Banks follow the following Principles of lending:
Principles of lending – Any banking institution’s lending procedure is founded on fundamental concepts like security, liquidity, variety, stability, and profitability.
Liqudity:
A bank selects investments with sufficient liquidity for its investment portfolio. This is crucial because the bank must be able to quickly sell off a portion of the securities without significantly altering the market price to raise the money required to meet the urgent needs of its consumers. Bonds issued by the federal, state, and local governments are among the assets that can be sold swiftly without losing value.Online CA Consultation
Debentures and shares of large industrial businesses are also included in this group. Nevertheless, selling common company shares and debentures is only possible by reducing market values. Consequently, banks should purchase government securities, debentures, and shares of respectable industrial enterprises.
Safty:
Another prerequisite for lending is the security of the funds lent. Safety refers to the borrower’s ability to make principal and interest payments on time and on schedule without defaulting. Repayment of the loan depends on the kind of security provided, the borrower’s character, his capacity to repay the loan, and his financial circumstances.
Like other assets, bank investments are not without risk. Danger varies according to security. State and local governments’ securities are not as safe as those held by the federal government. State and local governments also have safer investments than corporate entities. The federal government has significantly more resources than local, state, and private sector organisations.
The value of industrial concerns’ shares and debentures is determined by their earnings, which might fluctuate based on the country’s economy. The bank should consider the government’s capacity to repay its debts while investing in government securities. Peace and stability in politics. In addition to peace and security, this requires political stability.
Stability:
It is safe to invest in the securities of a government that generates a lot of tax revenue and has a large borrowing capacity. The same applies to the securities of a wealthy municipality or local body and the state government in an affluent region. The bank should select securities, shares, and debentures from these local organisations, governments, and industrial concerns to uphold safety when investing.
As a result, the bank considers the type of security very important when deciding which loan to approve. The borrower’s creditworthiness must still be deemed based on his moral fibre, repayment capacity, and financial standing. The approved loan project must be technically and financially feasible to secure bank funds.
diversification:
A commercial bank should follow the diversification concept when choosing its investment portfolio. Instead of investing all its excess capital in a single type of securities, it should diversify its holdings. It ought to choose bonds and stocks from different sectors of the economy with locations across the country. Local groups and state governments ought to follow the same guidelines. Reducing risk in an investment portfolio is the aim of diversification for banks.
Lending money to various companies, sectors, and occupations falls under the definition of diversity. A bank should follow the maxim, “Don’t put all your eggs in one basket.” It should spread its risks by lending money to several businesses and trades dispersed across the country’s regions.
Stability: Purchasing equities and other assets with very steady pricing must be vital to a bank’s investment plan. The bank cannot bear any decline in the value of its holdings. As a result, it ought to invest its funds in shares of respectable companies where a price decline is unlikely.
Fixed interest rates apply to government bonds and corporate debentures. Their value fluctuates along with the market interest rate. However, due to the financial crisis, the bank must liquidate some of them to satisfy its cash needs. Otherwise, they complete their full term of 10 years or longer and are not significantly impacted by fluctuations in the market interest rate. As a result, bank investments in debentures and bonds are safer than those in company shares.
Corporate debentures and government bonds have fixed interest rates. Their worth varies in tandem with the rate of interest in the market. However, to meet its cash needs, the bank had to sell some of them because of the financial crisis. If not, they finish their entire term—ten years or more—and are not significantly harmed by changes in the market interest rate. Consequently, bank investments in bonds and debentures are more secure than those in stock in companies.
FAQs-
“Principles Of Good Lendings” Liquidity, or assurance for the future, is an additional crucial element of banking lending. The Bank Will Consider Potential Security Measures Before Granting a Loan.
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“Principles Of Bank Lendings” Any banking organization’s loan process is built upon core principles such as profitability, diversity, stability, security, and liquidity.
“Principles Of Good Lendings” Liquidity, or assurance for the future, is an additional crucial element of banking lending. The Bank Will Consider Potential Security Measures Prior to Granting a Loan.
Disperse.
Examining, processing, etc., a credit request.
Observation and Reaction.