There are few full general principles of goodness lending which every banker follows when appraising an advance proposal. These full general principles of goodness lending are explained inward this article.
1. Safety
"Safety first" is the most of import regulation of goodness lending. When a banker lends, he must experience for certain that the advance is safe; that is, the money volition definitely come upwardly back. If, for example, the borrower invests the coin inward an unproductive or speculative venture, or if the borrower himself is dishonest, the advance would survive inward jeopardy. Similarly, if the borrower suffers losses inward his describe organization due to his incompetence, the recovery of the coin may perish difficult. The banker ensures that the coin advanced past times him goes to the right type of borrower in addition to is utilized inward such a means that it volition non merely survive rubber at the fourth dimension of lending but volition stay then throughout, in addition to afterwards serving a useful operate inward the merchandise or manufacture where it is employed, is repaid alongside interest.
2. Liquidity
It is non plenty that the coin volition come upwardly back; it is also necessary that it must come upwardly dorsum on need or inward accordance alongside agreed terms of repayment. The borrower must survive inward a seat to repay inside a reasonable fourth dimension afterwards a need for repayment is made. This tin survive possible merely if the coin is employed past times the borrower for short-term requirements in addition to non locked upwardly inward acquiring fixed assets, or inward schemes which accept a long fourth dimension to pay their way. The origin of repayment must also survive definite. The argue why bankers attach every bit much importance to 'liquidity' every bit to safety' of their funds, is that a mass of their deposits is repayable on need or at curt notice. If the banker lends a large portion of his funds to borrowers from whom repayment would survive coming inward but slowly, the powerfulness of the banker to run into the demands made on him would survive seriously affected inward spite of the security of the advances. For example, an advance of Rs.50 lakhs (approx. $111,354.60 USD) on the security of a legal mortgage of a bungalow of the marketplace value of Rs. 100 lakhs (approx. $222,716.82 USD), volition survive rattling safe. If, however, the recovery of the mortgage money has to survive made through a courtroom process, it may accept a few years to produce so. The loan is rubber but non liquid.
3. Purpose
The operate should survive productive then that the coin non merely stay rubber but also provides a definite origin of repayment. The operate should also survive curt termed then that it ensures liquidity. Banks discourage advances for hoarding stocks or for speculative activities. There are obvious risks involved therein apart from the anti-social nature of such transactions. The banker must closely scrutinize the operate for which the coin is required, in addition to ensure, every bit far every bit he can, that the coin borrowed for a detail operate is applied past times the borrower accordingly. Purpose has assumed a special significance inward the introduce twenty-four hours concept of banking.
4. Profitability
Equally of import is the regulation of 'profitability' inward depository fiscal establishment advance similar other commercial institutions, banks must brand profits. Firstly, they conduct maintain to pay involvement on the deposits received past times them. They conduct maintain to incur expenses on establishment, rent, stationery, etc. They conduct maintain to brand provision for depreciation of their fixed assets in addition to also for whatever possible bad or doubtful debts. After coming together all these items of expenditure which come inward the running damage of banks, a reasonable profit must survive made; otherwise, it volition non survive possible to deport anything to the reserve or pay dividend to the shareholders. It is afterwards considering all these factors that a depository fiscal establishment decides upon its lending rate. It is sometimes possible that a detail transaction may non appear profitable inward itself, but at that spot may survive about ancillary describe organization available, such every bit deposits from the borrower's other concerns or his foreign exchange business, which may survive highly remunerative. In this way, the transaction may on the whole survive profitable for the bank. It should, however, survive noted that lending rates are affected past times the Bank Rate, inter-bank contest in addition to the Federal / Central Bank's directives (e.g Directives of Reserve Bank of India, RBI), if any. The rates may also differ depending on the borrower's credit, nature of security, means of charge, in addition to cast in addition to type of advance, whether it is a cash credit, loan preshipment finance or a consumer loan, etc.
5. Security
It has been the practise of banks non to lend every bit far every bit possible except against security. Security is considered every bit an insurance or a cushion to autumn dorsum upon inward instance of an emergency. The banker carefully scrutinizes all the dissimilar aspects of an advance earlier granting it. At the same time, he provides for an unexpected modify inward circumstances which may impact the security in addition to liquidity of the advance. It is merely to furnish against such contingencies that he takes security then that he may realize it in addition to reimburse himself if the well-calculated in addition to almost for certain origin of repayment unexpectedly fails. It is wrong to regard an advance proposal from the indicate of stance of security alone. An advance is granted past times a goodness banker on its ain merits, that is to state alongside due regard to its safety, probable operate etc., in addition to afterwards looking into the character, capacity in addition to upper-case alphabetic quality of the borrower in addition to non merely because the security is good. Apart from the fact that taking of security reserves every bit a security valve for an unexpected emergency it also renders rattling difficult, if non impossible, for the borrower to heighten a secured advance from about other origin against the rattling security.
6. Spread
Another of import regulation of goodness lending is the diversification of advances. An chemical factor of risk is ever introduce inward every advance, all the same secure it powerfulness appear to be. In fact, the entire banking describe organization is i of taking calculated risks in addition to a successful hanker is an proficient inward assessing such risks. He is keen on spreading the risks involved inward lending, over a large number of borrowers, over a large number of industries in addition to areas, in addition to over dissimilar types of securities. For example, if he has advanced besides large a proportion of his funds against merely i type of security, he volition run a large adventure if that cast of security steeply depreciates. If the depository fiscal establishment has numerous branches spread over the country, it gets a broad assortment of securities against the advances. Slump does non usually impact all industries in addition to describe organization centres simultaneously.
7. National Interest, Suitability, etc.
Even when an advance satisfies all the aforesaid principles, it may soundless non survive suitable. The advance may run counter to national interest. The Federal / Central Bank (e.g Reserve Bank of India, RBI) may conduct maintain issued a directive prohibiting banks to allow the detail type of advance. The constabulary in addition to gild province of affairs at the house where the borrower carries on his describe organization may non survive satisfactory. There may survive other reasons of a similar nature for which it may non survive suitable for the depository fiscal establishment to grant the advance.
In the changing concept of banking, factors such every bit operate of the advance, viability of the proposal in addition to national involvement are assuming a greater importance than security, peculiarly inward advances to agriculture, minor industries, minor borrowers, in addition to export-oriented industries.
Ideal Advance
L.C. Mather describes an ideal advance every bit "one which is granted to a reliable client for an approved operate inward which the client has adequate experience, rubber inward the noesis that the coin volition survive used to payoff in addition to repayment volition survive made inside a reasonable menstruum from trading receipts or known maturities due on or well-nigh given dates."
