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    Principles of Credit Lending

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    Ra'fat Jallad
    The document outlines the key principles of credit lending for banks including safety, liquidity, security, spread, purpose, profitability, and policy validation. Specifically, it discusses how banks must ensure funds lent are safe and repaid, maintain sufficient liquidity reserves, acquire adequate collateral security, diversify lending across sectors and regions, only provide loans for approved productive purposes, aim to be profitable, and adhere to regulatory credit policies.

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    Principles of Credit Lending

    Uploaded by

    Ra'fat Jallad
    48 views10 pages
    The document outlines the key principles of credit lending for banks including safety, liquidity, security, spread, purpose, profitability, and policy validation. Specifically, it discusses how banks must ensure funds lent are safe and repaid, maintain sufficient liquidity reserves, acquire adequate collateral security, diversify lending across sectors and regions, only provide loans for approved productive purposes, aim to be profitable, and adhere to regulatory credit policies.

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    principles of credit lending

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    The document outlines the key principles of credit lending for banks including safety, liquidity, security, spread, purpose, profitability, and policy validation. Specifically, it discusses how banks must ensure funds lent are safe and repaid, maintain sufficient liquidity reserves, acquire adequate collateral security, diversify lending across sectors and regions, only provide loans for approved productive purposes, aim to be profitable, and adhere to regulatory credit policies.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    48 views10 pages

    Principles of Credit Lending

    Uploaded by

    Ra'fat Jallad
    The document outlines the key principles of credit lending for banks including safety, liquidity, security, spread, purpose, profitability, and policy validation. Specifically, it discusses how banks must ensure funds lent are safe and repaid, maintain sufficient liquidity reserves, acquire adequate collateral security, diversify lending across sectors and regions, only provide loans for approved productive purposes, aim to be profitable, and adhere to regulatory credit policies.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    The key takeaways from the document are the principles of credit lending - safety, liquidity, profitability, policy validation, security, spread, purpose that banks follow when granting loans.

    The principles that banks follow for credit lending are safety, liquidity, profitability, policy validation, security, spread and purpose. Safety ensures loan repayment, liquidity refers to ability to convert assets into cash, profitability aims to increase revenue, policy validation adheres to regulatory guidelines, security is collateral for loan, spread diversifies risk across sectors and purpose must be for approved productive activity.

    The factors that determine the liquidity of a bank are the portion of deposits kept as cash reserve ratio (CRR) with RBI, investments in approved securities as statutory liquidity ratio (SLR) and RBI's credit policy decisions regarding the levels of CRR and SLR to control money supply.

    DEVTECH FINANCE

    PRINCIPLES OF
    CREDIT LENDING
    CREDIT MANAGEMENT
    SAFETY
    SPREAD LIQUIDITY

    CREDIT
    PURPOSE PROFITABILITY
    LENDING

    POLICY
    SECURITY VALIDATION
    SAFETY

    • The Banker should ensure that the funds lent are safe and would be
    repaid by the borrower as per the terms of sanction.

    • The credit policy and the guidelines of the bank helps to take proper
    decision safety of loans granted.

    • Since the major source of loan given is deposit that belong to customers
    the banker should ensure that amount lent would be received back with
    interest.
    LIQUIDITY

    • The ability of bank to convert the assets into cash. Entire amount that a bank
    mobilizes as deposits cannot be lent. A portion of the deposits should be kept
    with RBI in form of CRR and another sizeable portion as SLR should be
    invested in approved securities.

    • RBI changes CRR and SLR as part of credit policy announcements to control
    the money supply in the economy.

    • If money supply is more RBI tends to increase the CRR so that the lendable
    funds with commercial banks are reduced and vice-versa.
    SECURITY

    • The asset acquired out of bank finance is the primary security for the loan
    borrowed.

    • If higher risk is involved in the loan, additional security is required in form of


    immovable property or securities termed as collateral.

    • Collateral security is sold as last resort by the bank in case the borrower
    defaults in repayment despite various steps taken.
    SPREAD

    • Entire credit cannot be granted to an individual customer or a particular


    industry or a particular location.

    • Credit should be spread across various sectors and different classes of


    people and different geographical areas.

    • Diversification to mitigate risk involved in credit business.

    • Priority sector lending mandated by govt. for development of economy &


    society as whole.
    PURPOSE

    • The loan granted should be for an approved purpose and productive activity.

    • The purpose of loan should be for a business that is legally permissible and
    economically feasible.

    • The banker expect from the customer to repay the dues from business
    income and thus gives utmost importance to viability of the project for which
    credit is granted.
    PROFITABILITY

    • Profit as in all the business is the main objective of banking business as well.

    • Increase customer base and revenue.

    • Cost benefit analysis.

    • Capturing market share.


    POLICY VALIDATION

    • RBI credit policy

    • Banks credit policy

    • Priority sector lending

    • Not opposed to national interest

    • Basel Norms
    THANK YOU FOR WATCHING

    DEVTECH
    FINANCE

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