Lending and Lending Principles | कर्जा र कर्जा लगानीका सिद्धान्तहरु

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lending principles

What is the loan?

Loan is the amount of money provided to individual or institution for a predefined time period by the bank and financial institutions by charging a fixed amount of interest. A loan can be either individual or institutional. Loan taker is called loanee or borrower. Advancing loan is the primary function of the bank and it is dominant assets of the bank. For a bank, interest income is a major source of income. For a bank –

20-25 % Other sources

75-80 % Interest income

Rate of interest and the time period is fixed before advancing the loan to a borrower. In general, a borrower has to accept the terms & conditions imposed by the bank. So, can be simply defined as the contractual agreement between lender and borrower.

Types of Loan

BasisType
On the Basis of Tenure1) Short Term Loan
2) Mid Term Loan
3) Long Term Loan
On the Basis of Security1) Secured Loan
2) Unsecured Loan
On the Basis of Customer1) Individual Load
2) Institutional Loan
On the basis of Modality1) Single Bank Loan
2) Consortium/ Syndicate Loan
On the Basis of Treatment1) Funded Loan
2) Non-funded Facilities
On the Basis of Nature1)Term Loan
2) Working Capital Loan
3) Consumer Loan

Short Term Loan – Loan with the repayment period of less than o 1 year.

Mid Term Loan – Generally, we only use short term loan and long term loan in practice.

Long Term Loan – Loan with the repayment period of more than 1 year.

Individual Loan – Loan provided to the individual person i.e. natural person

Institutional Loan – Loan provided to the artificial person, legal person i.e. organizations.

Secured Loan – Loan with enough collateral securities.

Unsecured Loan – Loan is given without enough collateral securities.

Single Bank Loan – Loan provided by the single bank only.

Syndicate/Consortium Loan – Single amount of L=loan provided by more than one bank.

Funded Loan – In funded loan cash outflow from the bank

Non-funded Loan – Non funded facilities are those facilities in which bank’s funds are not involved and the bank provides their services as an agent of its customer. For example bank guarantees like performance guarantee, bid bonds, financial guarantees, money retention guarantees, advance mobilization guarantees, LC, etc.

Term Loan- Term loan is such a loan which is provided for the objective of incorporation, development, and expansion of industries. A term loan is generally of more than one year and can not be renewed and revolved.

Working Capital Loan –They are generally of short duration (< 1 year). The duration may be longer if the working capital gestation period is longer. This loan is provided for day to day operation.

Loan Cycle

credit cycle
This is also called Lending Cycle or Loan Cycle

Appraisal (कर्जा दिनु भन्दा अगाडी बैंकले गर्ने मुल्यांकन)

An Appraisal is conducted to examine every aspect to assess whether it is appropriate and viable before finance is committed. The appraisal is based on the proposal but may involve new information if the appraiser is not satisfied. The appraiser may suggest altering the proposal to develop a new one if she/she finds serious flows.

The appraiser may reject the proposal if he/she finds the proposal is not sound of creditworthy.

The designed officers from the credit department will carry out the detailed analysis of loan application information obtained from the interview and site visit report.

Appraisal for 

  • Consumer Loan
  • Project Loan

For Consumer Loan – For consumer loan 5 C’s should be considered before advancing the loan. They are –

  1. Character – the ability to pay vs willingness to pay
  2. Capital – financial conditions of the capital structure. Eg. the debt-equity ratio, current ratio, interest coverage ratio, debt to assets ratio
  3. Capacity – sources of repayment i.e cash flow
  4. Conditions – If the loan is needed for setting up a retail business in a particular area, then the lender must take a study of the economic conditions.
  5. Collateral – the assets offered for mortgage or pledge by the borrower to secure the loan. No compromise should be made while obtaining such securities.

For Project Loan – While conducting an appraisal for a project loan, different aspects are analyzed. Such as

  1. Technical Aspect
  2. Management Aspect
  3. Marketing Aspect
  4. Socio-environment Aspect
  5. Legal Aspect
  6. Securities Aspect
  7. Environmental Aspect
  8. Financial Aspect
  9. Analysis of Collateral etc.

What are the Lending Principles?

कर्जा लागानीका सिद्धान्तहरु

Banks follow the following principles of lending

  1. Principle Liquidity – तरलताको सिद्धान्त – Banks must maintain liquidity while lending
  2. Principle of Profitability – नाफाको सिद्धान्त – Bank should focus on making a profit while lending
  3. Principle of Safety – सुरक्षाको सिद्धान्त – Bank must invest in the safe project only
  4. Principle of Security – प्रशस्त धितो सुरक्षाको सिद्धान्त – the value of collateral should be greater than the loan amount
  5. Principle of National Interest – राष्ट्रिय हितको सिद्धान्त – Banks should also consider national interest while lending
  6. Principle of Tax Benefit – कर लाभको सिद्धान्त – Bank should prioritize the lending sector so that ultimately helps in collecting more tax
  7. Principle of portfolio/diversification- विविधताको सिद्धान्त – the concept of “Do not put all the eggs in one bucket”
  8. Principle od Objective – उदेश्यको सिद्धान्त – Bank should invest in those projects or that customer who has got