DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name : Sreenivasa Rao B.
Designation : Lecturer in CCP
Branch : Commercial and Computer Practice
Institute : S.U.V.R&S.R GPW, Ethamukkala
Semester : VI
Subject Name : Banking II
Subject Code : CCP 604 (B)
Major Topic : Loans and Advances – Short term &
Long term
Duration : 50 minutes
Sub Topic : Principles
CCP-604(B).3 of sound lending policy 1
Objectives:
On completion of this period you would be
able to

 Explain the General principles of Sound Lending

Policy.

CCP-604(B).3 2
Recap
 The principles of sound lending
1. Safety
2. Liquidity
3. Profitability
4. Security
5. Purpose of loan
6. Diversification of risks
7. Assured repayment

CCP-604(B).3 3
General Principles of Sound
Lending Policy

8 Safety Margin :

 Margin is nothing but a provision for safety .

 Margin = Value of security – Amount of loan

granted.

 Safety margin will play a vital role in realization of

the loan amount in case the borrower defaults.

CCP-604(B).3 4
General Principles of Sound
Lending Policy…

 While granting loan against security , the bank will

have to keep sufficient safety margin.

For example:
When loan is given against a jewel whose market

value is Rs. 10000/- the loan amount will be Rs.

6000/- and safety margin is Rs. 4000/-

CCP-604(B).3 5
 General Principles of Sound
Lending Policy…

• Easy Marketability.
The securities accepted against loans by
banks should easily marketable without loss in
its value and time.

10. Shift ability.

 When a bank undertakes lending or investment, it
must bear in mind the shift ability of the security.
CCP-604(B).3 6
General Principles of Sound
Lending Policy…
11. Matching Contribution:
 The banker should insist matching contribution of
investment from the party reasonably, so that he will
have commitment to his profession and will also bear
risk.

Example:
If a trader wants to start a business for which Rs. 10
Lakhs investment is required, the banker should lend
50 to 80 percent and remaining is the contribution of
trader.
CCP-604(B).3 7
General Principles of Sound
Lending Policy…

12. National Interest:

 The bank must keep in mind national interest
while lending or investing depositor’s money.

Example:
When a country is facing unemployment,
the bank must give more loans to employment
oriented industries, so that the problem of
unemployment can be reduced.
CCP-604(B).3 8
General Principles of Sound
Lending Policy…

 Similarly , when a country is faced with food problem,

more loans should be given for agriculture so that,
food production can be increased.

 The banker should not exploit the borrower by

charging higher rates of interest.

CCP-604(B).3 9
General Principles of Sound
Lending Policy…

13. The Law of Limitation Act:

 There may be disputes between the banker and
customer .

 To resolve the disputes courts may have to be

approached .

 While approaching court Law of limitation Act should be

followed.

 According to the Act, a debt will become bad after expiry

of 3 years from the date of the loan.
CCP-604(B).3 10
Summary
 A major part of the money lent by a banker comes
from various deposits which are repayable on
demand.
 The banker should follow certain principles while
lending, such as
 Safety, liquidity, profitability, security
 Purpose of loan, diversification, Assured repayment
 Margin, Marketability, shift ability
 Matching contribution, Social objectives etc.,

CCP-604(B).3 11
Quiz
1. Bankers are not only dealers of money but also
Leaders in

a) Economic development
b) Trade development
c) Industry development
d) Service department

CCP-604(B).3 12
Quiz

2. According to the Law of Limitation Act, a

debt will become a bad one after the
expiry of ______ years.

 3
 5
 8
 4

CCP-604(B).3 13
Quiz

3. Safety Margin denotes the ______ between the

value of the security and the amount of loan
lent.

a) Difference
b) Excess
c) Security
d) None
CCP-604(B).3 14
Frequently Asked Questions
1. What do you mean by liquidity in banking
technology?
2. A bank is not a philanthropic institution, why?
3. Explain the general principles of sound lend
policy?

CCP-604(B).3 15