Lending Portfolio of Bank

LENDING PORTFOLIO OF BANK
Lending Portfolio
Portfolio loans are pretty much what they sound like. A lender who loans
money to a borrower and keeps the debt on their portfolio to earn consistent
interest on the loan. It's not sold to other lenders. It is smaller banks and credit
unions that offer portfolio loans in many cases.
Banks follow the following principles of lending:
1. Liquidity:
Liquidity is an important principle of bank lending. Bank lend for short periods
only because they lend public money which can be withdrawn at any time by
depositors. They, therefore, advance loans on the security of such assets which
are easily marketable and convertible into cash at a short notice.
2. Safety:
The safety of funds lent is another principle of lending. Safety means that the
borrower should be able to repay the loan and interest in time at regular
intervals without default. The repayment of the loan depends upon the nature of
security, the character of the borrower, his capacity to repay and his financial
standing.
3. Diversity:
In choosing its investment portfolio, a commercial bank should follow the

principle of diversity. It should not invest its surplus funds in a particular type
of security but in different types of securities. It should choose the shares and
debentures of different types of industries situated in different regions of the
country. The same principle should be followed in the case of state governments
and local bodies. Diversification aims at minimising risk of the investment
portfolio of a bank.
4. Stability:
Another important principle of a bank’s investment policy should be to invest in
those stocks and securities which possess a high degree of stability in their
prices. The bank cannot afford any loss on the value of its securities. It should,
therefore, invest it funds in the shares of reputed companies where the
possibility of decline in their prices is remote.
5. Profitability:
This is the cardinal principle for making investment by a bank. It must earn
sufficient profits. It should, therefore, invest in such securities which was sure a
fair and stable return on the funds invested. The earning capacity of securities
and shares depends upon the interest rate and the dividend rate and the tax
benefits they carry.
It is largely the government securities of the centre, state and local bodies that
largely carry the exemption of their interest from taxes. The bank should invest
more in such securities rather than in the shares of new companies which also
carry tax exemption. This is because shares of new companies are not safe
investments.
6. Purpose
While lending the funds, the banker enquires from the borrower the purpose for
which he seeks the loan. Banks do not grant loans for each and every purpose.
They ensure the safety and liquidity of their funds by granting loans only for
productive purposes. It is however the duty of the bank to keep in mind that the
other principles of lending are adhered to, which in turn will automatically
ensure that this principle is taken care of as well.
TYPES OF LENDING:
1. Fund Based Lending:- This is a direct form of lending in which a loan

with an actual cash outflow is given to the borrower by the Bank. In most
cases, such a loan is backed by primary and/or collateral security. The
loan can be to provide for financing capital goods and/or working capital
requirements. This fund based lending are:
 Loans
a loan is the lending of money by one or more individuals, organizations,
or other entities to other individuals, organizations etc.
 Cash credit
Cash credit is a facility to withdraw money from a current bank account
without having credit balance but limited to the extent of borrowing limit
which is fixed by the commercial bank. The interest on this facility is
charged on the running balance and not the borrowing limit which is
given by bank.
 Overdraft
Overdraft is a financial instrument in which the money can still be
withdrawn from the current or savings account, even if the account
balance goes below zero. It is a type of extension of monetary limit
offered by banks and that money is said to be overdrawn.
 Purchase of BOE
The banker would purchase the bill at a discount from its full amount
because payment was due at a future date; the purchasing merchant's
account would be debited when the bill became due. Bills of exchange
are sometimes called drafts, but that term usually applies to domestic
transactions only.
2. Non-Fund Based Lending:- In this type of facility, the Bank makes no

funds outlay. However, such arrangements may be converted to fund-
based advances if the client fails to fulfill the terms of his contract with
the counterparty. Such facilities are known as contingent liabilities of the
bank. Facilities such as 'letters of credit' and 'guarantees' fall under the
category of non-fund based credit. This non- fund based lending are:
 Bank guarantee
The bank guarantee means a lending institution ensures that the liabilities
of a debtor will be met. In other words, if the debtor fails to settle a debt,
the bank will cover it.
 Letter of Credit
A letter of credit, or "credit letter" is a letter from a bank guaranteeing
that a buyer's payment to a seller will be received on time and for the
correct amount. In the event that the buyer is unable to make a payment
on the purchase, the bank will be required to cover the full or remaining
amount of the purchase.
3. Asset-based lending
Asset-based lending is any kind of lending secured by an asset. This
means, if the loan is not repaid, the asset is taken. In this sense, a
mortgage is an example of an asset-based loan.
CONCLUSION:
The aims and objective of lending portfolio are critical and important with a
view to managing the portfolio in a manner that is consistent with key pre-
determined objective, designed to guard against any potential loss. The whole
essence of lending portfolio management is to reduce risk rather than increasing
return. Any lending organization must therefore develop efficient debt portfolio
management which include effective credit extension, credit monitoring and
excellent debt collection programmes.
BIBILIOGRAPHY
1. https://www.scribd.com/doc/99090020/Basic-Principles-of-Sound-
Lending
2. https://www.slideshare.net/mobile/TitikshaChaturvedi/bank-lendings-
and-loans-ppt?from_m_app=android
3. https://insightrealtygroup.com/what-is-portfolio-lending/

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LENDING PORTFOLIO OF BANK

Banks follow the following principles of lending:

In choosing its investment portfolio, a commercial bank should follow the

1. Fund Based Lending:- This is a direct form of lending in which a loan

2. Non-Fund Based Lending:- In this type of facility, the Bank makes no

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