What precautions should be taken by a banker before advancing the loan or Investment

What precautions should be taken by a banker before advancing the loan or Investment

What precautions should be taken by a banker before advancing the loan or Investment
Who is a banker?
Banker is a person who mange the bank by his knowledge, skills { a) Educational Qualities, b) Technical Qualities, c) Social Qualities d) Personal Qualities} and his prudence.
Banker’s  first important function is to collect deposits from those who can save but cannot profitably utilize this saving themselves. People consider it more rational to deposit their savings in a bank and to earn interest,  avoid the danger of theft.
Who is a Customer?
In general any individual/organization who maintains account with the bank is treated as a customer. But in some situations Banker extends their services to the individuals/organizations even if they are not customer as defined above.
According to duration concept a customer should run transactions of banking business for a certain period.But in practice period of transactions is not an important factor for considering an entry as a customer.
Step One:
After receiving the application from a customer, banker has to study at least  borrower’s 5 C’s to consider his credit
worthiness and eligibility for a bank loan or investment.
5 C’s are:

1. Character
2. Capital
3. Capacity
4. Collateral
5. Condition

1. Character: The banker should be able to attest to the integrity of the borrower. Status enquiries on the borrower will help.Character of the borrower depends upon honestly, family background, nature of employment, habits and the record of the past. So before advancing loan these things musty be considered.
2. Capital: No institution will lend more than the authorized capital of a company. The principle or partial contribution, where the promoters and the lender sponsor a project is advisable.
3. Capacity: Law forbids lending to minors or incapacitated individuals such as lunatic or anyone whose sanity is in doubt. The Memorandum of Association of a company contain the object clause, loan given should be in line with operation of a company.
4. Collateral: This is what the bank or lender fall back on to recoup its money should borrower defaults. This takes care of the unforeseen circumstances that can develop after granting the loan.
5. Condition: Business condition indicators include profits, revenues and productivity.1.  Law: An uncertain future act or event, the occurrence of which determines the existence or extent of an interest or right, or liability or obligation; or which initiates, halts, or terminates the performance of a duty.
   2. Contracts: The central instrument in a contract. A condition (1) invests or divests the rights and duties of the parties to the contract, or (2) stipulates that the occurrence or nonoccurrence of a certain event creates or terminates a contract.
   
   An actual or stipulated condition is called an express condition or condition in deed, and a condition deemed to be automatically present is called an implied condition or condition in law.Here we mean not the above all conditions. we mean the status of the assets, liabilities, and owners’ equity (and their interrelationships) of an organization, as reflected in its financial statements of the borrower.

Step Two: After findings the above 5 C’s.If the banker is satisfy then he will come forward to the step two. Here he watch the following factors which are given below:
Undoubtedly the advancing of loan is also risk as well. If the loan is for a longer period then risk will be also greater. So before advancing the loan a banker should keep in view the following precautions :

1. Ability to Repay : Before advancing loan a banker must be satisfied with the sources of the repayment of the funds.Before giving financial accommodation, a banker should consider the source from which repayment is promised. In some instances, debentures which are to be redeemed in few months’ time or a life insurance policy which is to mature in near future may be offered as security. Advances against such security give no trouble.Sometimes customers may apply for loans for additional working capital for their business and undertake to repay out of the profits over a period. In such cases the rate at which the customer can reasonably hope to repay should be ascertained.
2. Purpose: The banker has to carefully examine the purpose for which the advance has been applied for. In case the advance is intended for productive purposes, it could be reasonably anticipated that cash flows arising for productive activities will result in prompt repayment. Of course, the banker has to be careful to monitor the exact purpose for which the advance is actually utilized.
3. Business Volume: Business Volume means the number of items sold, or the number of shares sold on the Stock Exchange during a day’s trading.
4. Purpose of the loan or Financing :Funds should be provided for genuine requirements of the customers. Bankers should not advance the loan for gambling or smuggling.
5. Amount of Financing or Loan :
   The amount of loan must be according to the proportion of the customers own capital resources and it should be sufficient to meet the needs.
6. Period of Financing or Loan :
   It should be kept in view that funds may not be locked up for a long term. A major part of the loan should be payable on demand.
7. The earning Power of the Customer:The borrower’s earnings vis-a-vis the amount to be given out as loan are some of the determining factors in granting and issuing loans.
8. The Sources of Re-payment: The Bank Managers will also like to know the possible sources the customer intending to borrow loans has for repaying the loan.
9. The Present Government Policy on Bank Lending: A Customer may fulfill all the “Conditions” but if government policy on lending is credit squeeze, the Bank will not grant the Loan and vice versa.
10. Check The Assets :The banker should also check the property capital and borrower. This property can kept as a security of loan. In other words if the businessman financial condition is sound then it can be lended otherwise not.
11. Expansion Of Credit : A banker should not advance the loan to only one sector. It can be harmful. The bank should extend the loan various sectors of the economy. In this way there will be maximum safety for the banker.
12. Profit Margin Of The Business :
    Banker should also keep in view the profit margin of business. If the demand and profit margin of the product is low, then loan may not be advanced.
13. Liquidity : The term ‘liquidity’ implies the ability to produce cash on demand. A bank mainly utilizes ‘ its deposits for the purpose of granting advances. These deposits are repayable on demand or on the expiry of a specified period.To meet the demand of the depositors in time, banks should keep their funds in liquid state. Money locked up in long-term loans cannot be received back in time and so are less liquid. So a bank should confine its lending to short-term loans only.
14. National Interest : Banker should also keep in view the national interest before advancing the loan. If loan advancing is not suitable for the speculation then he should not advance. So central bank credit policy must be followed.
15. Capability :
    It is also necessary that a borrower should be capable to use the funds, wisely. Banker can examine the management ability of the businessman of checking the past and present record of the business.
16. Safety and Security:The banker should ensure that the borrower has the ability and the willingness to repay the advances as par agreement. Closely allied to this point is that before granting a secured advance, he should carefully consider the margin of safety offered by the security and possibilities of fluctuations in value.If it is an unsecured advance, its repayment depends on the creditworthiness of the borrower, and that of the guarantor. As such, the cardinal principles which the banker should consider in case of unsecured advances are character, capacity, and capital (popularly known as the 3 C’s) or reliability, responsibility, and resources (popularly known as the 3 R’s) of the borrower and the guarantor.
17. Diversification of Risk: The security consciousness of a banker and the integrity of the borrower are ‘ not adequate factors to keep the banker on safe side. What is also important is the diversification of risk. This means, the banker should not lend a major portion of his/her loan-able fund to any single borrower or to an industry or to one particular region. Otherwise, an adverse change in the economy may affect the entire business.In such as a case repayment will be highly difficult and the survival of the bank becomes questionable. Therefore a bank should follow the wise policy of “do not put all the eggs in a single basket.” The bank must advance moderate sums to a large number of customers spread over a wide area and belonging to different industries.
18. Management Guarantees:The bank will probably require personal guarantees from each owner of the company, assuming that it is a closely held business with only several owners. Usually, each owner completes a personal financial statement on a form provided by the bank. The standard procedure is for the bank to review the personal statements and then, when the loan is approved, have each owner execute a guarantee. In addition to providing additional security, the personal guarantees assure the bank that the owners will probably remain with the business while the loan is in force.
19. Social Responsibility:While admitting that banks are essentially commercial ventures, a bank should not forget the fact that it is not enough that only people of means are given bank finance. Through productive effort bank finance should make people credit worthy, and turn them into people of means.Technical competence of the borrower, operational flexibility, and economic viability of the project, rather than the security which the borrower can offer, should be considered in evaluating a loan proposal.The identification of priority sectors for the purpose of extending bank credit should be considered as a positive development in the banking system, aimed at effectively discharging its responsibility towards society.
20. 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 it funds in the shares of reputed companies where the possibility of decline in their prices is remote.
21. Referral of the Customer: It is also considered that who are refer the customer. If the referee’s are good customer will be good basically.Banker’s should have to take guarantee of the referee.It will safe for the bank and banker.

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Step Three:
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Let all the above factors are favorable for making loan for the borrowers.The bankers will take the CIB form the competent authority.Beside this,The bankers will have to take confidential Report from the local area’s of the bank.Because, the CIB of the competent authority updated after every three months.Bankers should have to remember that various types of customers are not allow to give any loan or investment; such as PEPS,DC, SP,Judge,Advocate etc.

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