Lending Principles & mgt. por rite (fray 1, Why do commercial banks disburse loans? What principles does the bank follow in lending? Explain in detail. (5 + 5= 10) A: Commercial banks collect small scattered capital in the form of deposits and provide large projects and even small personal loans. The following are the reasons for disbursement of loans by commercial banks providing banking services through large branch network in remote to accessible areas. 1. To contribute to the development of the country by investing in infrastructure development (such as roads, bridges, power projects) 2. To provide various home loans, business loans, agricultural loans, etc. as per the requirement of the customer to the small accumulated capital, 3. As a non-profit organization, to make a profit by investing the accumulated deposits in loans and earning interest, 4, To pay bank operating expenses such as staff expenses, administration expenses, 5. To mobilize the deposit to preventing it from being passive 6. To increase the overall assets of the bank ) 7. To implement the bank's credit creation capaci 8. To provide loans for the upliftment of the 9, To enhance the reputation of the bank: viding quality credit 10. To invest the amount collected in aéGordance with the principle of matching The following are the principles to ee by a bank before disbursing a loan. 1. Principle of Liquidity: According to this principle, the bank should maintain some amount of liquidity without converting all the accumulated deposits into loans, for example, the loan to deposit ratio should not exceed 90 percent. 2. Principle of Profitability: The bank should disburse loan for profitable project but it should not exceed the limit of 4.4 percent spread rate set NRB. 3. Principle of Loan Diversification: As per the NRB ditective, single obligor limit should not exceed 25% of the core capital and sectoral limit should not exceed 40% of total loan. 4. Principle of security: Banks should take adequate collateral security while disbursing the loan. As per NRB directive, the loan to fair market value of collateral ratio (LTV Ratio) should not be less than 70%. 5. Principle of Risk Management: The flow of credit should be done according to the risk appetite and tolerance limit, especially by adequately addressing the risks in the loan. 6. Principle of National Interest: If there is an act against the national interest due to flow of credit or in money laundering or terrorist activities, such borrower should not be given loan. Facebook: www.facebook.com/cakrishnaniraula Youtube: www.youtube.com/user/Krish472929Lending Principles & mgt. por fritter (fire) 7. '5C' in credit: When disbursing loan, customer's Capital, Character, Collateral, Condition and Capacity should be considered. 8. Apart from this, various aspects such as management aspect, financial aspect, market aspect, social aspect, technical aspect, legal aspect etc. should also be considered in the project loan, 2. Mention the types of loans disbursed by the bank on sectoral basis. Ans: Banks disburse different types of loans on sectoral basis. As per NRB Directive No. 9, the loan can be divided into 16 different sectors as follows. 1. Agriculture and forestry 2. Fisheries 3. Mine 4, Agriculture, forestry and beverage production 5. No-food production 6. Construction s 7. Bleetricity, gas and water & 8. Metal products, machinery and electronic to6ts and connections 9. Transportation, storage and commu a 10. Wholesalers and retailers & 11. Finance, insurance and real estafe) 12. Tourism 13, Other services (advertising, automotive, hospital, education, etc.) 14, Consumption 15. Local government 16. Others 3. Classify loans by purpose/produet. When classified on the basis of purpose, loans can be classified on the basis of the following purposes as per NRB Directives no. 9. Term loan . Overdraft 1 2, 3. Trust Receipt Loan / Import Loan 4, Demand and other working capital loans 3. . Individual residential home loan Facebook: www.facebook.com/cakrishnaniraula Youtube: www.youtube.com/user/Krish472929Lending Principles & mgt. wor fatter (firm) 6. Real Estate Loans 7. Loans of margin nature 8. Hire purchase loan 9. Deprived Sector loans 10. Bills Purchased 11, Other products (credit cards, educational loans, small and medium loans, etc.) 4. What is credit creation? Why is a commereial bank called factory of eredit creation? (S+5) Credit creation means the ability to mobilize the accumulated deposits and create huge loans. The commercial banks convert the collected deposits into loans and the converted loans generate large amount of loans by re-depositing. Credit creation also brings multiplicity of deposits. The process of credit creation is presented with the following examples: it.FRs. | lakh in a bank, The bank collects © Suppose a person named A makes a depo: the amount as primary deposit. © From the primary deposit, the en 3% as CRR in NRB and gives the remaining Rs. 97,000 as loan to son named B. © As the loan amount will ‘deposited in the bank account of B, the amount is deposited as a derived deposit. © This way, a large amount of loan can be created from the deposit amount of B to the person named Cand others in the same process as above. © Credit Creation Formula = 1 / CRR x Deposit Amount, (1/CRR is called money multiplier.) © In the above example credit creation amount = 1/3% x 100.000 i.e. primary deposit of Rs 1 lakh can createa total loan of up to Rs 33.33 lakh. Credit creation is also affected by the rate of CRR, the speed at which the customer withdraws money, the CD ratio, ete. ‘Commercial banks are called factories of credit creation because of the following. 1. Ability to collect small deposits and invest in large projects 2. Having the ability to invest commercial or persoral loans according to the customer's purpose Facebook: www.facebook.com/cakrishnaniraula Youtube: www.youtube.com/user/Krish472929Lending Principles & mgt. por rite (fray 3. As it has the potential to develop the country by investing the accumulated deposits in productive sectors 4, As it has the capacity to provide loans even for the upliftment of the deprived sector 5. Even if there is a lack of liquidity, it is possible to take a loan from central bank and recreate more credit from that loan 6. To contribute to bring balance in the total money supply of the economy by creating credit through disciplined banking system etc. Thus commercial banks are called factories of credit creation as they help the commercial banks to monetize the economy by collecting scattered deposits and converting them into various loans such as productive, deprived sector, commercial, personel, etc. following the ‘guidelines issued by NRB and various policies and rules. 5, What is resource mobilization and mobilization in a bank? Write briefly about the credit eyele in the banking sector, 5 +5=10 Resources are needed to run any business, and business is run using those resources. There are three main types of resource mobil ation ang business, namely, promoter or shareholder capital, eredit capital and deposits épllected from the general public. Therefore, resource mobilization is the business of banks. It has various elements but the most important resource is dengaGorronis are of call, current, savings, fixed, margin ate . The Bank uses the funds received from these sources as follows: 1. To maintain the mandatory cash reserve prescribed by NRB. 2. To disburse loans to the general public and other firms and companies 3 To provide inter-bank loan 4 To purchase fixed assets 5. To invest in shares of other companies, debentures, government securities, NRB bonds ete. In this way, banks invest the resources received in various sectors and uses the returns to give business promotion and fair dividend to the shareholders. Credit eycle: Liquidity limits are not always the same in any bank or financial institution. Market demand and supply, economic policy and budget of the government, monetary policy of NRB, etc. are directly and indirectly affecting the credit investment of banks. The cycle of credit transactions in banks and financial institutions can be studied as follows. A. Expansion: This step includes the following elements: Facebook: www.facebook.com/cakrishnaniraula Youtube: www.youtube.com/user/Krish472929Lending Principles & mgt. wor fatter (firm) ~ Adequate availability of capital ~ Increase in the use of credit capital in Vasalat - Expansion in capital expenditure B. Contraction: Credit contraction occurs at this stage where: - Lack of loan investment amount ~ Property prices will fall ~ There are signs of tightening of investment policy Repair: To solve the problem of credit seen in the banking business at this stage: ~ Business is brought in appropriate size or size - Attempts are made to issue ordinary shares ~ Attention is paid to cost reduction D. Revival: At this stage, the problems seen in the credit cycle are resolved and the following symptoms are seen: - Increase in cash flow - Increasing profit margins s ~ Decrease in leverage ratio & Thus the Credit cycle helps - To assess the financial success of the bs ~ To determine the share market aan bank ~ To fix the bank interest rate and “%, ~ Helps the customer to decide when to take a loan from the bank. 6. Mention the procedure to be followed when a customer applies for a loan at a bank. Also write down what you need to pay attention to in efficient credit administration. Following are the various procedures that can be followed when a customer submits a loan application in the prescribed format. 1. Credit Analysis: In this the bank analyzes various aspects of the customer according to the demand of the loan, it uses more SC, in which * Character will be studied + Capital i.e. customer's investment and bank's investment ratio + Condition + Capacity projection of customer's ability to repay the loan + Collateral ie whether the loan collateral ratio is maintained as specified by NRB, collateral status, location, etc. Facebook: www.facebook.com/cakrishnaniraula Youtube: www.youtube.com/user/Krish472929Lending Principles & mgt. por rite (fray 2. Credit Approval: After studying the various documents submitted by the customer, on- the-spot monitoring if necessary, evaluation of the collateral, etc., the bank approves the loan by completing the prescribed institutional process if the customer is confident of making good use of the loan. 3. Credit Disbursal: The approved loan is used by the customer as per his requirement. 4. Monitoring and Supervision: The bank also monitors and supervises whether the customer has used the loan properly or not, 5. Credit Recovery: This includes the process of getting the loan repaid on time in installments as per the loan agreement after the disbursal of the loan. Following points should be remembered for proper credit administration © What type of customer is needed for the loan © What type of loan to give to which type of customer © What kind of documents to demand from the customer © Specified scope of loan amount limit © Explain loan recommendation, loan os approval and loan disbursement phase (evel of loan disbursement), meffid, procedure ete. © Provisions for loan renewal, restgiéfiting or rescheduling, transfer etc. should be clear © After the loan approval, consumption, the fee to be paid fo the bank should be clarified. time limit of loan consumption, in case of non- © Approved loan, interest and any other fee should be clearly disclosed Conclusion, in credit administration, work is done to make credit quality, profitable and effective, Facebook: www.facebook.com/cakrishnaniraula Youtube: www.youtube.com/user/Krish472929