Principles of Lending
Relevent for JAIIB PPB | CAIIB ABM | CCP Module A
Why It Matters in Branch:
Every credit decision you take at branch must pass through these principles. The RBI and your bank’s credit policy are built on them.
SHORT NOTES
Lending is the core function of a bank. A banker must lend carefully — every rupee lent is a depositor’s rupee. Five fundamental principles guide sound lending:
1. Safety — The primary principle. The loan must be repaid. Assess borrower’s repayment capacity and security offered carefully.
2. Liquidity — Banks must maintain the ability to repay depositors on demand. Loans should not lock funds for excessively long periods without matching liability.
3. Profitability — Lending must generate income. Interest earned must cover the cost of funds, operating expenses, and NPA provisioning.
4. Purpose / Productive Purpose — Loans must be for lawful, productive purposes. Finance for speculation, hoarding, or anti-social activities is prohibited.
5. Diversification of Risk — Do not concentrate lending in one sector, geography, or borrower group. Spread risk across sectors, regions, and borrower types. This is the basis of portfolio management.
The “Six Cs of Credit” operationalise these principles: Character, Capacity, Capital, Collateral, Conditions, Compliance.
RBI guidelines on credit management, loan policy, and exposure norms all flow from these five principles.
BRANCH CONTEXT
✦ In branch, when a customer walks in with a loan request, our mental checklist — can they repay? Is the security adequate? What is the purpose? — it is nothing but these five principles running in our head. Inqueries, documents, pre-sanction inspections, background checks, CIC Checks, TIR, Valuation etc all are done to ensure sound and safe lending.
TEST YOUR UNDERSTANDING WITH THESE 5 MCQS
