SOURCE OF FUND OF A BANK

Source of Fund of a Bank

1. Paid-up Capital: The total amount of shareholder

capital that has been paid in full by shareholders. Paid-up capital is essentially the portion of authorized stock that the company has issued and received payment for. 2. Reserve fund: An account set aside by an individual or business to meet any unexpected costs that may arise in the future as well as the future costs of upkeep. In most cases, the fund is simply liquid asset, as it is impossible to predict when an unexpected cost may arise. However, if the fund is set up to meet the costs of scheduled upgrades, less liquid assets may be used

Source of Fund of a Bank

Source of Fund of a Bank

3. Undistributed fund: the amount of earnings that is not

distributed to shareholders as dividends. It is an internal source of financing for organization. 4. Deposit (savings, current, fixed deposit, etc.): funds collected by banks from the customers through various accounts such as savings, current and fixed deposit account. 5. Borrow from other Bank: Banks will typically borrow money from each other to make sure they have the correct amount of money on deposit as mandated by the central bank. The amount of money they must have will be dependent on their financial standing. Banks will charge a rate to one another for the money they borrow.

Source of Fund of a Bank

6. International Aid: international aid is a voluntary transfer of resources from one country to another, given at least partly with

the objective of benefiting the recipient country.

PRINCIPLES OF SOUND LENDING

A. Qualitative
1. Purpose: while lending his funds the banker

enquiries from the borrower the purpose for which he seeks the loan. Banks do not grant loans for every purpose, they should ensure the safety and liquidity of their funds by granting loans for productive purpose only. 2. Safety: as the bank lends the funds entrusted to it by the depositors, the first and foremost principal of lending is to ensure the safety of the funds lent. By safety is meant that the borrower is in a position to repay the loan, along with interest according to the terms of the loan contract.

A. Qualitative
3. Social Responsibility: 4.Business Ethics 5.Spread & Risks Diversification: this is also a

cardinal principal of sound lending. A prudent banker always tries to select the borrower very carefully and takes tangible assets as securities to safeguard his interests. The banker follows the principal of diversification of risks based on the famous maxim do not keep all the eggs in one basket. It means that the banker should not grant advances to a few big firms only or to concentrate them in a few industries or in a few cities or regions of the country only.

A. Qualitative
6.National Interest 7.Recovery Assurance: banks deal as intermediary between

the deposits and borrowers. They have to repay the money of the depositors with interest. So when they sanction loan they must assure about the recovery of the loan. For this they can take mortgage of assets as collateral security. 8.Repayment on Demand: Banks basically provide loan for short term basis because they have to the money of depositors if they demand. So when they sanction loan to customers they must have to check the ability of customer to pay the loan when the ban demand the money.

B.Quantitative

1.Liquidity: banks are essentially intermediaries for short term funds. Therefore they lend funds for short period and mainly for working capital purposes. The loans are therefore largely on demand. The banker must ensure that the borrower is able to repay the loan on demand or within a short period. This depends upon the nature of assets owned by the borrower and pledged to the banker. 2. Profit & Profitability: commercial banks are profit earnings institutions, the nationalized banks are no exception to this. They must employ their funds profitably so as to earn sufficient income out of which to pay interest of the depositors, salaries to the staff and to meet various other establishment expenses and distribute dividends to the shareholders. 3.Adequate Security: to ensure repayment of loan from the borrowers the bank should ensure adequate security of the loan. They should take personal guarantee side by side collateral securities to ensure repayment in the case default of the borrowers.

SELECTION OF BORROWER 5 C

The five key elements a borrower should have to obtain credit:

1.Character (integrity): In accessing the creditworthiness of a person, the first consideration is that of the character of the person concerned. The word character implies and includes a number of personal characteristics of a person like honesty, integrity, regularity and promptness in fulfilling his promises and repaying his duties, sense of responsibility, good habits and the reputation and goodwill which he enjoy in the eyes of others. If a person possesses all these qualities without any doubt or suspicion in the mind of others, he possesses an excellent character and will be considered creditworthy by the banker. 2.Capacity (sufficient cash flow to service the obligation): The success of an enterprise largely depends upon the ability, competence and experience of the entrepreneur. If the borrower possesses necessary technical skill, managerial ability and experience to run a particular industry or trade, success of such unit may be taken for granted and the banker will consider him a deserving case for granting an advance.

The five key elements a borrower should have to obtain credit:

3.Capital (net worth): the importance attached by the banker

to the adequacy of capital of the borrower is not without significance. Banks are the repositories of the public money and lend the borrower money. The banker therefore does not lend money to an entrepreneur who does not have adequate funds of his own. In case of failure of the business enterprise the banker will be able to realize his money if the borrowers own capital is sufficient. 4.Collateral (assets to secure the debt): The cardinal principal of sound banking is to ensure safety of funds lent by a banker to his customer. So the banker take collateral of asset through the means like Lien, Pledge, Hypothecation, Mortgage etc.

The five key elements a borrower should have to obtain credit:

5.Conditions (of the borrower and the overall economy): to ensure sound lending policy the banker have to consider other conditions such as overall economic condition of the country, the economic condition of the borrower etc. side by side other characteristics of the borrower.