principles of bank lending

FCA Devang Sadrani, 9586555997

Principles of Bank Lending


Meaning / Why Bank Lending principles are important ?

5 P’s Safety Security Suitability Profitability Liquidity Integrity Adequacy of Finance



Meaning ..... The Ideal Advance is one which is granted to a reliable

customer for an approved purpose in which the customer has adequate experience, safe in the knowledge that the money will be used to advantage and repayment will be made within a reasonable period...... L C Mather.

Why this topic is important ?

Major Portion of the Asset Structure of the Bank is Advances. Have largest Impact on Earnings. Greatest Credit Risk and Potential Loss. Loan Losses/Fraud Cause MOST Bank Failures.



People Purpose Payment Protection Prospects

5 ‘Ps’ OF SOUND LENDING


1. PeopleWho is the borrower and what is their

ability/willingness to pay? Type of Business/Industry Organizational Structure Payment History with Your Institution Credit Report Information from Other Lenders/PartiesMost Important ….Borrower kevo che ?



PurposeWithout knowing the purpose, the Bank cannot

define its product.Sometimes, to fit in good Borrower, Banks come

out with different products to fit in the purpose of Borrower.

Eg Cent Over Draft Home Loan, to give facility to Home Loan Buyers to make furniture, or if the working capital of the Business man is disturbed while buying house, the o/d facility will help him.

As a banker, the initial interview should focus this.



3.PAYMENTWhat are the terms and borrower’s

ability to pay? Terms of Debt Source of Repayment Income to Debt Service Requirements Living/Other Expenses Other Sources of Income Consistency with People and Purpose



4. PROTECTIONWhat is the collateral and what would

it be worth? Lien Perfection Lien Position Market/Liquidation Value Marketability Access/Control



5. PROSPECTSWhat is the likelihood of continued

repayment ability Company Trends/Future Prospects Industry Trends/Future Prospects Economic Forecasts Succession/Continuation Plans New Developments New Laws and Legislation



Saftey- Banks Deal with Public money

General Public keep money in

Bank. They have lot of

confidence in Bank.

Banks get money in form of Deposits.

Borrower taking Loans

10-12% Interest charged by Bank to the

Borrowers

8-10% Bank will pay interest to Depositors


Bank

Housing Loan

House Mortgaged with Bank

Personal Guarantee

Gold Loan

Gold taken away by bank.

Security

Insurance is also taken as a cover for loan.Security should be realisable.Enough margin for cover.Value to be ascertained and should remain constant.


Move the money where it is desired. Purpose that is desirable from the point of

view of the nation as a whole. Government policy to the considered. Efforts of the government to combat

inflation and raising standard of living of the people.

Suitablity


Base Rate + Profit. MCLR (Marginal Cost of Fund based Lending Rate) is the internal

benchmark rate for banks used for benchmarking floating rate loans effective from 1st April 2016

MCLR is based on cost of funds for banks and is derived as sum of marginal cost of funds, negative carry on account of CRR, operating costs of banks and tenor premium

As MCLR is closely linked to repo rate, it will improve the transmission of RBI’s repo rate cut to the end borrower

Banks publish MCLR for at least five durations which are overnight MCLR, 1 month MCLR, 3 month MCLR, 6 month MCLR and 1 year MCLR. However banks may publish MCLR base rates for more than five periods. The banks may revise the MCLR rate every month.

Interest rate on each floating rate loan would be reset on based on the duration of the MCLR to which it is linked

Profitability


Copy this link :

https://www.myloancare.in/bank-base-rates-plr-india/

Excel sheet of the Trend analysis of Base rate.

Profitablity




Base Rate Base Rate is the minimum interest rate at which a bank can lend except for

loans to its own employees, its retired employees and against bank’s own deposits

All floating and fixed rate loans sanctioned by banks before 1st April, 2016 were priced using base rate as benchmark.

PLR PLR (Prime Lending Rate) is the internal benchmark rate used for

benchmarking floating rate loans sanctioned by Non Banking Financial Companies (NBFC) and Housing Finance Companies (HFC) eg. India Bulls and HDB Finance.

PLR is calculated based on average cost of funds NBFC and HFC generally price loan at discount on their existing PLR. How does MCLR base rate works? You need to consider two parameters while taking floating rate home loan or

business loan . A. Reset Frequency: The applicable MCLR rate will be the rate

corresponding to the interest rate reset frequency of the loan. So, a home loan with a reset frequency every one year will be priced with the 1 year MCLR as the benchmark and a home loan with a 3 month reset will be price with the 3 month MCLR as the benchmark.

Profitability (Only for your study )


Spread: You need to consider the spread (margin that you pay over the banks MCLR) for the particular loan type of the bank. The margin charged would be fixed at time of sanction and can be changed only if there is change in customers’ credit profile. For instance, Bank A has 1 year MCLR of 9.1% and spread of 0.2 % for home loan. The interest rate that you will be charged in this case would be 9.3%.

MCLR Base rate Borrowers who have taken loan from banks before 1st April 2016, their loan will be

priced at base rate, instead of MCLR If you check the MCLR and base rate of banks shown above, you will notice that

MCLR rates are mostly 5 - 50 bps lower compared to base rate. The reason for this is MCLR is closely linked to repo rate, and hence it has improved the transmission of RBI’s repo rate cut to the end borrower

In the current economic scenario where interest rate and bonds yields are falling, and hence banks are compelled to reduce the MCLR, it would be wise to switch from base rate to MCLR rate regime. All existing borrowers have the option of shifting to MCLR regime by paying a conversion fee of 0.5-1% of the loan amount

Impact of MCLR on Interest rate, loan tenure and EMI’s As MCLR is closely linked to cost of funds of banks and the repo rate, hence any

change in the repo rate will impact your floating interest rate on home loan or business loan

When a bank reduces the MCLR, your interest rate on floating home loan will be reduced. Generally this will not have any impact on EMI paid but it will impact the loan tenure

Profitability (Only for your study )


Short term finance such as Bill Discounting. Non Fund Based Lending.(L/C etc ). Should not be in a position of “Locked In”

through granting “Massive” Long Term Loans.

Liquidity


Quality of Being honest and having strong moral Principles.- Dict. Meaning of Integrity.

Borrower’s integrity should be seen. Bank also to maintain Integrity. The leakage

of data of the client is the biggest Problem.

Integrity


Bank to lend a sum which is adequate for the project. If project is fail, bank loan will fail. Ultimately, problem ????

Adequacy of Finance

BankFunds given by the Bank

is Rs. 50 Lacs

Borrower with Total

Project Cost of

Rs.1 crore.

Own source able to Manage

another 20 Lacs.

Always Ask ? From where

you will manage

your other funds ? ?


Finance should be given on proper time. Opportunities might lapse by the borrower.

Timeliness


Principles of Sound Lending should address following questions :-

a. Who is to be financed ?b. What is to be financed ?c. How to Finance and When to finance?d. What is the likely outcome after

financing ?If these principles are properly followed, the

BANKS Will

In Nutshell


The Banks will……..smile….


THANK YOU