Page 110 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 7: Loans and Advances

Notes
last four years. The growth in gold loans from NBFCs has been particularly high, albeit
marked by fluctuations.
In 2009-10, the annual growth in gold loans from NBFCs soared to about 140 per cent,
before recording fluctuations and later, a decline.

Of late, annual average growth in gold loans from banks has been rising. Since August
2009, when it fell to 35.0 per cent, it rose steadily to 76.0 per cent by February 2012.
Among the challenges banks face is the lack of standard procedures, which a report by the
Bank of America Merill Lynch termed vital. Also, RBI plans to put a cap on loan rates,
another factor that may hit NBFCs. The current cap for microfinance companies stands at
24 per cent. Given the secured nature of gold loan products, Bank of America Merill Lynch
believes the cap may be kept at the same level or below the cap for microfinance
institutions. This may take a toll on net interest margins.
Source: http://www.business-standard.com/article/markets/gold-loans-rbi-favours-banks-over-nbfcs-
113010600053_1.html
7.4 Principles of Good Lending

Lending is the most profitable business of a commercial bank, but it is highly risky too. Leading
is always accompanied by the credit risk arising out of the borrowers’ default in repaying the
money. A banker should, therefore, manage his loan business in a safe and profitable manner.
He should take all the necessary precautions to minimize the risk associated with the grant of a
loan. In considering a loan proposal, he should bear in mind certain general principles of
lending.
1. Safety

2. Liquidity
3. Diversification of Risks
4. Profitability

5. Purpose
These principles help him to set up some credit standards for evaluation of the loan applications
of borrowers. Some of these principles are incompatible, e.g., liquidity and profitability, but a
judicious banker is able to strike a satisfactory compromise between these two.
These principles are given below:

7.4.1 Safety

The safety of funds is the most important guiding principle of a banker. The safety of funds
implies that the borrower would repay the principal sum and the interest thereon in the manner
and on the conditions provided for in the loan agreement.
While lending out funds, a banker should ensure that:

1. The loan to a particular borrower does not involve any avoidable risk of nonpayment.
2. A bank must follow an aggressive policy of lending in its bid to maximize earnings; but
it has also to be defensive at the same time because it cannot afford to lose the people’s
(depositors) money.
3. A banker should always take a calculated risk.

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