Principles of bank lending

FCA Devang Sadrani, 9586555997

 Meaning / Why Bank Lending principles are
important ?
 5 P’s
 Safety
 Security
 Suitability
 Profitability
 Liquidity
 Integrity
 Adequacy of Finance

 Meaning .....
The Ideal Advance is one which is granted to a reliable
customer for an approved purpose in which the customer
has adequate experience, safe in the knowledge that the
money will be used to advantage and repayment will be
made within a reasonable period...... L C Mather.
 Why this topic is important ?
 Major Portion of the Asset Structure of the Bank is
Advances.
 Have largest Impact on Earnings.
 Greatest Credit Risk and Potential Loss.
 Loan Losses/Fraud Cause MOST Bank Failures.

 People
 Purpose
 Payment
 Protection
 Prospects

 1. People
Who is the borrower and what is their
ability/willingness to pay?
 Type of Business/Industry
 Organizational Structure
 Payment History with Your Institution
 Credit Report
 Information from Other Lenders/Parties
Most Important ….Borrower kevo
che ?

 Purpose
Without knowing the purpose, the Bank cannot
define its product.
Sometimes, to fit in good Borrower, Banks come
out with different products to fit in the purpose
of Borrower.
Eg Cent Over Draft Home Loan, to give facility to
Home Loan Buyers to make furniture, or if the
working capital of the Business man is disturbed
while buying house, the o/d facility will help him.
As a banker, the initial interview should focus this.

 3.PAYMENT
What are the terms and borrower’s ability to
pay?
 Terms of Debt
 Source of Repayment
 Income to Debt Service Requirements
 Living/Other Expenses
 Other Sources of Income
 Consistency with People and Purpose

 4. PROTECTION
What is the collateral and what would it be
worth?
 Lien Perfection
 Lien Position
 Market/Liquidation Value
 Marketability
 Access/Control

 5. PROSPECTS
What is the likelihood of continued
repayment ability
 Company Trends/Future Prospects
 Industry Trends/Future Prospects
 Economic Forecasts
 Succession/Continuation Plans
 New Developments
 New Laws and Legislation

General Public
keep money in
Bank. They have
lot of confidence
in Bank.
Banks get money
in form of
Deposits.
Borrower
taking Loans
10-12% Interest charged
by Bank to the Borrowers
8-10% Bank will pay
interest to Depositors

Bank
Housing Loan
House Mortgaged
with Bank
Personal
Guarantee
Gold Loan
Gold taken
away by bank.
Insurance is also taken as a cover for loan.
Security should be realisable.
Enough margin for cover.
Value to be ascertained and should remain
constant.

 Move the money where it is desired.
 Purpose that is desirable from the point of
view of the nation as a whole.
 Government policy to the considered.
 Efforts of the government to combat inflation
and raising standard of living of the people.

 Base Rate + Profit.
 MCLR (Marginal Cost of Fund based Lending Rate) is the
internal benchmark rate for banks used for benchmarking
floating rate loans effective from 1st April 2016
 MCLR is based on cost of funds for banks and is derived as
sum of marginal cost of funds, negative carry on account
of CRR, operating costs of banks and tenor premium
 As MCLR is closely linked to repo rate, it will improve the
transmission of RBI’s repo rate cut to the end borrower
 Banks publish MCLR for at least five durations which are
overnight MCLR, 1 month MCLR, 3 month MCLR, 6 month
MCLR and 1 year MCLR. However banks may publish MCLR
base rates for more than five periods. The banks may
revise the MCLR rate every month.
 Interest rate on each floating rate loan would be reset on
based on the duration of the MCLR to which it is linked

 Copy this link :
https://www.myloancare.in/bank-base-rates-
plr-india/
 Excel sheet of the Trend analysis of Base rate.

 Base Rate
 Base Rate is the minimum interest rate at which a bank can lend
except for loans to its own employees, its retired employees and
against bank’s own deposits
 All floating and fixed rate loans sanctioned by banks before 1st
April, 2016 were priced using base rate as benchmark.
 PLR
 PLR (Prime Lending Rate) is the internal benchmark rate used for
benchmarking floating rate loans sanctioned by Non Banking
Financial Companies (NBFC) and Housing Finance Companies (HFC)
eg. India Bulls and HDB Finance.
 PLR is calculated based on average cost of funds
 NBFC and HFC generally price loan at discount on their existing PLR.
 How does MCLR base rate works?
 You need to consider two parameters while taking floating rate
home loan or business loan .
 A. Reset Frequency: The applicable MCLR rate will be the rate
corresponding to the interest rate reset frequency of the loan. So, a
home loan with a reset frequency every one year will be priced with
the 1 year MCLR as the benchmark and a home loan with a 3 month
reset will be price with the 3 month MCLR as the benchmark.

 Spread: You need to consider the spread (margin that you pay over the banks
MCLR) for the particular loan type of the bank. The margin charged would be
fixed at time of sanction and can be changed only if there is change in
customers’ credit profile. For instance, Bank A has 1 year MCLR of 9.1% and
spread of 0.2 % for home loan. The interest rate that you will be charged in
this case would be 9.3%.
 MCLR Base rate
 Borrowers who have taken loan from banks before 1st April 2016, their loan
will be priced at base rate, instead of MCLR
 If you check the MCLR and base rate of banks shown above, you will notice
that MCLR rates are mostly 5 - 50 bps lower compared to base rate. The
reason for this is MCLR is closely linked to repo rate, and hence it has
improved the transmission of RBI’s repo rate cut to the end borrower
 In the current economic scenario where interest rate and bonds yields are
falling, and hence banks are compelled to reduce the MCLR, it would be wise
to switch from base rate to MCLR rate regime. All existing borrowers have
the option of shifting to MCLR regime by paying a conversion fee of 0.5-1%
of the loan amount
 Impact of MCLR on Interest rate, loan tenure and EMI’s
 As MCLR is closely linked to cost of funds of banks and the repo rate, hence
any change in the repo rate will impact your floating interest rate on home
loan or business loan
 When a bank reduces the MCLR, your interest rate on floating home loan will
be reduced. Generally this will not have any impact on EMI paid but it will
impact the loan tenure

 Short term finance such as Bill Discounting.
 Non Fund Based Lending.(L/C etc ).
 Should not be in a position of “Locked In”
through granting “Massive” Long Term Loans.

 Quality of Being honest and having strong
moral Principles.- Dict. Meaning of Integrity.
 Borrower’s integrity should be seen.
 Bank also to maintain Integrity. The leakage
of data of the client is the biggest Problem.

 Bank to lend a sum which is adequate for the
project. If project is fail, bank loan will fail.
Ultimately, problem ????
Bank
Funds given
by the Bank
is Rs. 50
Lacs
Borrower
with Total
Project
Cost of
Rs.1
crore.
Own source
able to
Manage
another 20
Lacs.
Always Ask ?
From where
you will
manage your
other funds
? ?

 Finance should be given on proper time.
 Opportunities might lapse by the borrower.

 Principles of Sound Lending should address
following questions :-
a. Who is to be financed ?
b. What is to be financed ?
c. How to Finance and When to finance?
d. What is the likely outcome after financing ?
If these principles are properly
followed, the BANKS Will

THANK YOU

Principles of bank lending

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