Lending Functions of

a Bank
SHIKHAR MAHESHWARI
X-C
A Bank is a financial institution/ financial intermediary that
accepts deposits and channels those deposits into lending
activities. It is done either directly by lending to the needy
borrowers or indirectly by investing is the capital markets
instruments. Thus a bank intermediates between customers who
have surpluses of funds and customers who need funds.
PRINCIPLES OF SOUND LENDING
• SAFETY
• LIQUIDITY
• PURPOSE
• PROFITABILITY
• SECURITY
• DIVERSIFICATION
• SUITABILITY
 5 C’s of LENDING
• CHARACTER: The borrower’s willingness to repay, his honesty and integrity.
• CAPACITY: Ability to successfully run the business and repay the borrowed amount out of
the profits of his business.
• CAPITAL: How much own money he has put in the business and how much he has saved
from his earnings so far. It is called the net worth.
• COLLATERAL: The security offered to the bank as cover for the advance, so that if the
borrower does not pay the dues, the bank can recover it by selling the security; the security
should have stable value and should be easily marketable.
• CONDITIONS: the changes that are constantly occurring in the economy which may
affect the borrower’s business.
 Types of Advances

• Secured Loans

• Unsecured Loans
 SECURED LOANS
• Secured loans: it is in the interest of a bank to recover all the loans with the
interest thereon at the due dates. To ensure this, the banks try to obtain
security from the potential borrowers as backing for the prompt recovery of
the loans.

• Security may be in the form of a house/ residential flat/ any landed property
like factory land, or plant and machinery, life insurance policies with
surrender values etc.
 Types of Secured Loans
• Loan against Gold
• Loan against Insurance Policies
• Loan against Bank Fixed Deposits
• Housing Loans
• Loans against Shares and Units in Mutual Funds
 UNSECURED LOANS
• Unsecured bank loans, as the name itself suggests, are loans granted by the
bank without the baking of any physical securities either primary or
collateral.
• An unsecured loan is more risky for a bank- if the borrower fails to pay the
dues, the bank has no security to fall back upon for recovering its dues. So a
bank grants unsecured loans only to persons of very good credit rating, with
good track record, and a steady income sufficient enough to repay the loan.
The potential borrower’s exiting loans also in an important point to consider.
 Types of Unsecured Loans
• Personal Loans

• Credit Cards Loans

 ADVANCES

CASH BILLS
LOANS OVERDRAFT PURCHASED &
CREDIT DISCOUNTED

SHORT MEDIUM LONG

TERM TERM TERM
 TYPES OF LOANS
• Short term: Repayable within a year.

• Medium term: Repayable over a period of

5 to 7 years.

• Long term: Repayable over a period

more than 5 to 7 years.
 CASH CREDIT

• This loan is given to meet the working capital requirements of a company.

• It is given against a collateral security.
• Interest is charged only on the amount of loan availed by the customer and
not on the amount of credit sanctioned.
 OVERDRAFT
• Every overdraft facility has an approved credit limit.
• An overdraft facility is not subject to any repayment as long as the amount
used is within the overdraft limit.
• No minimum monthly payment.
• Joint borrowers allowed.
 PURCHASE & DISCOUNTING OF BILLS

• Funds for working capital required by commerce and industry are also
provided by banks by Purchase/discounting of commercial bills.
• Safety of funds
• Smooth liquidity
• Facility of refinancing
• Certainty of payments.