General principles that guide a banker in making loans to a customer

General principles that guide a banker in making loans to a customer

The person who performs the banking activities such as accepting of deposits, lending money, withdrawing facilities, exchanging of money is known as a banker. In other words, the person who directly related to the banking business is called banker. Banker manages all the activities of a bank.

Here explain the general principles that should guide a banker in making loans and advances to a customer. Banks follow the following principles of lending:

Liquidity:

Liquidity is an important principle of bank lending. Bank lend for short periods only because they lend public money which can be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets which are easily marketable and convertible into cash at a short notice.

Safety: The safety of funds lent is another principle of lending. Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. The repayment of the loan depends upon the nature of security, the character of the borrower, his capacity to .repay and his financial standing.

Diversity:

In choosing its investment portfolio, a commercial bank should follow the principle of diversity. It should not invest its surplus funds in a particular type of security but in different types of securities. It should choose the shares and debentures of different types of industries situated in different regions of the country. The same principle should be followed in the case of state governments and local bodies. Diversification aims at minimizing the risk of the investment portfolio of a bank.

Stability:

Another important principle of a bank’s investment policy should be to invest in those stocks and securities which possess a high degree of stability in their prices. The bank cannot afford any loss on the value of its securities. It should, therefore, invest its funds in the shares of reputed companies where the possibility of the decline in their prices is remote.

Profitability:

This is the cardinal principle for making an investment by a bank. It must earn sufficient profits. It should, therefore, invest in such securities which were sure a fair and stable return on the funds invested. The earning capacity of securities and shares depends upon the interest rate and the dividend rate and the tax benefits they carry.

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