Safety of Loans and Advances
Posted by Ripon Abu Hasnat on Tuesday, February 26, 2019 | 0 comments
Lending is the
most profitable business of a commercial bank, but it is highly risky too.
Leading is always accompanied by the credit risk arising out of the borrowers’
default in repaying the money. A banker should, therefore, manage his loan business
in a safe and profitable manner.
The safety of
funds is the most important guiding principle of a banker. The safety of funds implies
that the borrower would repay the principal sum and the interest thereon in the
manner and on the conditions provided for in the loan agreement.
While lending
out funds, a banker should ensure that:
1. The loan to a
particular borrower does not involve any avoidable risk of nonpayment.
2. A bank must
follow an aggressive policy of lending in its bid to maximize earnings; but it
has also to be defensive at the same time because it cannot afford to lose the
people’s (depositors) money.
3. A banker
should always take a calculated risk.
4. Banker must
always insist upon collateral, margins and guarantees in addition to the personal
promise of the borrower.
Thus, a bank
should lend money after ensuring its full safety of repayment; otherwise the banker
will not be in a position to repay the deposits. Consequently, he will lose
public confidence and thus subsequently may get ruined.
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