ADVANCES
PRINCIPLES OF LENDING
Bank lending is an art as well as a science. Techniques, tools and methods are available for appraising a credit proposal. These are mostly mechanical. One can learn these with a little practice. But principles which are guide to action and aid to perfection are not static and are drawn from experience. According to L.C. Mather "The ideal advance is one which is granted to a reliable customer for an approved purpose in which the customer has adequate experience, safe in the knowledge that the money will be used to advantage and repayment will be made within a reasonable period". Some of the basic principles that should govern bank lending are given below:
SAFETY
The safety of funds lent by a bank is of paramount importance. The bank's business rests upon the public trust it enjoys and anything likely to shake this confidence such as doubts regarding the safety of funds lodged with it, must be carefully avoided. The advance should be granted to a reliable borrower who can repay the loan in the ordinary course of business.
SECURITY
Security is taken as a form of insurance so that it is available to fall back upon in the event of some unforeseen developments taking place. Naturally when security is taken, it should be good enough to be realized even in adverse circumstances if it is to serve as an insurance cover against contingencies. It should be easy to ascertain its value, which should remain steady over a period and provide enough margin for depreciation. The borrower should possess a clear and marketable title capable of being passed on to the banker easily and at little cost.
SUITABILITY
An advance may be safe and secured but still it may not be suitable or desirable. Banker should concentrate his lending on purposes, which are desirable from the stand point of economic health of the nation and economic imperatives of the country. Consideration has to be given to government control and its directions in the efforts to combat inflation and raising the standard of living of the people.
PROFITABLITY
An advance must be granted at a rate of interest considered satisfactory in relation to the risk entailed and keeping in view the amount of work and expenses the amount will cause to the bank.
LIQUIDITY
A Bank would remain liquid if its advances are also liquid. In order to meet the demands of depositors, it is essential for the banker to ensure that borrower would be in a position to repay the loan either on demand or within a reasonable period thereafter.
INTEGRITY
No advance should be made to a borrower of doubtful integrity. A banker should be concerned about the business integrity of the borrower.
ADEQUACY OF FINANCE
A prudent banker would not lend a sum, which is inadequate to finance a given project. If he does, not only he kills the project but sinks the advance as well because, a partly completed project cannot generate money to pay for the investment.
TIMELINESS
Not only that adequate finance be made available to the borrower, it is also important that it is given in time. It is better not to give the finance at all rather than giving it after a considerable lapse of time. Many opportunities might have been lost due to delay or many crises could have been averted but for the delay.
DIVERSIFICATION OF RISK
Banker should not grant advances to only a few business houses, undertaking, cities, industries or regions. It should be ensured that the advances are diversified in a good number of customers.
