Banking operation

Lending Bankers
A bank is a financial institution that creates credit by lending money to a borrower,
thereby creating a corresponding deposit on the bank's balance sheet. Lending
activities can be performed either directly or indirectly through capital markets. Due
to their importance in the financial system and influence on national economies,
banks are highly regulated in most countries. Most nations have institutionalized a
system known as fractional reserve banking under which banks hold liquid assets
equal to only a portion of their current liabilities. In addition to other regulations
intended to ensure liquidity, banks are generally subject to minimum capital
requirements based on an international set of capital standards, known as the Basel
Accords.
The entire range of banking operations are segmented into four broad heads- retail
banking businesses, wholesale banking businesses, treasury operations and other
banking activities. Banks have dedicated business units and branches for retail
banking, wholesale banking (divided again into large corporate, mid corporate) etc.
The products of the banking industry broadly include deposit products, credit products
and customized banking services. Most banks offer the same kind of products with
minor variations. The basic differentiation is attained through quality of service and
the delivery channels that are adopted. Apart from the generic products like deposits
(demand deposits current, savings and term deposits), loans and advances (short
term and long term loans) and services, there have been innovations in terms and
products such as the flexible term deposit, convertible savings deposit (wherein idle
cash in savings account can be transferred to a fixed deposit), etc. Innovations have
been increasingly directed towards the delivery channels used, with the focus shifting
towards ATM transactions, phone and internet banking. Product differentiating
services have been attached to most products, such as debit/ATM cards, credit cards,
nomination and demat services.
Other banking products include fee-based services that provide non-interest income to
the banks. Corporate fee-based services offered by banks include treasury products;
cash management services; letter of credit and bank guarantee; bill discounting;
factoring and forfeiting services; foreign exchange services; merchant banking;
leasing; credit rating; underwriting and custodial services. Retail fee-based services
include remittances and payment facilities, wealth management, trading facilities and
other value added services.
Banking operations
The legal transactions executed by a bank in its daily business, such as providing
loans, mortgages and investments, depending on the focus and size of the bank,
Lending

a. To give or allow the use of temporarily on the condition that the same or its
equivalent will be returned.
b. To provide (money) temporarily on condition that the amount borrowed be
returned, usually with an interest fee.
What is a 'Lender'
Someone who makes funds available to another with the expectation that the funds
will be repaid, plus any interest and/or fees. A lender can be an individual, or a public
or private group. Lenders may provide funds for a variety of reasons, such as a
mortgage, automobile loan or small business loan.
BREAKING DOWN 'Lender'
A lender provides cash or credit to a borrower that needs to be repaid either in
increments (as in a monthly mortgage payment) or as a lump sum (as in a promotional
"buy now pay later" arrangement). The terms of the loan will specify how the loan is
to be satisfied, over what period of time, and state the consequences of default.
5 Important Principles Followed by the Banks for Lending Money

Banks follow the following principles of lending:

1. Liquidity:
Liquidity is an important principle of bank lending. Bank lend for short periods only
because they lend public money which can be withdrawn at any time by depositors.
They, therefore, advance loans on the security of such assets which are easily
marketable and convertible into cash at a short notice.
A bank chooses such securities in its investment portfolio which possess sufficient
liquidity. It is essential because if the bank needs cash to meet the urgent requirements
of its customers, it should be in a position to sell some of the securities at a very short
notice without disturbing their market prices much. There are certain securities such
as central, state and local government bonds which are easily saleable without
affecting their market prices.

The shares and debentures of large industrial concerns also fall in this category. But
the shares and debentures of ordinary firms are not easily marketable without bringing
down their market prices. So the banks should make investments in government
securities and shares and debentures of reputed industrial houses.

2. Safety:
The safety of funds lent is another principle of lending. Safety means that the
borrower should be able to repay the loan and interest in time at regular intervals
without default. The repayment of the loan depends upon the nature of security, the
character of the borrower, his capacity to repay and his financial standing.
Like other investments, bank investments involve risk. But the degree of risk varies
with the type of security. Securities of the central government are safer than those of
the state governments and local bodies. And the securities of state government and
local bodies are safer than those of the industrial concerns. This is because the
resources of the central government are much higher than the state and local
governments and of the latter higher than the industrial concerns.
In fact, the share and debentures of industrial concerns are tied to their earnings which
may fluctuate with the business activity in the country. The bank should also take into
consideration the debt repaying ability of the governments while investing in their
securities. Political stability and peace and security are the prerequisites for this.
It is very safe to invest in the securities of a government having large tax revenue and
high borrowing capacity. The same is the case with the securities of a rich
municipality or local body and state government of a prosperous region. So in making
investments the bank should choose securities, shares and debentures of such
governments, local bodies and industrial concerns which satisfy the principle of
safety.
Thus from the banks viewpoint, the nature of security is the most important
consideration while giving a loan. Even then, it has to take into consideration the
creditworthiness of the borrower which is governed by his character, capacity to
repay, and his financial standing. Above all, the safety of bank funds depends upon
the technical feasibility and economic viability of the project for which the loan is
advanced.
3. Diversity:
In choosing its investment portfolio, a commercial bank should follow the principle of
diversity. It should not invest its surplus funds in a particular type of security but in
different types of securities. It should choose the shares and debentures of different
types of industries situated in different regions of the country. The same principle
should be followed in the case of state governments and local bodies. Diversification
aims at minimising risk of the investment portfolio of a bank.
The principle of diversity also applies to the advancing of loans to varied types of
firms, industries, businesses and trades. A bank should follow the maxim: Do not
keep all eggs in one basket. It should spread it risks by giving loans to various trades
and industries in different parts of the country.

4. Stability:
Another important principle of a banks investment policy should be to invest in those
stocks and securities which possess a high degree of stability in their prices. The bank
cannot afford any loss on the value of its securities. It should, therefore, invest it funds
in the shares of reputed companies where the possibility of decline in their prices is
remote.
Government bonds and debentures of companies carry fixed rates of interest. Their
value changes with changes in the market rate of interest. But the bank is forced to
liquidate a portion of them to meet its requirements of cash in cash of financial crisis.
Otherwise, they run to their full term of 10 years or more and changes in the market
rate of interest do not affect them much. Thus bank investments in debentures and
bonds are more stable than in the shares of companies.
5. Profitability:
This is the cardinal principle for making investment by a bank. It must earn sufficient
profits. It should, therefore, invest in such securities which was sure a fair and stable
return on the funds invested. The earning capacity of securities and shares depends
upon the interest rate and the dividend rate and the tax benefits they carry.
It is largely the government securities of the centre, state and local bodies that largely
carry the exemption of their interest from taxes. The bank should invest more in such
securities rather than in the shares of new companies which also carry tax exemption.
This is because shares of new companies are not safe investments.
TYPES OF LENDING BY BANKS IN INDIA
One of the most confusing parts of the mortgage process can be figuring out all the
different kinds of lenders that deal in home loans and refinancing. There are direct
lenders, retail lenders, mortgage brokers, portfolio lenders, correspondent lenders,
wholesale lenders and others.
Many borrowers simply head right into the process and look for what appear to be
reasonable terms without worrying about what kind of lender they're dealing with. But
if you want to be sure of getting the best deal, or are looking for a jumbo loan or have
other special circumstances to address, understanding the different types of lenders
involved can be a big help.
Mortgage Lenders vs. Mortgage Brokers
A good place to start is with the difference between mortgage lenders and mortgage
brokers.
Mortgage lenders are exactly that, the lenders that actually make the loan and provide
the money used to buy a home or refinance an existing mortgage. They have certain
criteria you have to meet in terms of creditworthiness and financial resources in order
to qualify for a loan, and set their mortgage interest rates and other loan terms
accordingly.

Wholesale and Retail Lenders

Wholesale lenders are banks or other institutions that do not deal directly with
consumers, but offer their loans through third parties such as mortgage brokers, credit
unions, other banks, etc. Often, these are large banks that also have retail operations
that work with consumers directly. Many large banks, such as Bank of America and
Wells Fargo, have both wholesale and retail operations.
Warehouse Lenders
Somewhat similar to wholesale lenders are warehouse lenders. The key difference
here is that, instead of providing loans through intermediaries, they lend money to
banks or other mortgage lenders with which to issue their own loans, on their own
terms. The warehouse lender is repaid when the mortgage lender sells the loan to
investors.
Portfolio Lenders
Portfolio lenders, on the other hand, use their own money when making home loans,
which they typically maintain on their own books, or "portfolio." Because they don't
have to satisfy the demands of outside investors, they can set their own terms for the
loans they issue.
Hard Money Lenders
Direct Lenders
Correspondent Lenders
A final term you may hear is "correspondent lender." Whereas some types of lenders
are distinguished by the process leading up to the loan, correspondent lenders are
defined by what happens after the loan is issued. Correspondent lenders work with an
investor, called a sponsor, who purchases any mortgages they make that meet certain
criteria. Often, this is either Fannie Mae or Freddie Mac, in their roles as the major
U.S. secondary lenders.
Non-fund based lending versus fund based lending In Non-fund based lending,
bank does not make any funds outlay but only gives assurance. The letter of credit
and bank guarantees fall into the category of non-funding loans. The non-funding
loan can be converted to a fund-based advance if the client fails to fulfil the term of
contract with the counterparty. In banking language, the non-funding advances are
called Contingent Liability of the banks.
Secured Loans and Unsecured Loans In the secured loans, the borrower has to
pledge some assets (such as property) as collateral. Most common secured loan is
Mortgage loan in which people mortgage their property or asset to get loans. Other
example is Gold Loan, Car Loan, Housing loan etc.
Priority Sector Lending The overall objective of priority sector lending program is
to ensure that adequate institutional credit flows into some of the vulnerable sectors of

the economy, which may not be attractive for the banks from the point of view of
profitability.
Lending money to the public
Lending money is one of the two major activities
of any Bank. Banks accept deposit from public
for safe-keeping and pay interest to them. They
then lend this money to earn interest on this
money. In a way, the Banks act as intermediaries
between the people who have the money to lend
and those who have the need for money to carry
out
business
transactions.
The
difference
between the rate at which the interest is paid
on deposits and is charged on loans, is called
the "spread".
Banks lend money in various forms and they lend
for practically every activity. Let us first
look at the lending activity from the point of
view of security. Loans are given against or in
exchange
of
the
ownership
(physical
or
constructive) of various type of tangible items.
Some of the securities against which the Banks
lend are :
1. Commodities
2. Debts
3. Financial Instruments
4. Real Estate
5. Automobiles
6. Consumer durable goods
7. Documents of title