Lending Activities

Importance of Lending Activity

• Lending is a principal activity of a bank.
• Advances portfolio a bank indicates its dynamic
personality.
• Credit is the mainstay for any financial institution
particularly banks.
• A bank’s credit management exercise is aimed at
accomplishing its mission of retaining its position as a
premier financial institution.
• Lending is a crucial activity for a bank as it enables the
bank to generate income.
• Banking operations survive and thrive on the activity
of lending
Types of Lending Activities
Fund based credit facilities
Non-fund based Credit activities
Term Loans
 Types of Borrowers
• Individual
• Partnership firm
• Hindu Undivided Family
• Companies
• Statutory Corporations
• Trusts and Co-operative Societies
Secured & Unsecured Loans
Secured Loans
“ Loans that are generally covered
by tangible security of valuable
collaterals under pledge or
hypothecation, and or
Mortgage .”
Unsecured Loans
“ Unsecured Loans are those for which
Pledge is bailment of goods as a
the banker has to rely upon the personal
security
security of the borrower i.e. the credit
Hypothecation is treated as worthiness of the borrower.”
constructive mortgage.
Mortgage or charge over immovable
properties is another security
accepted by banker in his
business of lending.
Basic requirements for Lending
• Capital or financial resources
• The borrower
• Credit Appraisal
• Credit Rating
• Documentation
• Credit monitoring
• Recovery mechanism
• The Legal Remedy
The FIVE ‘C’s of Credit Appraisal
• 1. Character (good citizen)
• 2. Capacity (cash flow)
• 3. Capital (wealth)
• 4. Collateral ( security)
• 5. Conditions (economic, especially downside
vulnerability)
 Essentials of Credit Appraisal
• 1. Industry Analysis
• 2. Company Analysis
• 3. Management Assessment
• 4. Creditworthiness
• 5. Profitability
• 6. Cash Flow
• 7. Credit Risk

• 1. If I lend this money, how and when will I be

repaid.
• 2. What can go wrong and what protections do I
have if it does.
• 3. What advantages are in the advances for the
bank and how can they be safely maximised
 Structuring a Credit Proposal
• 1. Purpose
• 2. Amount
• 3. margin Contribution
• 4. Portfolio Consideration
• 5. Credit Risk and Term
• 6. Yield
• 7. Legal Consideration
• 8. Repayment
• 9. Security and Quasi-Security
• 10. Control and Monitoring
• 11. Designing Credit Facilities
• 12. pricing
• 13. Conclusion on structuring a proposal
 The Role of Credit Information
• In order to know the customer, Credit information is of immense
help.
• The Credit Information Bureau (CIB) provides a platform for the
sustainable growth of the Financial Services Sector, helps in Fraud
and Loss Prevention and enables the member institutions to achieve
higher accuracy in risk prediction.
• It also facilitates faster decision-making in regard to sanction of
credit.
• A credit bureau not only collects but also processes and stores credit
information both on the existing borrowers and the potential
institutions, which are its members.
• The Bureau does not collect information on deposit account, current
account, etc., of the borrower. It collects only credit information
from its member banks/institutions. The CIBs would facilitate credit
dispensation and help mitigate credit risk.
Credit Management in Banks
Risk Management
 SUMMARY
• Credit management is a core process for commercial
banks, and therefore, the ability to manage this
process is essential for their success.
• Lending is a crucial activity for a bank as it enables
the bank to generate income.
• Effective credit management separates loan review
from credit analysis, execution and administration.
• Credit management includes a skilful review of
existing credit files and a close monitoring of the
credit department to be able to structure a
practicable solution.