PRINCIPLES AND FORMS OF LENDING

Question 1

Principles of Lending

Answer 1

Basically there are five principles which must be duly observed while advancing money to the borrowers. They are:
Safety
Liquidity
Dispersal
Security
Remuneration or Profitability

Question 2

Principles & Forms of Lending

Safety

Answer 2

Bankers’ funds comprise mainly of money borrowed from numerous customers.

Whatever money the banker holds is that of his customers who have entrusted the banker with it only be-cause they have full confidence in the expert handling of money by their banker. 
Character
Capacity
Capital
Conditions
Cash flow

Question 3

Principles & Forms of Lending
Safety
1 CHARACTER

Answer 3

A borrower’s character can indicate his intention to repay the advance,

honesty and integrity

Question 4

Principles & Forms of Lending
Safety
2 CAPACITY:

Answer 4

1. how successful a business has been in the past and the future possibilities are.
2. he may make his business very profitable

Question 5

Principles & Forms of Lending
Safety
3 CAPITAL

Answer 5

1. This is the monetary base, of the business, because the money invested by the proprietors represents their faith in the business and its future.
2. Extent of funds from the entrepreneurs
3. Sources of these funds.

Question 6

Principles & Forms of Lending
Safety
4 CONDITIONS:

Answer 6

1. Business depends not only on internal but external factors also.
   a. Political
   b. Law & order
   c. Weather
   d. Economic slowdown
2. The bankers must carefully examine the con­ditions to foresee the situation which may affect the repayment of the advanced funds by the borrower.

Question 7

Principles & Forms of Lending
Safety
5 CASH-FLOWS:

Answer 7

1. The banker must evaluate whether the business will generate sufficient funds to repay the principal amount of loan and agreed markup.
2. Study the cash flow statement and analyse the credit cycle being maintained by the borrower with his principal buyers.

Question 8

Liquidity

Answer 8

1. possibility of recovering the advances in emergency
2. banker should allow only of running finance not for the purchase of fixed asset, because running finance is short term and readily available to be paid.

Question 9

Dispersal

Answer 9

1. Diversification of Funds on various sectors

2. reduces the risk of recovery something goes wrong with one sector

Question 10

Security

Answer 10

Verify the security

Question 11

Remuneration

Answer 11

1. return payable to the money deposited with him:
2. to meet various statutory monitory requirements under the Banking Law.
3. salaries and fringe benefits payable to the staff members:
4. overhead expenses and depreciation and mainte­nance of the fixed assets of the bank:
5. an adequate sum to meet possible losses;
   provisions for a reserve fund to meet unforeseen contingencies;
6. payment of dividends to the shareholders

Question 12

FORMS OF LENDING

Answer 12

Cash Finance (Cash Credit)
Loans (Term Finance)
Purchase and Discounting of Bills
Hire-purchase and Leasing Finance

Question 13

Cash Finance (Cash Credit)

Answer 13

common form of borrowing for commercial and industrial purpose
borrower allowed to borrow up to certain limit
Interest charge on utilized amount

Question 14

Loans (Term Finance)

Answer 14

fixed amount payable in periodic payments or lumpsum at fix future time after incorporating interest.

Question 15

Purchase and Discounting of Bills

Answer 15

Documentary BOE - accompained with title of goods documents

Demand Bill - Payable on Demand
Usance Bill

Question 16

Hire-purchase and Leasing Finance

Answer 16

Fixed asset financing

Question 17

Overdraft

Answer 17

temp accommodation

withdrawal in excess balance available