Page 113 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes Self Assessment

Fill in the blanks:
10. A bank must follow an ………………………..policy of lending in its bid to maximize
earnings.

11. Net liquidity ratio is the ratio of the net liquid assets of the borrowing bank to its aggregate
demand and time ………………………..

7.5 Loan Procedure followed by Banks

Banks provide financial assistance to its customers in the form of loans, advances, cash credit,
overdraft and through the discounting of bills. The procedure of applying for and sanction of
loans and advances differs from bank to bank. However, the steps which are generally to be
taken in all cases are as follow:
1. Filling up of loan application form: Each bank has separate loan application forms for
different categories of borrowers. When you want to borrow money from a bank, you
will have to fill up a loan application form available with the bank free of cost.

The loan application form contains different columns to be filled in by the applicant. It
includes all information required about the borrower, purpose of loan, nature of facility
(cash-credit, overdraft etc.) required, period of repayment, nature of security offered, and
the financial status of the borrower. A running business limit may be required to furnish
additional information in respect of:
(a) Assets and Liabilities
(b) Profit and loss for the last 2 to 3 years.
(c) The names and addresses of three persons (which may include borrowers, suppliers,
customers and bankers) for reference purposes.
2. Submission of form along with relevant documents: The loan application form duly filled
in should be submitted to the bank along with the relevant documents.
3. Sanctioning of loan: The bank scrutinizes the documents submitted and determines the
credit worthiness of the applicant. If it is found to be feasible, the loan is sanctioned. If the
loan is for ` 5000 or less, normally the Branch Manager himself can take the decision and
sanction the loan. In case the amount of loan is more than ` 5000, the application is
considered at regional, zonal or head office level, depending on the amount of loan.
4. Executing the Agreement: When the loan is sanctioned by the bank and the borrower is
informed about it, he will have to execute an agreement with the bank regarding terms
and condition for the amount of loan raised.
5. Arrangement of Security for Loan: The borrower will now arrange for security against the
loan. These securities may be immovable properties, shares, debentures, fixed deposit
receipts, and other documents, like, Kisan Vikas Patra, National Savings Certificate, as per
agreement.
When the borrower completes all the formalities, he is allowed to get the amount of
loan/advance/overdraft as sanctioned by the bank. In case of ‘discounting of bills’, the bank
credits the amount of bill to the customer’s account before the realization of the bill and thus,
makes available the fund. In case, the bill is dishonoured on due date, the amount due on the bill
together with interest and other charges are payable by the party whose bill is discounted.

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