Principles of credit lending

Principles of credit lending

• 1.
  DEVTECH FINANCE CREDIT MANAGEMENT PRINCIPLESOF CREDIT LENDING
• 2.
  CREDIT LENDING SAFETY LIQUIDITY PROFITABILITY POLICY VALIDATIONSECURITY PURPOSE SPREAD
• 3.
  SAFETY • The Bankershould 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.
• 4.
  LIQUIDITY • The abilityof 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.
• 5.
  SECURITY • The assetacquired 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.
• 6.
  SPREAD • Entire creditcannot 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.
• 7.
  PURPOSE • The loangranted 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.
• 8.
  PROFITABILITY • Profit asin all the business is the main objective of banking business as well. • Increase customer base and revenue. • Cost benefit analysis. • Capturing market share.
• 9.
  POLICY VALIDATION • RBIcredit policy • Banks credit policy • Priority sector lending • Not opposed to national interest • Basel Norms
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