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.