In this article, we have discussed about three things: meaning of lending, lending principles of commercial bank and documents required for applying the loan.
Topics Discussed In This Article:
- Meaning of Lending
- Lending Principles of Commercial Bank
- Documents Required For Applying the Loan
Now, let’s discuss meaning, principles and documents required for the lending in detail.
Meaning of Lending
Bank perform different kinds of functions on a daily basis. But accepting deposit and providing loans are the major function of any commercial bank. They use major portion of their fund for lending purpose and it is also the major source of income for any bank and financial institutions.
Lending is the function of providing a sum of money to a person or organization as loan under certain terms and conditions to pay it back later. The person who takes loan is called borrower and they have to pay a certain rate of interest to the bank.
Lending is a fully risky work for a bank. The purpose of loan, nature of activities, financial stability, earning and loan repaying capacity, these all things must be very carefully analyzed by the bank before providing any kinds of loan to a person or organization.
Lending Principles of Commercial Bank
Liquidity is one of the major principle of lending for commercial banks. Bank lends the public money to the borrowers. People deposit their money in bank which is used for the purpose of providing loans. So, banks are more responsible for repaying the money to the people on their demand. So, banks must consider easy availability of cash before performing any lending function. They should lends only for short period of time and on the security of liquid assets.
2. Principle of Solvency
Today, the market is fully competitive. So, banks must be financially capable enough to stay or sustain long-term in the market. They have to ensure the sufficiency of capital to run it’s business smoothly. For this, bank must ensure the safety of deposit to people in order to increase public deposit. Because, the major source of bank’s capital is public deposit.
3. Principle of Profitability
Like any other business, the main objective of commercial bank is to earn profit. They use public deposit for lending and make profit from that lending. So, profit is the main factor that commercial bank should focus on before conducting any activities.
4. Principle of Loan and Investment
As we know that banks generate major part of their income through lending. But along with this, bank should also focus more on generating income by using it’s fund for making investments on business and other sectors.
5. Principle of Savings
Commercial bank collects their deposits by creating different saving products. People saves their surplus money in bank which bank uses for providing loans and making Profit. So, bank must focus on the principle of more saving, more investment and more profit.
6. Principle of Services
Customer is known as the real God of any business. Commercial banks must ensure effective and efficient services to their customers. The success of bank highly depends of the customer satisfaction. So, customer only choose those bank where get improved services.
7. Principle of Secrecy
Customers always want to keep secrecy about their valuable assets and money. So, it is the responsibility of bank to maintain high Secrecy of their customer’s account to make them more satisfied. Bank should also provide personal locker facility for this purpose.
8. Principle of Efficiency
This principle says that bank should operate it’s business efficiently. For this, the efficiency of employees and management should be increased by providing training to them. A business can run efficiently only if it’s management team and subordinates are efficient and capable enough.
9. Principle of Location
Commercial banks should have to locate their branches in the best places where bank can get high number of customers and a good business environment. The place should also be safe enough and all facilitates should be easily available there.
Documents Required For Applying the Loan
1) Guarantee Application form or Loan Application form for a legal person
2) Foundation documents of a legal person:
– Article of association
– Authorization and licenses
3) Identity document of the representative of the legal person
4) If there is a supervisory board, resolution of a supervisory board on applying for loan/ bank guarantee and granting collateral
5) Financial reporting: Audited annual report for the previous financial year with an auditor’s report, if auditing is mandatory pursuant to law. Quarterly balance sheets and income statements of the current year which are not older than 120 days.
6) Business plan, if required
7) Justification of need for a loan
8) Contracts related to the project to be guaranteed
9) In case of collateral security: An extract from the relevant register or Land register regarding the collateral; Contract of sale, acceptance and delivery report, commercial lease contract, etc.
– Written decision of property owner to provide assets as security;
– The power of attorney to sign the guarantee contract;
– The report of collateral valuation which is issued by an appraiser accepted by the bank;
– Insurance policy for benefit of the bank which is issued by the insurance company accepted by the bank.
10) In case of surety ship/guarantee:
– Copy of registry card from commercial register of surety/guarantor;
– Copy of surety’s/ guarantor’s article of association;
– If there is a supervisory board, resolution of a supervisory board to provide suretyship/ guarantee;
– Surety’s/ guarantor’s audited annual report for the previous financial year, if auditing is mandatory pursuant to law;
– Current year’s quarterly balance sheets and income statements of surety or guarantor;
– Copy of the identity document of the private person – surety/ guarantor or copy of the identity documents of the representative of the legal person – surety/ guarantor;
– Application form for private person – surety;
– Application form for the enterprises – surety/ guarantor;
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