
course.
The repayment of the loan depends upon the borrower’s
capacity to pay and willingness to pay.
The capacity depends upon the tangible assets of the borrower.
The willingness to pay depends upon the honesty and character
of the borrower.
5. • Liquidity refers to the ability of an asset to be
converted into cash without loss within short time.
•The liabilities of a bank are repayable on demand or at
a short notice. To meet the demand of the depositors
in time, the banks should keep its funds in liquid state.
•The borrower must be in a position to repay within a
reasonable time.
•Liquidity also signifies that the assets should be
salable without any loss.
6. PURPOSE
• A banker would not throw away money for any
purpose for which the borrower wants.
• The purpose should be productive so that the money
not only remains safe but also provides a definite
source repayment.
• Loans for undesirable activities such as speculation
and hoarding should be discouraged.
7. •A banker has to see that major portion of the assets
owned by it are not only liquid but also aim at
earning a good profit.
•The difference between the interest received on
advances and the interest paid on deposits constitutes
a major portion of bank’s income.
8. Security:
Security serves as a safety valve for an unexpected
emergency.
The security offered for an advance is a cushion to fall
back upon in case of need.
An element of risk is always present in every advance
however secured it might appear to be.
9. •The advances should be as much broad-based as
possible and must be in keeping with the deposit
structure.
•The advances must not be in one particular direction
or to one particular industry.
•Again, advances must not be granted in one area
alone.
10. VIABILITY
Economic feasibility - ensuring capacity, demand and
supply position, cost of production, sale prospects and
price level.
Technical feasibility –raw materials supplies, government
licensing, import policies, transport bottlenecks, wage
levels, labour situation, power and water supply,
availability of machineries and other civic facilities.
Financial feasibility –cost of production, and
profitability, cash flow, estimated sources of funds.
Managerial competence and availability of needed
personnel – both technical and skilled.