PRINCIPLES OF BANK LENDING POLICIES

sunandaC

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PRINCIPLES OF BANK LENDING POLICIES---------------


The main business of banking company is to grant loans and advances to traders as well as commercial and industrial institutes.

The most important use of banks money is lending. Yet, there are risks in lending.

So the banks follow certain principles to minimize the risk:

1. Safety

2. Liquidity

3. Profitability

4. Purpose of loan

5. Principle of diversification of risks

• SAFETY:-

Normally the banker uses the money of depositors in granting loans and advances.

So first of all initially the banker while granting loans should think first of the safety of depositor’s money.

The purpose behind the safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.

• LIQUIDITY:-

It is a legal duty of a banker to pay on demand the total deposited money to the depositor.

So the banker has to keep certain percent cash of the total deposits on hand.

Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.

• PROFITABILITY:-


Commercial banking is profit earning institutes. Nationalized banks are also not an exception.

They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees.

Moreover the banker can also incur business cost and can give more benefits to customer.

• PURPOSE OF LOAN:-




Banks never lend or advance for any type of purpose.

The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes.

For example, the bank gives such loan for the requirement for unproductive purposes.

• PRINCIPLE OF DIVERSIFICATION OF RISKS:-


While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured.

Suppose, any particular state is hit by disasters but the bank shall get benefits from the lending to another states units.


Thus, he effect on the entire business of banking is reduced.


There are proverbs that do not keep all the eggs in one basket.
 
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