Lending business is a risky activity. As banks' main function is lending, they must follow certain principles in order to protect their funds. The basic principles that banks follow while lending are....
1. Safety:
Banks need to consider the borrowers' capacity to pay, willingness to pay, and income generation of the person or business entity. This is a safety check that banks need to consider while lending.
2. Liquidity:
Lent amount is to be paid in proper repayment schedules and inflow towards the loan or advance must be proper in order to fulfill the demand of their depositors.
3. Profitability:
The activity of lending is done in order to make some profit out of it.
4. Purpose:
The loans must be grant for some income generation purpose and not for speculation or some anti social activity. The purpose must be genuine.
5. Diversification of risk:
Banks need to diversify their risk by lending to different type, sectors and areas of businesses.
6. Security:
Security on the loan is the primary criteria for the bank. All secure loans are safe and can be recovered even the borrower is a defaulter.
Different types of lending....
Banks lend money in different ways. NThese are classified into following categories:
★ Fund based advances:
Fund based advances are those where the bank give money as loan or advance. These are for business entities and individuals. These are like term loans and working capital loans. Those may be secure or unsecure loans.
★ Working capital loans:
These are generally unsecure loans but vary from bank to bank and borrower to borrower. This is a type of loan taken to meet day to day cash requirement of the business entities. Requirements like purchase of raw material, payment of wages, payments to vendors etc.,. As said the criteria differ in lending, the documentation and securities also differ, where the loan will not have a fixed amount, or fixed intervals, or fixed period or fixed schedule for repayment. The best example is Overdraft (OD).
★ Term loans:
As the word 'term' denotes period these loans have to be paid back in a fixed period and fixed schedule. For these loans the rate of interest will be fixed as well as payment period and payment amount (like EMIs). These loans may be secure or unsecure loans and rate of interest varies for both, as rate of interest will be lower to secure loans compared with unsecure loans.
The best examples are: business loans, vehicle loans, jewellery loans. These are secure loans. And personal loan, credit cards etc are unsecure loans.
★ Secure loans:
These are loans that are granted on basis of certain security against it as collateral. If the borrower defaults in payment of the loan the security will be used for repayment. Security may be land, house, factory, jewellry, vehicle, shares, life insurance policies, fixed deposits etc.
★ Unsecure loans:
These loans are granted by banks without any security against it. Banks may be at high risk in these cases. The examples are loans like credit cards, personal loans, overdraft etc.
1. Safety:
Banks need to consider the borrowers' capacity to pay, willingness to pay, and income generation of the person or business entity. This is a safety check that banks need to consider while lending.
2. Liquidity:
Lent amount is to be paid in proper repayment schedules and inflow towards the loan or advance must be proper in order to fulfill the demand of their depositors.
3. Profitability:
The activity of lending is done in order to make some profit out of it.
4. Purpose:
The loans must be grant for some income generation purpose and not for speculation or some anti social activity. The purpose must be genuine.
5. Diversification of risk:
Banks need to diversify their risk by lending to different type, sectors and areas of businesses.
6. Security:
Security on the loan is the primary criteria for the bank. All secure loans are safe and can be recovered even the borrower is a defaulter.
Different types of lending....
Banks lend money in different ways. NThese are classified into following categories:
★ Fund based advances:
Fund based advances are those where the bank give money as loan or advance. These are for business entities and individuals. These are like term loans and working capital loans. Those may be secure or unsecure loans.
★ Working capital loans:
These are generally unsecure loans but vary from bank to bank and borrower to borrower. This is a type of loan taken to meet day to day cash requirement of the business entities. Requirements like purchase of raw material, payment of wages, payments to vendors etc.,. As said the criteria differ in lending, the documentation and securities also differ, where the loan will not have a fixed amount, or fixed intervals, or fixed period or fixed schedule for repayment. The best example is Overdraft (OD).
★ Term loans:
As the word 'term' denotes period these loans have to be paid back in a fixed period and fixed schedule. For these loans the rate of interest will be fixed as well as payment period and payment amount (like EMIs). These loans may be secure or unsecure loans and rate of interest varies for both, as rate of interest will be lower to secure loans compared with unsecure loans.
The best examples are: business loans, vehicle loans, jewellery loans. These are secure loans. And personal loan, credit cards etc are unsecure loans.
★ Secure loans:
These are loans that are granted on basis of certain security against it as collateral. If the borrower defaults in payment of the loan the security will be used for repayment. Security may be land, house, factory, jewellry, vehicle, shares, life insurance policies, fixed deposits etc.
★ Unsecure loans:
These loans are granted by banks without any security against it. Banks may be at high risk in these cases. The examples are loans like credit cards, personal loans, overdraft etc.
Thnx
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