PRINCIPLES AND FORMS OF LENDING Flashcards Preview

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Flashcards in PRINCIPLES AND FORMS OF LENDING Deck (17):
1

Principles of Lending

Basically there are five principles which must be duly observed while advancing money to the borrowers. They are:
Safety
Liquidity
Dispersal
Security
Remuneration or Profitability

2

Principles & Forms of Lending
Safety

Bankers' funds comprise mainly of money borrowed from numerous customers.

Whatever money the banker holds is that of his customers who have entrusted the banker with it only be-cause they have full confidence in the expert handling of money by their banker.
Character
Capacity
Capital
Conditions
Cash flow

3

Principles & Forms of Lending
Safety
1 CHARACTER

A borrower's character can indicate his intention to repay the advance,

honesty and integrity

4

Principles & Forms of Lending
Safety
2 CAPACITY:

1. how successful a business has been in the past and the future possibilities are.

2. he may make his business very profitable

5

Principles & Forms of Lending
Safety
3 CAPITAL

1. This is the monetary base, of the business, because the money invested by the proprietors represents their faith in the business and its future.
2. Extent of funds from the entrepreneurs
3. Sources of these funds.

6

Principles & Forms of Lending
Safety
4 CONDITIONS:

1. Business depends not only on internal but external factors also.
a. Political
b. Law & order
c. Weather
d. Economic slowdown
2. The bankers must carefully examine the con­ditions to foresee the situation which may affect the repayment of the advanced funds by the borrower.

7

Principles & Forms of Lending
Safety
5 CASH-FLOWS:

1. The banker must evaluate whether the business will generate sufficient funds to repay the principal amount of loan and agreed markup.
2. Study the cash flow statement and analyse the credit cycle being maintained by the borrower with his principal buyers.

8

Liquidity

1. possibility of recovering the advances in emergency
2. banker should allow only of running finance not for the purchase of fixed asset, because running finance is short term and readily available to be paid.

9

Dispersal

1. Diversification of Funds on various sectors
2. reduces the risk of recovery something goes wrong with one sector

10

Security

Verify the security

11

Remuneration

1. return payable to the money deposited with him:
2. to meet various statutory monitory requirements under the Banking Law.
3. salaries and fringe benefits payable to the staff members:
4. overhead expenses and depreciation and mainte­nance of the fixed assets of the bank:
5. an adequate sum to meet possible losses;
provisions for a reserve fund to meet unforeseen contingencies;
6. payment of dividends to the shareholders

12

FORMS OF LENDING

Cash Finance (Cash Credit)
Loans (Term Finance)
Purchase and Discounting of Bills
Hire-purchase and Leasing Finance

13

Cash Finance (Cash Credit)

common form of borrowing for commercial and industrial purpose
borrower allowed to borrow up to certain limit
Interest charge on utilized amount

14

Loans (Term Finance)

fixed amount payable in periodic payments or lumpsum at fix future time after incorporating interest.

15

Purchase and Discounting of Bills

Documentary BOE - accompained with title of goods documents

Demand Bill - Payable on Demand
Usance Bill

16

Hire-purchase and Leasing Finance

Fixed asset financing

17

Overdraft

temp accommodation
withdrawal in excess balance available