Chapter 6:Lending policy
Sound Lending Policy :
Sound lending policy or sound credit policy is a written document which set up a Banks basic principles and provides a formal sets of procedure to carry it out properly and effectively .
Elements of Sound Lending Policy:
Elements or the principles of sound lending policy are stated below:
Safety: Advances should be expected to come back in the normal course .The repayment of the loan depends upon the borrower capacity to pay and willingness to pay .These are depended by the borrowers assets and tangible assets and characteristics .
Liquidity:Liquidity is the availability of the bank funds needed on short notice .The borrower must be repay the loan within a reasonable amount of time given by the bank authority.
Profitability :Its not the factor of liquidity of asset but the possibility to earn profit by it.Largest part of bank income earned by interest received in advance for given loans and interest paid on deposit other than that foreign exchange business also a great source of earnings.
Purpose:Banker should lend money to borrowers considering the factor of borrowers productivity to ensure safety and definite source of repayment.
Security:Security works as curatin aginest unexpected risk .Risk is always there for every advance.So any kinds of property works as collateral against the borrowers loan.
Spread/Diversity:The advnces sould be as much broad based as possible and must be in keeping with the deposit structure .The advances must not be one directive or to one particular industry or one area.
National Interest:Banker should lend if the the purpose of the advance is for overall national development .
vi.Help hedge against losses due to changing interest rates.
*Definition of Good loan:
The loan which cant easily repayable on time from borrower are called good loan.
This loan is the mostly traditional loan and follow able.
Loan identification area made through proper credit analysis and adequate security offered by reliable clients .
Definition of bad loan or problem loan:
The bad loan or the problem loan where repayment are not being made as orginally agreed between lender bank and borrower client which may never be repaid.
Characteristics of good loan:
Fixed interest rate:Fixed interest rate is beneficial to the consumer .Mortgage loans are a good example.Fixed rate loans are protected from the spikes of ever changing market.
Low interest rate:The lower the interest rate the easier it is to make payments .Whether its mortgage ,auto loans ,credit card account.
Installment options:Consumers can benefits from taking out smaller loans that are paid back to the lender in monthly installments over fixed period of time.
The causes of bad loan and steps to handle them:
There are mainly two types of reasons behind problem loan or bad loan
THE QUANTITATIVE CAUSES:
i.Excessive loan expansion for getting high rate of profit
ii.Lending large size of loans to overpower the competitive banks.
iii.Providing loans which is beyond the repayment capacity of the borrowers.
iv.Sanctioning loans without adequate securities.
v.Accepting overvalued securities in excess of market price.
vi.Loans given on the basis of transaction rather than net worth.
vii.Over attention on bank profit and growth.
THE QUANTITATIVE CAUSES:
i Repayment plan not clearly given or not stated properly.
ii.Inadequate professionally capable persons to handle loan cases.
iii.Giving loan based on favoritism and nepotism
iv.Loan to new business with inexperienced owner or manager.
v.Inadequate loan review.
vi.Inadequate loan supervision.
PROBLEM LOANS CAN BE HANDLE IN DIFFERENT WAYS:
a.Taking legal actions through court.
1.General recovery suit.
2.Recovery suit by liquidation.
b.Steps by bank itself.
1.Preventive steps.
2.Curative steps.
Profitability :Its not the factor of liquidity of asset but the possibility to earn profit by it.Largest part of bank income earned by interest received in advance for given loans and interest paid on deposit other than that foreign exchange business also a great source of earnings.
Purpose:Banker should lend money to borrowers considering the factor of borrowers productivity to ensure safety and definite source of repayment.
Security:Security works as curatin aginest unexpected risk .Risk is always there for every advance.So any kinds of property works as collateral against the borrowers loan.
Spread/Diversity:The advnces sould be as much broad based as possible and must be in keeping with the deposit structure .The advances must not be one directive or to one particular industry or one area.
National Interest:Banker should lend if the the purpose of the advance is for overall national development .
Security:
A financial intrument that represent an ownership position in a publicly traded corporation(stock) a creditor relationship with govt body or a corporation (bond) or rights to ownership as represent by an option.
Bank Security:
A security is an interest or a right in property given to the creditors to convert it into cash in case of the debtor fails to meet the principals and interest on loan.
Features of good Security against Bank loan:
There are some certain qualities that a good tangible securities must have .These are given below:
MARKETABILITY:The security must have a ready market .The Bank has not taken the asset to keep it in possessions for an indefinite period but rather to sell it in the market and realize the loan amount .Hence ,no matter how valuable the asset may be it is of no user if it does not have a broad market.
LIQUIDITY:Liquidity refers to how quickly an asset can be converted into cash ideally a security should be liquid which will enable the banker sell the property at a known price as soon as the default occurs .
OWNERSHIP:Before accepting a security the banker must ensure the ownership of the property .An asset which is not owned by the lender may create difficulty in getting loan repaid.If title is defective the lender may face problem.
ADEQUACY:The value of security must be adequate to cover the full amount of the loan < Moreover a reasonable margin over the loan has to be maintained .The margin is the difference between the market value of the security offered and loan granted.
QUALITY:If a commodity is consider as security it should be good quality.
A commodity which is perishable and may deteriorate in phases of time then it should not be accepted as good security.
YIELD GENERATING SECURITY:An asset which generates earnings during the period in which the loan is outstanding is a better security than those which don't and are preferred by the bankers .
Easy Store ability and low maintenance cost :A security should not create a headache or be a burden for the banker .It must be easy to store with low maintenance cost.
OTHERS:
i.Validity of the title of the borrower.
ii.Stability of Price.
iii.Documentation.
iv.Free from disabilities etc.
IT is mandatory to take security against a bank loan:
It is imperative to take security against a bank loan.The reasons are as follows
i.Stabilize income so that revenue level out over the business cycle when loan revenues fail income from investment securities may rise.
ii.Offset credit risk exposure in loan portfolio .High quality securities often come from different regions than the source of loans helping diversify a financial firms sources of income.
iii.Provide a backup sources of liquidity because securities can be sold to raise needed cash or used as the borrower of additional funds.
iv.Reduce tax exposure especially in off setting taxable loan revenues.
v.Serve as collateral to secure govt deposits held by a depository institution.vi.Help hedge against losses due to changing interest rates.
*Definition of Good loan:
This loan is the mostly traditional loan and follow able.
Loan identification area made through proper credit analysis and adequate security offered by reliable clients .
Definition of bad loan or problem loan:
The bad loan or the problem loan where repayment are not being made as orginally agreed between lender bank and borrower client which may never be repaid.
Characteristics of good loan:
Fixed interest rate:Fixed interest rate is beneficial to the consumer .Mortgage loans are a good example.Fixed rate loans are protected from the spikes of ever changing market.
Low interest rate:The lower the interest rate the easier it is to make payments .Whether its mortgage ,auto loans ,credit card account.
Auto pay features:Auto pay feature is a great factor for consumer to stay current and and avoid additional finance fees.
Installment options:Consumers can benefits from taking out smaller loans that are paid back to the lender in monthly installments over fixed period of time.
The causes of bad loan and steps to handle them:
There are mainly two types of reasons behind problem loan or bad loan
THE QUANTITATIVE CAUSES:
i.Excessive loan expansion for getting high rate of profit
ii.Lending large size of loans to overpower the competitive banks.
iii.Providing loans which is beyond the repayment capacity of the borrowers.
iv.Sanctioning loans without adequate securities.
v.Accepting overvalued securities in excess of market price.
vi.Loans given on the basis of transaction rather than net worth.
vii.Over attention on bank profit and growth.
THE QUANTITATIVE CAUSES:
i Repayment plan not clearly given or not stated properly.
ii.Inadequate professionally capable persons to handle loan cases.
iii.Giving loan based on favoritism and nepotism
iv.Loan to new business with inexperienced owner or manager.
v.Inadequate loan review.
vi.Inadequate loan supervision.
PROBLEM LOANS CAN BE HANDLE IN DIFFERENT WAYS:
a.Taking legal actions through court.
1.General recovery suit.
2.Recovery suit by liquidation.
b.Steps by bank itself.
1.Preventive steps.
2.Curative steps.
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