The repayment of the loan depends upon the borrower’s capacity to pay and

willingness to pay. The capacity depends upon the tangible assets of the
borrower. The willingness to pay depends upon the honesty and character of the
borrower. Liquidity: The money should return to the bank as per the repayment schedule.
liquidity would refer to the quality of assets, which should be easily convertible into cash without any
loss of value.  Liquidity is the availability of bank funds on short notice. The borrower
must be in a position to repay within a reasonable time. Profit:  Commercial banks
are profit earning institutions. They must employ their funds profitably so as to earn sufficient income
out of which to pay interest to the depositors, salaries to the staff and to meet various other
establishment expenses and distribute dividends to the shareholder. The

sound principle of lending is not to sacrifice safety or liquidity for

the sake of higher profitability. he banks should

not grant advances to unsound parties with doubtful repaying

capacity, even if they are ready to pay a very high rate of interest. Diversifi:
A commercial bank should follow the principle of diversity.Risks
of lending can be reduced by diversifying the loans. It should not invest its surplus

funds in a particular type of security but in different types of

securities. While granting loans, the banker should not grant a major part of the loan to one
single particular person or particular firm or an industry. If the banker grants loans and advances to a
number of firms, persons or industries, the banker will not suffer a heavy loss even if a particular firm
or industry does not repay the loan. Object of loan: A banker would not throw away
money for any purpose for which the borrower wants. Ifit is for
unproductive purposes, then there is less chances of repayment
of loan.The purpose should be productive so that the money not only remains
safe but also provides a definite source repayment. SECURITY: a banker
should grant secured loans only. if they fail to repay the loan or otherwise meet the terms of
loan agreement, the banker has the legal right to seize and sell the property in order to repay the
loan.  They can recoup their losses by selling their collateral in the event of a default.
An unsecured loan is not protected by any collateral. If they default on the loan, the banker can't
automatically take their property. NATIONAL : Bank has a significant role in the economic
development process of a country. They should keep in mind the national development plan while going
for lending but maintaining safety, liquidity and profitability. CHARACTER : the banker should examine
the characteristics of the borrower and conditions of the loan, attempting to
estimate the chance of default , the risk of a financial loss for the banker. Banker
needs to know the borrower and guarantors are honest and have integrity.
  FORMS OF LENDING :::: Lending of money to different kinds of borrowers is one of the most
important functions of commercial bank. The forms of lending are given below : page 241
Bank loans are one of the most common
points… LOANS :
forms of lending. Bank loans are frequently given for finance start-up capital and
also for larger, long-term purchases. A loan is when money is given to another
party in exchange for repayment of the loan principal amount plus interest.

 A loan may be secured by collateral such as a mortgage or it may be

unsecured such as a credit card. borrowers pay a certain percentage of the principal
amount to the lender as compensation for borrowing. CAS CREDIT: Cash credit is a short-
term business loan.  It enables a company to withdraw money from a bank account without
keeping a credit balance. The account is limited to only borrowing up to the borrowing limit.
Generally Cash Credit is granted to borrowers to meet their working capital requirement.It
is given against a collateral security. OVER DARFT: Overdrafts are a short-term way
to borrow money up to an arranged limit. Interest is only charged on the amount
overdrawn . The overdraft allows the account holder to continue withdrawing
money even when the account has no funds in it or has insufficient funds to
cover the amount of the withdrawal.overdraft facility is granted to a current
account holder only. PURCHASE: It is another type of lending which is very
popular with the modern banks.such bills form good investment for a
bank.customers can get it discounted by the bank,when they are in need of
money, after deducting its commission, the bank pays the present price of the
bill to the holder. TYPES OF LOANS : 1.commercial: A commercial
loan, also commonly called a business loan, represents an important
line of business for the banking industry and a key source of funds
for the business sector.it includes loans for commercial and
industrial purposes to sole proprietorships, partnerships,
corporations, and other business enterprises, whether secured or
unsecured, single-payment, or installment. Loan advanced to a business
instead of to a consumer. Commercial loans are usually for a short-term. 2.consumer:
Consumer loan means a secured or unsecured loan given to customers for
personal, family, or household purposes, or for consumable items such as a
car, boat, manufactured home. It is usually given on the basis of borrower's
integrity and ability to pay. It is also called as consumer lending. 3.agricultural:
An agriculture loan is an overdraft facility which could be used to meet the cost of farming, cultivation and
working capital activities.The loan can be availed by farmers to finance agricultural projects
such as Running day to day operations
 Buying farm machinery such as tractors, harvesters, et cetera
 Purchasing land
 Storage purposes
 Product marketing loans
 Expansion…..
  ON THE BASIS OF TIME: 1.short : short term loans are generally to be repaid within a

few months or a year .  a short-term loan is a type of loan that is obtained to

support a temporary personal or business capital need. Short-term loans provide

quick cash when cash flow is lacking. The borrowing amount is usually

lesser as compared to other forms of loans.

These kinds of loans carry a higher interest rate.

These loans are mostly unsecured in nature. 2.medium: a loan that must

be paid back between two and five years. after the money is borrowed.
Medium-term loans are best suited for growing, revenue-positive businesses
with a need for capital to further expand.  3. Long: A type of loan that has an
extended time period for repayment usually lasting between three and 30 years.
Car loans and home mortgages are examples of long-term loans. It can be very
advantageous to take out a long term loan for both a consumer and for a business. Usually,
only established businesses with some years of financial success are approved
for long-term bank loans.  ON THE BASIS OF SECUR: 1.secured:it is a loan
that is granted on the security of tangible assets.  secured business loans tend to
be less risky for a banker. Basically, a secured loan requires borrowers to offer
collateral.  if a customer can’t repay a secured loan, the banker can sell their collateral to
pay off the loan.2. UNSECUR:It is a loan that is granted without any security.
Unsecured loans are the reverse of secured loans. It is very risky for the banker.
because there is no asset to recover in case of default….. DETERMINING CREDIT
WROTHYNESS: 1 .capital: Capital describes the financial and non-financial assets that a
business holds, as well the amount of money the business owners have invested in their
company. bankers analyze a borrower's capital level when determining
creditworthiness.  2.character: character refers to a borrower's reputation or
record. Banks want to lend to people who are responsible and keep commitments.
3.ability: Capacity measures the borrower's ability to repay a loan by comparing
income against recurring debts  . Lenders want to be assured that your business
generates enough cash flow to repay the loan in full. Examining the payment history of current
loans and expenses is an indicator of the borrower’s reliability to make loan payments.
4:soundness of project: boi theke…. CONCLUSION: banks are one source of
financing for small businesses. play an important role in the financial system and
the economy.  provide the loan to a large number of people at low-interest rate.
5) Banks promote agricultural and industrial sector by providing loans.