Page 207 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes periods so that the realizations can be utilized to meet the investors obligations. The funds can
be invested in securities of diversified nature to earn reasonable returns.
Banks should check well into the purpose of loan an applicant seeks and track whether the loan
is applied. This is important for productive purpose and the banks social obligations are also
satisfied. An advance made to for non productive and speculative purposes is subject to high risk
of recovery. A banker should avoid making loans against wasteful expenditure on social functions.
The banker should examine whether the credit granted is not for a purpose other than that is
sought.
A bank has the social obligation of meeting the diverse credit needs of the society ranging from
personal needs to small businesses to large industrial business needs. It can not afford to lend
the funds of its depositors indiscriminately and incur losses. The loan policy should be carefully
structured to maintain uniformity and standardization of lending policies. There is always a
risk of misunderstanding and misinterpretation of the policy. In general the loan policy in a
bank largely influenced by the following factors:
1. Capital position: A bank having strong capital base can follow a liberal lending policy.
2. Earning Requirements: Profit making and required rate of return becomes the basis while
structuring lending policy.
3. Deposit variability: Large variation is found between the urban banks and rural banks
regarding demand and of supply of money. Banks expecting a rising tendency can go for
liberal credit policy.
4. State of local economy and National economy: Banks have to understand the local needs
and national needs due to variation in seasonality, commercial activity or agricultural
needs.
5. Monetary policy of the Central bank: RBI announces the lending policy of term loans and
interest rates range focusing on sectoral growth for prosperity and to put a check on
inflationary movements affecting the common man and welfare of the economy. Fiscal
disciplinary measures are to be followed by the banks and need to follow the directives of
the central banks.

6. Term lending policy of a commercial bank is usually based on industrial activity and
sectoral growth needs. Banks have to commit large funds to long term loans to industry.
Commercial banks generally seek the assistance of banks like NABARD, IDBI etc. while
granting collaborative lending to commercial purposes with respect to term loans.
The commercial banks thus play an important role in the growth of an economy by mobilizing
funds from small investors to business and play a critical role in the transformation of the nation
to a greater and powerful economy.

Task Prepare a project feasibility proposal as per the guidelines of a merchant Banker by
selecting an entrepreneurial activity.

Self Assessment

Fill in the blanks:
8. ……………….is the link between financial markets and bank's profitability.
9. A capital shortage of a bank indicatos that it should change, among others, it's
…………………policies.

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