5 Important Principles Followed by the Banks for Lending Money

Banks follow the following Principles of lending:

principles of lending

Princeples of lending –Any banking institution’s lending procedure is founded on fundamental concepts like security, liquidity, variety, stability, and profitability.


A bank selects investments for its investment portfolio that have enough liquidity. It is crucial because the bank must be able to quickly sell part of the securities without significantly changing its market pricing if it needs cash to cover its clients’ immediate demands. There are some assets that can be easily sold without impacting their market pricing, such as bonds issued by the federal, state, and municipal governments. Get Online CA Consultation

Large industrial firms’ shares and debentures also fit into this group. However, ordinary firms’ shares and debentures are difficult to sell without lowering their market prices. Therefore, banks should invest in reputable industrial houses’ shares, debentures, and government securities.


Another lending tenet is the security of the money lent. Safety refers to the ability of the borrower to make timely, scheduled payments of the principal and interest without defaulting. The loan’s repayment is based on the type of security, the borrower’s personality, his ability to pay back the loan, and his financial situation.

principles of sound lending

Bank investments carry risk, just like other investments. The level of risk, however, varies depending on the security. Securities held by the federal government are more secure than those held by state and local governments. Additionally, local and state governments have safer investments than industrial organisations. This is due to the fact that the resources of the federal government are far greater than those of the state, local, and industry enterprises.

Actually, the shares and debentures of industrial concerns are based on their earnings, which may change depending on the nation’s economic activity. When investing in government securities, the bank should also take the ability of the government to repay its debts into account. Political harmony and stability. This need political stability as well as peace and security.

3. Stability:

Investing in the securities of a government with significant tax revenue and high borrowing capacity is quite safe. The same holds true for a wealthy municipality’s or local body’s securities as well as the state government in an affluent area. In order to satisfy the principle of safety, the bank should choose securities, shares, and debentures from such governments, local organisations, and industrial concerns when making investments.

Therefore, from the bank’s perspective, the type of security is crucial when making a loan decision. Even then, it must take into account the borrower’s creditworthiness, which is determined by his moral character, ability to repay, and financial situation. Above all, the project for which the loan is granted must be technically feasible and commercially viable in order for bank funds to be secure.

4. diversification:

A commercial bank should adhere to the diversification principle while deciding on its investment portfolio. It should diversify its investments rather than place all of its surplus money in one kind of security. It should select the stocks and bonds of various industries with locations in various parts of the nation. State governments and local organisations should adhere to the same rule. The goal of diversification is to lower the risk in a bank’s investment portfolio.

principles of sound lending

The notion of diversity also applies to the lending of money to different kinds of businesses, industries, and professions. A bank ought to abide by the saying, “Don’t put all your eggs in one basket.” By providing loans to numerous trades and industries located in diverse regions of the nation, it should spread its risks.


Investing in stocks and assets with highly stable prices should be another significant principle of a bank’s investment strategy. Any reduction in the value of its securities is unaffordable to the bank. Therefore, it should place its money into shares of reputable businesses where there is little chance of a price decrease.

principles of sound lending

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 is compelled to liquidate some of them in order 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 rate of interest. As a result, bank investments in debentures and bonds are safer than those in company shares. Legalari online ca services


the “Principles of sound lending” Not sacrificing safety or liquidity for greater profitability is a solid lending principle. That is to say, even if a party is willing to pay a very high interest rate, the bank should not grant advances to them because of their questionable ability to repay the loan.

“Principles of bank lendings” The loan process in any banking organisation is founded on fundamental ideas including security, liquidity, diversity, stability, and profitability.

“Principles of good lendings”  Liquidity…Assurance for the future…is yet another essential component of lending in banking. The bank will think about possible security measures before approving a loan application. …
Spread out.
Analysing a credit request, carrying it out, etc.

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