Page 120 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 7: Loans and Advances

In a stable economy, where the possibility of fluctuations in the level of deposits Notes
and loan demands is limited, the banker may follow a liberal loan policy.

Expectation about national economy:
If the economic conditions of the country are expected to improve.
If the level of business activity is likely to increase.
Then banks may liberalize their lending policies and accommodate those
borrowers who were previously refused banking facilities because of a stiff
credit policy.

If the economy is likely to recede (decline) in the future.
The banker must revise the existing policy and design a new one with tight
terms and conditions of lending, so that only borrowers of a very high credit
character are eligible for bank loans and advances.
Monetary Policy: The monetary policy of the central banking authorities is a factor in
determining the lending policy of a commercial bank.

The central bank influences the lending policy of banks by bringing about variation in the
minimum reserve requirement and the net liquidity ratio.
If central bank reduces the proportion of the minimum cash reserve, which a commercial
bank is required to carry with the central bank, and by reducing the net liquidity ratio, the
bank (commercial) will get additional funds to make more advances and vice-versa.

Ability and Experience of Loan Officers: The loan officers and staff of the bank play an
important role in the execution of its loan policies. Hence, the Board should consider the
skill and competence of its loan officers before laying down a loan policy.
A bank staffed by a large number of credit officers having expertise, knowledge and
rich experience in diverse forms of loans, can afford to provide different types of
lending facilities and thus formulate his loan policy accordingly.
Mostly big banks have good loan personnel and are able to have a wider and full
range loan policy.
Smaller banks have to limit their lending business to short-term loans.
Small banks normally abstain from consumer lending and term lending to business
enterprises because they are ill-equipped with skilled personnel.
Competitive Position: A bank enjoying a strong competitive position in the field of term
lending must go for it. A weak bank should restrict itself from entering into term loans.

Credit Needs of the Area Served: The credit needs of the area served by the bank would also
influence its loan policy.

If the bank operates in an economy mainly dependent on agriculture, the bank must
make its loan policies to meet the seasonal loan demands of the farmers.
If the bank operates in an economy mainly dependent on business activities the
bank must tailor (make) its loan policies to meet the long and short-term loan
demands of the businessmen.
A bank is supposed to meet the specific loan demands of all the local borrowers in
which it exists for it to succeed.

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