CHAPTER-1
PRINCIPLES OF LENDING
1. General :
a. Banking is both an art and science, which cannot be guided by merely a set of rules. It is to be
guided by general principles only. Even then there is no rigidity in the application of the set of
principles in banking.
b. The banker has to shift good things out of the elements which he comes across and, in it lies his
skill and diligence. No set of uniform rules can be invariably applied even in two similar
circumstances. In other words, he cannot be static. He should be changing according to the
changing types, times and conditions.
c. The banker should take into consideration the following aspects while dealing with a lending
proposition.
2. Safety of funds :
a. Safety is the first and foremost thing that the banker has to consider, especially because he has to
disburse depositors' money. As it is his primary duty to safeguard the monies of others, he has to
exercise caution, prudence and tact. Only out of experience the banker generally gets the
necessary caution and tact which go a long way in ensuring the safety of the money lent.
Sometimes a Bank gets such experience at a huge price.
b. The banker ensures that the money advanced by him go to the right type of borrowers and is
utilized in such a way that it will not only be safe at the time of lending but remains so throughout
and is repaid with interest after serving an useful purpose in trade, industry and agriculture etc. for
which the money is lent.
3. Identification of borrower :
a. The lending banker should satisfy himself by using all available sources of information as regards
the prospective borrower's character, integrity and business acumen. The usual sources are :
i. observation,
ii. market enquiry and if possible,
iii. study his past connections with any other institution
b. Generally, the banker should not be carried away by the appearance of the borrower The banker
should tap other sources to know on the character and integrity at all times and not merely at the
time of taking the loan.
c. Branches should apply the parameters prescribed by the Bank under the Customer Acceptance
Policy and Customer Identification Procedures before opening an account The KYC norms as
envisaged in the Bank's Anti-Money Laundering Standard should strictly be adhered to since the
borrower customers are treated as low risk category.
d. In the case of partnership firms, the banker should collect extensive material and record comments
1
, regarding the integrity, worth, etc. of all the partners. The collection and updation of information
about the borrowers/guarantors should be an on-going process.
4. Purpose :
a. Purpose for which the loan is required is very important. The banker should be clear about the
purpose for which the loan is required and the sources wherefrom the borrower is expected to repay
the loan. If the advance is for hoarding stocks or for speculation, it should be discouraged. These
are anti-national and anti-social activities. Again, if the money required is for liquidation of prior
borrowings or to make good the loss incurred or for unproductive expenditure, then the banker
should cautiously appraise the proposal.
b. The borrower may require stop-gap finance till the money from other sources flows in. Such
proposals may be favourably considered for good parties depending upon merits of each case and
subject to RBI guidelines from time to time.
c. After nationalisation financing of agriculture, small scale industries and rural economy had gathered
momentum. Banks were asked to extend credit facilities to new classes of people
namely professionals, self-employed persons, retail traders, agriculturists and transport
operators for productive purposes and generation of employment.
d. Bank's lending has to be purpose oriented and the purpose shall be socially and economically
desirable.
5. Liquidity / Repayment:
a. Due emphasis on repayment should be there. The sources and method of repayment should be
decided upon while disbursing credit and the borrower should adhere to it. The security offered
should be preferably easily realizable and/or self-liquidating. The reason why banker attaches more
importance to repayment is to recycle the funds and make available these funds for other needy
borrowers apart from the fact that deposits raised are required to be paid on demand or at short
notice. For example, an advance of Rs.50 lakhs on the security of legal mortgage of posh building in
the heart of a Metropolitan City with a market value of Rs.l 00 lakhs is safe indeed. If however, the
recovery is to be made through a Court process, it may take a few years, in which case the loan is
not liquid, in essence, the borrower should pay-off the loan on due date and the banker should
reserve the right to call back the advance at any time.
b. In short term loans, there is more liquidity than in medium or long term advances. Although much of
the credit extended by the banks is in the forms of CC/OD/loans repayable on demand and mostly-
for the purpose of Working Capital, they also evince interest in providing Term Loans for asset
creation etc. The refinance facility offered by RBI/SIDBI/NABARD etc. have been helpful to banks in
providing liquidity in their term loans. However, refinance is availed from respective refinancing
agencies for all eligible advances subject to the interest spread and bank's liquidity position.
c. In recent times, commercial banks have been increasing their term lendings either singly or in
participation with financial institutions. Banks should ensure that such increased participation in term
2
PRINCIPLES OF LENDING
1. General :
a. Banking is both an art and science, which cannot be guided by merely a set of rules. It is to be
guided by general principles only. Even then there is no rigidity in the application of the set of
principles in banking.
b. The banker has to shift good things out of the elements which he comes across and, in it lies his
skill and diligence. No set of uniform rules can be invariably applied even in two similar
circumstances. In other words, he cannot be static. He should be changing according to the
changing types, times and conditions.
c. The banker should take into consideration the following aspects while dealing with a lending
proposition.
2. Safety of funds :
a. Safety is the first and foremost thing that the banker has to consider, especially because he has to
disburse depositors' money. As it is his primary duty to safeguard the monies of others, he has to
exercise caution, prudence and tact. Only out of experience the banker generally gets the
necessary caution and tact which go a long way in ensuring the safety of the money lent.
Sometimes a Bank gets such experience at a huge price.
b. The banker ensures that the money advanced by him go to the right type of borrowers and is
utilized in such a way that it will not only be safe at the time of lending but remains so throughout
and is repaid with interest after serving an useful purpose in trade, industry and agriculture etc. for
which the money is lent.
3. Identification of borrower :
a. The lending banker should satisfy himself by using all available sources of information as regards
the prospective borrower's character, integrity and business acumen. The usual sources are :
i. observation,
ii. market enquiry and if possible,
iii. study his past connections with any other institution
b. Generally, the banker should not be carried away by the appearance of the borrower The banker
should tap other sources to know on the character and integrity at all times and not merely at the
time of taking the loan.
c. Branches should apply the parameters prescribed by the Bank under the Customer Acceptance
Policy and Customer Identification Procedures before opening an account The KYC norms as
envisaged in the Bank's Anti-Money Laundering Standard should strictly be adhered to since the
borrower customers are treated as low risk category.
d. In the case of partnership firms, the banker should collect extensive material and record comments
1
, regarding the integrity, worth, etc. of all the partners. The collection and updation of information
about the borrowers/guarantors should be an on-going process.
4. Purpose :
a. Purpose for which the loan is required is very important. The banker should be clear about the
purpose for which the loan is required and the sources wherefrom the borrower is expected to repay
the loan. If the advance is for hoarding stocks or for speculation, it should be discouraged. These
are anti-national and anti-social activities. Again, if the money required is for liquidation of prior
borrowings or to make good the loss incurred or for unproductive expenditure, then the banker
should cautiously appraise the proposal.
b. The borrower may require stop-gap finance till the money from other sources flows in. Such
proposals may be favourably considered for good parties depending upon merits of each case and
subject to RBI guidelines from time to time.
c. After nationalisation financing of agriculture, small scale industries and rural economy had gathered
momentum. Banks were asked to extend credit facilities to new classes of people
namely professionals, self-employed persons, retail traders, agriculturists and transport
operators for productive purposes and generation of employment.
d. Bank's lending has to be purpose oriented and the purpose shall be socially and economically
desirable.
5. Liquidity / Repayment:
a. Due emphasis on repayment should be there. The sources and method of repayment should be
decided upon while disbursing credit and the borrower should adhere to it. The security offered
should be preferably easily realizable and/or self-liquidating. The reason why banker attaches more
importance to repayment is to recycle the funds and make available these funds for other needy
borrowers apart from the fact that deposits raised are required to be paid on demand or at short
notice. For example, an advance of Rs.50 lakhs on the security of legal mortgage of posh building in
the heart of a Metropolitan City with a market value of Rs.l 00 lakhs is safe indeed. If however, the
recovery is to be made through a Court process, it may take a few years, in which case the loan is
not liquid, in essence, the borrower should pay-off the loan on due date and the banker should
reserve the right to call back the advance at any time.
b. In short term loans, there is more liquidity than in medium or long term advances. Although much of
the credit extended by the banks is in the forms of CC/OD/loans repayable on demand and mostly-
for the purpose of Working Capital, they also evince interest in providing Term Loans for asset
creation etc. The refinance facility offered by RBI/SIDBI/NABARD etc. have been helpful to banks in
providing liquidity in their term loans. However, refinance is availed from respective refinancing
agencies for all eligible advances subject to the interest spread and bank's liquidity position.
c. In recent times, commercial banks have been increasing their term lendings either singly or in
participation with financial institutions. Banks should ensure that such increased participation in term
2
