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.


Dispersal

As a principle, the dispersal of the amount of advances should be broadly based so that a large number of borrowing customers may benefit form the banker’s funds. Dispersal of advances is very necessary from the point of security as well, because it reduces the risk of recovery when something goes wrong in one particular sector or in one field.

Remuneration

The banker needs sufficient earning to meet the following

• Interest payable to the money deposited with him

• Salaries and fringe benefits payable to staff members

• Overhead expenses and depreciation and maintenance of the fixed assets of the bank

• An adequate sum to meet possible losses

• Provisions for a reserve fund to meet unforseen contingencies

• Payment of dividends to the shareholders

A major portion of banker’s earnings comes from the interest charged on the money borrowed by the customers.

Suitability

Here the word “suitability” is not to be taken in its usual literary sense but in broader sense of purport. It means that advance should be allowed not only to th carefully selected and suitable borrowers, but also in keeping with the overall national development plans chalked out by the authorities concerned. Before accomodating a borrower the banker should ensure that the lending is for a purpose in conformity with the current national credit policy laid down by the central bank of the country.