Principles and Form of Lending

Basically, there are five principles which must be duly observed while advancingmoney to the borrowers:

1. Safety
2. Liquidity
3. Dispersal
4. Remuneration
5. Suitability

Safety

Banker’s Fund comprise mainly of money borrowed from numerous customers on various accounts, such as Current Account, Savings Bank Account, Call Deposit Account, Special Notice Account and Fixed Deposit Account etc. it indicates that whatever money the banker hold is that of his customers who have entrusted the banker with it only because they have full confidence in the expert handling of money by their banker. Therefore , the banker must be very careful and ensure that his depositers’ money is advanced to safe hands where the risk of loss doesn’t exist.

The elements of character, capacity and capital can help a banker in arriving at a conclusion regarding the safety of advances allowed by him.

Liquidity

Liquidity means the possibilities of recovering the advances in emergency, because all the money borrowed by the customer is repayable in lumpsum on demand. Generally the borrowers repay their steadily, and the funds thus released can be used to allow fresh loans to other borrowers. Nevertheless the banker must ensure that the money he is lending is not blocked for an undue long time, and that the borrowers are in such a financial position as to pay back all the outstanding against them on a short notice. In such a situation, it is very important for a banker to study his borrower’s assets to liquidity, because he would prefer to lend only for a short period in order to meet the shortfalls in the working capital.

Corporate Finance

Managerial or corporate finance is the task of providing the funds for a corporation's activities. For small business, this is referred to as SME finance. It generally involves balancing risk and profitability, while attempting to maximize an entity's wealth and the value of its stock.

Long term funds are provided by ownership equity and long-term credit, often in the form of bonds. The balance between these forms the company's capital structure. Short-term funding or working capital is mostly provided by banks extending a line of credit.

Accounting Ratios for Financial Statement Analysis

Liquidity Analysis Ratios


                                  Current Assets
Current Ratio = ------------------------
                             Current Liabilities

                            Quick Asset
Quick Ratio = ----------------------
                           Current Liabilities


Quick Assets = Current Assets - Inventories

                                                  Net Working Capital
Net Working Capital Ratio = --------------------------
                                                     Total Assets

Net Working Capital = Current Assets - Current Liabilities

Profitability Analysis Ratios


                                                        Net Income
Return on Assets (ROA) = ----------------------------------
                                                    Average Total Assets

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2

                                                               Net Income
Return on Equity (ROE) = --------------------------------------------
                                                 Average Stockholders' Equity

Average Stockholders' Equity = (Beginning Stockholders' Equity + Ending Stockholders' Equity) / 2

Financial Statement

There are five key financial statements

1. Income statement

2. Balance sheet

3. Statement of retained earning

4. Statement of cash flow

5. Notes to financial statement

Income Statement

The income statement provides a financial summary of the firm’s operating results during a specified period. Most common are income statements covering a 1-year period ending a specified date, ordinally 31 December or 30 June of the calender year.

Balance Sheet                                                Assets = Liabilities + Equity

The balance sheet presents a summary of the firm’s financial position at a given point in time. The statement balances the firm’s assets(what it owns) against its financing, which can be either debt (what it owns) or equity (what was provided by owners).