ASSIGNMENT

Principles of Sound Lending


Banker is essentially a dealer in money belonging to others and he is required to repay it after sometime with interest. While employing these funds to grant loans and advances, a banker is required to follow certain principles. These principles are called principles of sound lending.

1.Safety

Safety depends up on the security offered by the borrower and their capacity and willingness to repay. So the banker should ensure that the securities offered by the borrower are adequate and readily realizable.

2.Liquidity:

 Liquidity refers to the ability of an asset to convert into cash within a short period of time.

3.Profitability: 

A commercial bank is essentially a profit making organisation. The resources of banks should be employed in such a way that they will bring reasonable amount of profit. 

4.Purpose: 

The banker should enquire the purpose of the loan from the borrower. A banker should grant loans only for productive purposes. Then only the banker can recover the loan from borrowers easily.

5.Security: 

Customers may offer different kind of securities such as goods, land, building etc. to get advances from the bank.

6.Repaying capacity: 

This is another important principle of lending. Before granting loan, the repaying capacity of the borrower should be considered.

7. Diversification of lending. 

Banker should try to diversify their loans so as to minimize the risk in lending.

8. Public or National interest:

 Banking institutions play a vital role in the economic development of a country. Therefore a banker should design his lending policy to suit the interest of the nation. 





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