Principles of Bank Lending

Bank lending is aimed at alleviating financial problems of borrowers whether individuals or corporate bodies. In essence, bank lending helps to induce economic growth and development.

It creates employment opportunities, increase general income level, stimulates economic activities and on the whole, ensures the going concern concept of a bank if the lending process is appropriately administered.

It is important for the lending banker to show deep interest on the borrowers' economic and social activities.

The lending process considers many factors which are called the Ps of credit analysis before taking a final decision on whether to lend or not. These Ps are:

• People: A lending banker should assess the integrity, qualifications, and experience of the people representing their corporate entities or on their behalf. The essence of doing this, is to ensure that any loan granted would be repaid as at when due. This is because a borrower could be in a position to repay, but unwilling to repay or may be willing to repay, but unable to repay. The behavioural traits of the applicants could be identified when the lending officer assesses their character, capability and experience.
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• Purpose: This considers the legality as well as the form of credit (loan). For a lending agreement to be enforceable, the underlying business transaction should be legal. Thus, a bank should not finance a project which is illegal. Moreover, any lending should conform with all the regulatory requirements or restrictions guiding the operation of the business being financed. In another angle, a banker should also be interested in the form of credit required by the borrower. He should know whether the loan is required to finance investment, seasonal trading peak, pay off hardcore short term debts, and expand the trading base of the business, etc. Loans required for the above purposes could be classified into short, medium, and long term loans. A borrower may apply for a short term loan when in fact he requires either a medium or long term loan. This should be properly addressed by the lending officer to enhance chances of repayment, as at when due.
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• Payment: This concerns the sources of funds for repayment. A loan could be repaid by means of asset conversion - sales of inventory, collection of account receivables, etc, or by profit distribution (appropriation). The first one is a short term loan, while the second is medium OE long term loan. Moreover, a personal loan could be repaid from a borrower's anticipated income. These have to be appropriately assessed by a lending officer before taking a lending decision. Lending should not be done unless one is satisfied with the probability of repayment, time frame for repayment and the source of repayment.
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• Protection: This concerns the collection of an acceptable collateral security for the loan. It should be noted that a collateral security acts as a mere cushion or buffer if the borrower is delinquent or defaults. In no case should a lender lend because of the availability of a collateral security if the project to be financed does not show commercial viability. Well perfected and bankable collateral securities should be accepted for any loan granted.

• Perspective: This concerns the risk and rewards associated with the loan. A loan which has the potentials of utilization of other services offered by the bank is more attractive than a loan which brings a once-for-all benefit to a bank. Such other services could be letters of credit, bills for collection, portfolio management, etc. These create additional income for a bank.