MANAGEMENT OF ADVANCES AND LOANS IN COMMERCIAL BANKS AN OVERVIEW
INTRODUCTION If accepting deposits is the function of one hand, lending is the function of the other hand. Without lending the process of eanning revenue or profit does not begin. A major portion of the bank deposits gets blocked in cash reserves and liquid assets to meet CRR and SLR.
Continued……. The residual funds or deployable funds have to be used for lending very carefully, so that not only establishment and interest obligation etc are met comfortably but reasonable return on funds is also earned.
BASIC PRINCIPLES OF LENDING SAFETY- reliable borrower, collateral security, good documentation and inspection and continuous follow up not of security alone but of borrowers operations as well. LIQUIDITY- it refers to the readiness with which bank can convert its assets into cash with no or nominal loss. PROFITABILITY
FACTORS TO BE CONSIDERED WHILE MAKING ADVANCES The borrower The business Capital resources f the borrower Amount of loan The purpose The source of repayment Security
FACTORS INFLUENCING LOAN POLICY Portfolio consideration Marketing of funds Terms and conditions Capital position Variability of deposits The state of economy Monetary policy Flexibility in deployment of funds Human resources Credit needs of the area
Credit procedures Application form Credit reports Credit rating or credit intelligence Scrutiny of advances proposals Supervision of advances Management of difficult accounts
Portfolio management Portfolio management refers to appropriate distribution of assets and liabilities of a bank in the light of its objectives. Assets must be allocated so that basic objectives as liquidity, solvency and profitability can be achieved
Objectives of portfolio management 1)Liquidity Ownership of demand deposits Requisite cash or liquid reserves Banking habits Seasonal requirements Structure of banking
Continued……. 2)Solvency Loss or misappropriation of assets Risk of default Risk of changes in interest rates 3) Income or profitability