CHAPTER
_15_ Loans and Advances
ENDING OF FUNDS to the constituents, mainly traders, business and indus’
enterprises, constitutes the main business of a banking company. The major portic
a bank's funds is employed by way of loans and advances, which 1s the most profit
‘employment ofits funds, The major part of bank's incomes earned from trterest and disc.
‘on the funds so lent. The business of lending, nevertheless, is not withcut certain ine
risks. Largely depending on the borrowed funds a banker cannot afford fo take undue r
‘in lending. While lending his funds, a banker, therefore, follows a very eautious policy
‘conducts his business on the basis ofthe well-known principles of sound lending in orde
‘minimise the risks.
PRINCIPLES -OF SOUND LENDING
‘There are three cardinal principles of bank lending that have been followed by the commet
banks since long, These are the principles of safety, liquidity and profitability. National.
‘banks in India, like others, do follow these principles in the employment other funds, Tl
‘banks are also required, under Section 8 of the Banking Companies (Aequtsition and Tran
‘of Undertakings) Act, 1970 inthe discharge oftheir functions, to be guided by such direct:
In regard to matters of policy tnvoluing public interest as the Central Government g
‘The Central Government and the Reserve Bank have issued a number of directions in
regard, the social purpose which they have to subserve. The traditional princh
of bank tending have, therefore, been followed with certain modifications. The concep
security has undergone a radical change and profitability has been subordinated to st
purpose in respect of certain types of lending.
1, Safety, As the ank lends the funds entrusted to It by the depositors, the rst and foren
principle of lending is to ensure the safety of the funds lent. By safety is meant that
Borrower is ina position to repay the lan, along with interest, according the terms of
Jean contract, The repayment of the loan depends upon the borrower's (a) capacity to 1
‘and (b) willingness to pay. The former dependa upon his tangible assets and the succes
his busines; if he fs suoceseful in is efforts, he earns profits and can repay the loan prom
Otherwise, tie loan is recovered out othe sale proceeds of his tangible assts, The willing:
to pay depends upon the honesty and character ofthe borrower. Tse bani should, theref
take utmost eare in ensuring thet the enterprise or business for which aloan is sought
sound one and the borrower is capable of carrying out successful. He should be a per
of integrity, good character and reputation. In addition to the above, the banker gener
relies on the security of tangible assets owned by the borrower to ensure the safety of
funds.
2. Liquidity. Banks are essentially intermediaries for short term funds. Therefore, t
lend funds for short periods and mainly for working capital purposes. The loans are, theref,
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