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How to Get Instant Personal Loan Approval for Low-Salary Employee

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Personal loans are a valuable financial tool that, if used responsibly, can allow you to make investments in your future or take care of an emergency. Even low-salaried professionals can usually get approved for personal loans, as long as they have a steady paycheck (or other income) and credit in good standing.

how to get approval for personal loans for low-salaried professionals
get personal loans for low-salaried employee

There are multiple ways to boost your approval chances for low-salary personal loans, and we’ll look at some of them here.

5 Tips to Get Approval for Personal Loans for Low-Salaried Professionals

Following are the tips to get an approved personal loan for your emergency need:

1. Employment Reputation & Stability

When looking for personal loans, it is important to have a strong employment reputation and stability to increase the chances of approval.

There are a few things that potential borrowers can do to improve their employment reputation and make themselves more attractive to lenders.

First, it is important to have a steady job history. Borrowers who have been employed at the same company for several years are more likely to be approved for personal loans than those with multiple jobs or frequent job changes.

Lenders want to see that borrowers have a stable source of income and are capable of making loan payments on time.

Second, try to avoid any major changes in your employment status, such as quitting, taking a long gap from work, or being fired.

2. Maintain A Good Credit Score

A good credit score shows lenders that you’re a responsible borrower and that you’re likely to repay your loan on time.

The higher your score, the lower your interest rate will be offered. So it’s worth taking some time to understand what goes into your score and how you can improve it.

You can do a few key things to improve your credit score.

First, ensure you keep up with all your payments, including credit card bills, utility bills, and any other kind of debt you may have.

Second, don’t max out your credit cards; using only a small portion of your available credit will help improve your score.

It is worth mentioning that people with no credit history can also get approved for a personal loan by finding a lender that doesn’t take credit score as a primary factor to approve their loans.

3. Don’t Take Multiple Loans At Once

One of the most important things you can do while taking a personal loan is to avoid taking out multiple loans at once.

When lenders see that you have multiple outstanding loans, it raises red flags about your financial stability and ability to repay the debt.

It’s better to focus on paying off one loan before taking out another.

Another thing to remember is the amount of debt you carry relative to your income. Lenders want to see that you have enough income coming in to cover your debts.

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If you have too much debt and not enough income, it’s going to be difficult to get approved for a loan.

4. Include All Sources Of Income

This may seem like an obvious piece of advice, but you’d be surprised how many people leave off key sources of income when applying for a loan.

how to get approved for a personal loan with bad credit
get approved for a personal loan with bad credit

Maybe they’re some freelance earnings that aren’t consistent, or maybe they have some money saved up in an investment tool that they don’t want to touch.

Whatever the case may be, if you’re leaving off key sources of income when applying for a loan, you’re doing yourself a disservice.

Lenders want to see that you have a steady stream of income coming in, so even if it’s not a huge amount, every little bit helps.

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5. Disclose Previous Loan History

Lenders will want to see a complete picture of your financial history before approving a new loan.

This means you’ll need to disclose any and all previous loans, even if they were paid off long ago. Be prepared to provide information about the lender, the amount of the loan, and the repayment schedule.

If you have any blemishes on your credit report related to previous loans, be sure to explain them in detail to the lender.

They’ll likely be more understanding and willing to work with you if they see that you’re being upfront about your situation.

Final Thoughts to Get an Approved Personal Loan

If you are a low-salaried professional and need some extra money that you can’t get from your existing resources, you should consider applying for a personal loan.

Personal loans can be used to pay for all kinds of things, including the purchase of a car, home repairs, medical bills, or even a wedding.

While the application process may seem complicated, the truth is that personal loans are easier to get than you might imagine.

If you follow the five-step approach mentioned above, the chances of your loan approval will boost significantly.

What are the Benefits of Being a Sub-Broker in the Stock Market?

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The stock market has witnessed significant activity lately, with more retail investors being introduced to the space. The primary aim of these investors is to expand their investment avenues and secure profits.

Long-term investment in securities or stocks helps them earn a passive income with a higher interest rate than traditional instruments like fixed deposits.

However, everyone entering the stock market does not have the time to conduct extensive research and understand the complexities of the space.

Benefits of being a sub-broker in stock market
Benefits of being a sub-broker

Hence, the Securities and Exchanges Board of India (SEBI) created and authorized the post of a sub-broker.

While SEBI does not grant them a trading license to function as independent stockbrokers, it provides them with a certification to officially associate with a licensed stockbroker in the stock market.

Given the upcoming opportunities in the market, a sub-broker is an attractive career option.

Read on to understand a sub-broker’s role and assess if the benefits are sufficient to dive into the domain.

Understanding the Roles and Responsibilities of a Sub-Broker

A sub-broker is an agent representing a particular stockbroker’s interest in the market. These professionals are not recognized as trading members in the Indian exchanges, preventing them from asking for brokerage charges.

However, they are permitted to work under the wing of stockbrokers to assist them and earn commissions.

Since they effectively function as an extension of stockbrokers, sub-brokers are also responsible for helping users with investment decisions.

They are expected to be well-versed in the nuances of the financial markets and recognize periodic market shifts to offer relevant advice.

Overall, operating as a sub-broker requires you to take on the following responsibilities:

  1. Seek out potential investors and indulge them in discussions about the stock market. Convince them to open a Demat account with the stockbroker you are affiliated with and guide them through the process of making their first investment.
  2. Assist users with understanding the relevant documents mandated to open a Demat account and ensure no discrepancies in standard procedures like KYC.

Usually, the sub-broker and the stockbroker have a mutually-beneficial agreement stating the terms of their collaboration.

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This document also highlights the commission per investment value for the sub-broker.

The Benefits Enjoyed by Sub-Brokers

Think of becoming a sub-broker as an entrepreneurial opportunity. You have access to flexible hours and a chance to work for several clients under the umbrella of a stockbroker.

However, the stockbroker does not control your business operations.

You are in charge of onboarding new clients and aiding them in executing high-profit trades to earn commissions.

Ultimately, becoming a sub-broker helps you avail yourself of several benefits.

1. Low or Zero Initial Deposit

Traditionally, sub-brokers were required to pay a minimal cost upfront to the stockbroker while the broking house handled all the other charges.

But the market’s resurgence has led to various brokerage houses forgoing the deposits to onboard promising sub-brokers.

For instance, several influential stockbrokers offer lucrative introductory offers with a zero deposit to stay afloat in the competitive market. These lucrative offers aim to acquire quality sub-brokers and increase the amount of Demat accounts and the trading value on their platform.

So, sub-brokership without deposit is possible and can aid you in kick-starting your entrepreneurial journey easily!

2. Operating under an Established Brokerage Platform

The most challenging aspect of a business is to build and nurture a reputation to increase client involvement and acquire their business.

Thankfully, sub-brokers work under the umbrella of stockbrokers who have already supplemented a distinctive reputation in the market.

Hence, it is relatively simpler to capitalize on this reputation and synonymize the business with exceptional investment advice to attract more clients.

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3. Scalable Commission

Although sub-brokers are not authorized to collect brokerage charges directly, they are provided with a predetermined commission by the stockbroker.

The value of this commission is subject to fluctuation, increasing with the investment made by the clients.

The sub-broker commission per investment value also depends on the brokerage charges of the firm. Hence, collaborating with stockbrokers charging higher fees marks an increase in income.

In addition, several brokerage firms employ a revenue-sharing model to motivate sub-brokers to join their team and increase their clientele.

The revenue-sharing model may fetch significant dividends, depending on the client traffic directed to the stockbroker.

4. Learning Opportunities

Operating as a sub-broker will familiarise you with the intricacies of the financial markets in India. For starters, you will learn to observe the market movements better and understand the international and national events that cause fluctuations.

Frequent client interactions will also help accentuate communication skills and increase confidence.

Sub-brokers can use these insights to expand their business or delve into personal consultations to onboard more clients and amplify earnings.

5. Access to Advanced Tools

Brokerage firms often provide unrestricted access to several paid tools to assist sub-brokers with managing and tracking clients using a consolidated platform.

Additionally, sub-brokers are handed over research and stock advisory to undertake targeted and compelling research to advise clients better.

The relationship between a sub-broker and a stockbroker is essential and benefits both parties. Since, stockbrokers cannot directly approach users to open a Demat account with their platforms, sub-brokers act as a bridge between these broking platforms and investors.

In turn, they are compensated fairly as stockbrokers adopt brokerage sharing to provide suitable compensation.

Hence, the key to operating as a successful sub-broker involves forming a partnership with a reputed brokerage firm like Choice India!

What is Clearing House? and Its Types and Objectives

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A clearing House may be defined as an organization of various banks con situated to offset interbank indebtedness arising from the transfer of deposits by a customer of a particular bank to another bank.

what is clearing house in banking
what is clearing house in banking

The place where the exchange of instruments occurs and the claims are settled is known as the Clearing House.

For example, In India, the cheques are cleared in the clearing houses managed by RBI or the reserve bank of India.

Objectives of Clearing House

The objectives of the clearing house are:

  1. To make arrangements for the speedy and economic collection of cheques, bills and other documents payable or deliverable at or through offices of the members and sub members of the house situated in the city/town by a system of clearing with power to apply or to extend any system or systems to any place in the environs of and from time to time abandon, re-constitute or alter any system or systems.
  2. To make arrangements and to frame rules relating to the collection or non-collections or documents between members and sub-members of the Clearing House.
  3. To maintain records of the clearing house and of such other matters as may be thought fit.
  4. To draw up and prescribe from time to time forms for the use of members and sub-members of the House in connection with the clearing.
  5. To do all such other lawful things as are incidental or conducive to the attainment of all or any of the foregoing objects.

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Types of Clearing House

The types of clearing are as follows:

1. Outward House Clearing

Outward refers to instruments that are deposited by customers that are drawn on other banks that need to be presented at the clearing.
This can be further divided to:

  1. Local clearing (instruments drawn on banks in that city).
  2. Outstation clearing (instruments drawn on banks outside the city). These may be within the country or on banks in other countries.

what are the types of clearing houses
what are the types of clearing houses

Branches normally collect all the local cheques and other instruments deposited by customers and after ensuring they have all the relevant details send them to their service branch.

The service branch then presents these at the clearinghouse.

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With regards to outstation cheques practices can differ:

  1. Some banks send the instruments to branches they have in the locations where the banks on whom the instruments are drawn for collection.
  2. Otherhand over the instruments to a large bank that has branches in multiple locations for collection.
  3. The bank can also participate in National clearing. This is managed by the reserve bank of the country. Cheques drawn on metropolitan centers are cleared in eight-day (different timings in different countries). In other cases, cheques drawn on other centers are cleared in fourteen days except those drawn on state capitals.
  4. If there are delays banks are expected to pay interest for the period of delay at the rate applicable for fixed deposits for the period of delay beyond the stipulated days. If the delay is abnormal then penal interest at the rate (which already decided by the reserve bank) above the fixed deposit rate has to also be paid.

Cheques are posted to the representative branch or correspondent branch for presentation in the clearing house in the outstation center.

On realization, the proceeds are remitted to the original presenting bank for credit to the customer’s account.

There are often considerable delays in the payment transaction both for the recipient of the funds as well as the banks involved.

2. Inward House Clearing

  1. The service branch will collect cheques drawn from the bank and the cheques would then be checked for completeness – signature, whether there is adequate balance, date, and the likes.
  2. If there is any inconsistency the cheque is returned.
  3. It should be remembered that all paper-based instruments have to be presented at the drawer bank either in person or by another bank in clearing or through the collection.
  4. Delays are due to the requirements of the physical presence of the paper instrument.

3. Return House Clearing

  1. Return clearing is the aggregate of all unpaid items. This:
  • Is debited to the original presenting bank.
  • Is credited to the drawee bank.

2. Credit given to the payee is reversed.

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Clearing Procedures

The system is local and confined to a defined jurisdiction covering all the banks and branches situated in the area under a particular zone.

The clearing house is a voluntary association of banks under the management of a bank where the settlement accounts are maintained.

Wherever Reserve bank has its office (and, a bank department), the clearing house is managed by it.

In the absence of an office of the reserve bank, the clearinghouse is managed by the State bank of India (In India manner), and its associate banks, and in a few cases by public sector banks.

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14 Major Defects of Indian Capital Market (Explained)

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Despite the rapid growth of the capital market in the 1980s, a number of abuses existed such as insider trading, price rigging, inadequate, vague, and misleading prospectuses of companies, delays in share allocation and issuing refund orders, and manipulation of prices in stock exchanges.

major defects of indian capital market
major defects of the Indian capital market

The capital market was less liquid and lacked transparency thereby providing little protection to investors.

Top Challenges of Indian Capital Market

Despite these reforms, there are many defects or problems in the working of the Indian capital market which re-discussed as under:

1. Inadequate Stock Exchanges

With the phenomenal increase in the number of companies being listed every month and in the number of shareholders, the existing stock exchanges numbering 22 with Mumbai having three, are inadequate.

This has resulted in the mushrooming of undertheorized and unregistered private stock exchanges all over the south.

These share trading houses and associations indulge in speculative transactions.

2. Defective Operations of Stock Exchanges

The stock exchanges in India continue to be defective in their operations.

They do not have proper infrastructure. They lack adequate space for the stockbrokers to operate efficiently.

They do not possess adequate telecommunication and computerization facilities. Old trading practices are still followed. All these defects deter trading or listed shares in the majority of stock exchanges in India.

This has led to a great rush at the Bombay Stock Exchange with its consequent delays in transaction deliveries and payments.

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3. Odd Lot Shares Problem

Despite SEBIs instruction regarding the non-issuing of odd-lot shares by the companies bonus share and rights issue share are being allotted in odd lots.

Nothing has also been done for small investors who already hold odd lot shares issued prior to the instruction of the SEBI. The holders of lots have to pay brokerage up to 15% while buying and selling odd lot shares.

The effort of the BSE, UTI, and GIC to buy and sell odd lots at fair brokerage is limited only to selective and good scrips.

4. Inadequate Protection to Investors

The protections given to clients in case of default by brokers and sub-broker are inadequate.

The protection is given to individual shareholders under the consumers’ protection fund set up at each stock exchange s limited to 40000 in case of a defaulting broker.

This limit is very low because it may be the cost of one lot of a high-priced share.

5. Lacks Transparency

Trading transactions in stock exchanges still lack transparency.

Buyers and sellers of scrips are at the mercy of brokers and sub-brokers who often quote the lowest traded rate of a script to the sellers and the highest top buyers.

Thus, they pocket the maximum fraudulent gain on both the transaction maintain proper accounts, and manipulate them.

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6. Stockbroking System Defective

The system of stockbroking continues to be defective.

The brokers have their sub-brokers and sub-broker, in turn, have their own sub-brokers who manipulate prices and cheat the sellers and buyers of shares and debentures in the secondary market.

7. Vague Prospectus

Despite SEBIs guidelines, the prospectuses issued by individual companies do not contain all the information and are vague.

Free pricing norms laid down by the SEBI are not strictly followed. Premium fixing is also not fair.

As a result, many companies dupe investors outright and close down without any trace.

8. Existence of Grey Market

The unofficial unregulated market before the listing of shares called the grey market, attract and misleads gullible in their analysis.

They often mislead investors at the instance of companies.

Consequently, small investors suffer the most.

9. Stockinvest not Popular

The stock investment instrument has been virtually cornered by big investors.

The non-availability of stockiest of small denominations, procedural difficulties, and high bank charges have kept the small investors away from his instrument.

10. Inefficient Banking and Postal Services

Banking and postal service are inefficient which adds to the woes of the small investors.

Refunds, dividend warrants, and interest payments are sent by companies to the small clients by ordinary posts which often do not reach them.

Some dishonest postal and bank employees often collaborate and pocket such cheques throughs fraudulent means and dupe the small investors.

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11. Inadequate market Instruments

The capital market instruments in India have been confined primarily to shares and debentures which are inadequate for the proper functioning of a capital market.

issues and challenges of capital market
issues and challenges of capital market

The newly introduced warrants, zero-coupon bonds, etc are not yet popular with investors.

12. Insider Trading

The Indian capital market has been plagued with fluctuations due to insider trading.

Persons working inside a company often buy or sell shares on the basis of the expected profitability or losses of the company.

This brings about price fluctuations in the scrips of the company thereby adversely affecting the interests of the small investors.

Some big industrial houses also resort to transactions in the shares of group companies thereby accentuating this problem of insider trading to the detriment of ordinary shareholders.

13. Delay in Delivery

There is an unusual delay in the delivery of scrips and settlement or payment of transactions.

The delivery of scrips usually takes 3 to 4 months and payments range between 2 to 3 months. Bad deliveries mainly due to the verification of signatures of sellers further lengthen the period and complicate the problem.

There are also delays in payments s which usually range between 1 to 2 months.

Often delays in payments and deliveries lead to the suspension of stock exchange operations.

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14. Poor Liquidity

The Indian capital market does not possess sufficient liquidity.

A recent study shows that only 20% of the scraps are traded everyday arid that too of group A. Another 20A% are traded 2 to 3 times a week and 10 % once in a fortnight.

Thus 50% of scraps listed on the Bombay stock exchange, the biggest in the country, have very poor liquidity. At other stock exchanges two, theirs of the scrips listed are not traded at all.

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9 Essential Steps of Loan Documentation Procedure

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Loan documentation is one of the vital areas in the credit portfolio of a bank. The purpose of taking documents is to fix the terms and conditions between the bankers and the borrowers, to identify the borrowers, to identify the securities, to count the period of limitation, to resort to legal remedies in case of need, and so on.

steps of loan documentation procedure
steps of loan documentation procedure

Generally, the documents required to processing the loan application are almost similar across all the banks, however, they may differ with various banks depending upon specific requirements, etc.

Important Steps of Loan Documentation Process

For a document to be error-free and proper, the steps to be followed are:

1. Selection of Correct Set of Documents

Documentation varies depending upon the nature of the facility may not be used for a term loan facility.

Similarly, a document meant for an individual borrower cannot be used for a company or partnership borrower.

As the bankers have pre-printed forms of documents, it should be ensured that the correct set of documents, which are relevant for the particular facility and borrower are used.

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2. Stamping

The next aspect of documentation is tamping. A document shall be stamped in accordance with the Indian stamp act as amended by the concerned state governments.

Indian stamp act contains provisions regarding the time of stamping for an instrument executed in India and out of India.

A document executed in India shall be stamped before or at the time of execution. Section 12 of the Indian stamp act provided for the cancellation of the adhesive step so that the same cannot be used again.

Any instrument bearing an adhesive stamp which has not been canceled, so that it cannot be used again, shall be deemed to be unstamped.

3. Filling

The next aspect of the documentation procedure is filling. As bankers are generally using the pre-printed formats of documents with blanks sanction of the credit facility before execution.

Once the document is executed it becomes a concluded contract and any subsequent filling by the bank without the consent of the executant will invalidate it.

The document is completed shall be filled with the same ink, in some handwriting by the same person in a single sitting.

Otherwise, it may give rise to a suspicion that the document is filed, subsequent to the execution.

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4. Execution

After filling, the next step in the documentation procedure is the execution or signing of the document.

It should be ensured that the signature in the document tallies with the signature as appearing in the application for the loan and also with the specimen signature, in case the party maintains a deposit account with the bank.

In case of execution in the representative capacity of sole proprietor or partner or director or agent or trustee or executor to the minor borrower for his necessity, the signature of the guardian is to be obtained for sale and as guardian of the minor borrower.

Normally, bankers take the signature of the execution in all the pages of the documentation, so that he (executant) may not argue in future, that the contents of the pages were not known to him.

In case the document contains any alteration, overwriting, or cutting, it must be authenticated with the full signature of the executant.

The documents shall be executed in the presence of bank officials and the fact of execution of documents with the date and time of execution, the details of documents executed, the fact of having to explain the contents of the documents in the language known to the executant shall be recorded in a register with the signature of two bank officials so that in case of any dispute regarding the execution of documents, this register may be produced as evidence before appropriate authority,

5. Legal Formalities

In some cases, after the execution of the document, certain legal formalities are required to be undergone.

For example, in case of advances to limited companies against its assets, the required forms are to be presented to the registrar of companies with the thirty days from the date of execution.

Similarly, in the case of the creation of registered mortgages, the mortgage deed is presented for registration before the registrar of assurances within four months from the date of execution of the deed.

If these formalities are not observed then the bank may have to lose priority over the security.

The documents may be admissible as evidence before the competent authority.

6. Keeping Documents Alive

The documents taken by banks for a credit facility do not have perpetual life. The provisions of limitation act apply to them.

The limitation act prescribes the period of limitation for different types of documents.

For example, the period of limitation for a DPN is three years from the date of execution. If a loan is not repaid within the period of limitation, then the bank has to get fresh documents for extending the period of limitation as per the provisions of limitation act.

As per section 18 of the act, when the borrower acknowledges the debt before the expiry of period of limitation, then the life of the document is extended by one more period from the date of sucb=h acknowledgment.

As per section 19 of the act, if the borrower or his authorized agent makes any part of payment towards the loan before the expiry of a period of limitations, then the period of limitation is extended by one more period from the date of such part payment. Government Loan Schemes for Small Businesses in India.

7. Renewal of Documents

At the time of renewal or variation within the limit, the bank should obtain a fresh set of documents or continue the existing set of documents duly supported by supplemental/additional deeds if required.

commercial loan documentation process
the commercial loan documentation process

Cancellation of the existing set of documents would cause a discontinuity in the bank’s charge on the security for the credit facility.

It is mandatory to obtain fresh sets of documents for the renewal of the credit facility.

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A formal letter to the borrower agreeing to continue the credit facility by the bank for a further period of say, one year, at his request would suffice.

Acknowledgment of the debt and security incorporating particulars o the original security document duly signed by the borrower are obtained, at the time of renewal and attached to form part of the original set of documents.

8. The Revival of Time-Barred Debts

When time-barred debts are to be revived, the recourse may be to subsection 3 of section 25 of the contract act 1872.

This section provides that a promise made in writing and signed by the person to be charged therewith, or by his agent, generally especially authorized in that behalf, to pay wholly or in part, debt, of which the creditor might have enforced payment but for the law of limitation of suits, is not void for want of consideration.

A statement made by a witness in court, admitting a time-barred debt, does not constitute a promise to pay within the meaning of section 25(3), it is implied a promise, would not be sufficient for this purpose.

9. Safekeeping and Preservation fo Documents

Nowadays banks give loans fora longer period say 20 years or even 25 years.

Until such tie the entire dues are recovered, the documents are to be preserved in good condition.

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21 Key Principles of Sound Lending with Examples

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The primary function of a bank is to receive deposits and lend loans, the majority of the funds are used for lending and this is also considered as the major source of income for the bank. But lending is accompanied by risk, therefore a banker must be cautious in this aspect.

principles of sound lending with examples
principles of sound lending with examples

A loan is granted for a specific time period. Generally, commercial banks provide short-term loans. But term loans like loans for more than a year may also be grated.

In the world of finance, lending is a cornerstone activity that fuels economic growth, facilitates investment, and empowers individuals and businesses to pursue their aspirations. The practice of lending involves providing financial resources to borrowers with the expectation of repayment over time, usually with interest.

However, the process of lending is not without its complexities and risks.

The borrower may be given the entire amount in a lump sum or in installments.

What are the Different Principles of Sound Lending?

Following are the different principles of sound lending, highlighting their significance and practical implications.

1. Creditworthiness Assessment

The foundation of sound lending lies in evaluating the creditworthiness of potential borrowers.

Creditworthiness refers to the ability and willingness of a borrower to repay the borrowed amount. Lenders utilize various financial and non-financial factors to assess creditworthiness, including credit history, income stability, employment status, debt-to-income ratio, and the purpose of the loan.

A thorough assessment helps lenders gauge the risk associated with the borrower and make informed decisions regarding loan approval, interest rates, and repayment terms.

2. Principle of Adequate Collateral

Collateral serves as a safety net for lenders in case a borrower defaults on their loan obligations.

Sound lending involves ensuring that the value of the collateral pledged by the borrower is sufficient to cover the outstanding debt in case of default.

This principle helps mitigate the risk of financial loss for lenders and encourages borrowers to take their repayment obligations seriously.

3. Interest Rate Determination

Interest rates play a pivotal role in lending transactions. Lenders must set interest rates that are not only competitive but also reflective of the risk involved.

The riskier the borrower, the higher the interest rate is likely to be.

Sound lending principles dictate that interest rates should be fair and transparent, ensuring that borrowers understand the cost of borrowing and can make informed decisions.

4. Liquidity

The second important golden rule of the grant loan is liquidity. Liquidity means the possibility of converting loans into cash without loss of time and money.

Needless to say, the funds with the bank out of which he lends money are payable on demand or short notice.

As such a bank cannot effort to block its funds for a long time. Hence, the bank should lend only to short-term requirements like working capital.

The bank cannot and should not lend for long-term requirements, like fixed capital.

5. Return or Profitability

It is another important principle. The funds of the bank should be invested to earn the highest return, so that it may pay a reasonable rate of interest to its customers on their deposits, reasonably good salaries to its employees, and a good return to its shareholders.

However, a bank should not sacrifice either safety or liquidity to earn a high rate of interest.

Of course, if safety and liquidity in a particular case are equal, the banker should lend its funds to a person who offers a higher rate of interest.

6. Diversification

One should not put all his eggs in one basket is a proverb that very clearly explains this principle.

A bank should not invest all its funds in one industry. In case that industry fails, the banker will not be able to recover his loans.

Hence, the bank may also fail. According to the principle of diversification, the bank should diversify its investments in different industries and should give loans to different borrowers in one industry.

It is less probable that all the borrowers and industries will fail at one and at the same time.

7. Object of Loan

A banker should thoroughly examine the object for which his client is taking loans.

This will enable the bank to assess the safety and liquidity of its investment. A banker should not grant loans for unproductive purposes or to buy fixed assets.

The bank may grant loans to meet working capital requirements.

However, after the nationalization of banks, the banks have started granting loans to meet loan term requirements.

As per prudent banking policy, it is not desirable because of term lending by banks a large number of banks had failed in Germany.

8. Safety and Security

The most important golden rule for granting loans is the safety of funds. The main reason for this is that the very existence of the bank is dependent upon the loans granted by him.

In case the bank does not get back the loans granted by it, it might fail. A bank cannot and must not sacrifice the safety of its fund to get a higher rate of interest.

A banker should grant secured loans only. In case the borrower fails to return the loan, the banker may recover his loan after realizing the securing.

In the case of unsecured loans, the chances of bad debts will be very high.

However, the bank may have to relax the condition of security in order to comply with the economic policy of the government.

9. Loan Diversification

Diversification is a key risk management strategy in lending. Lenders should avoid concentrating their loan portfolio on a single sector or industry.

Instead, they should diversify their lending across various sectors and borrowers to reduce the impact of economic fluctuations on their portfolio.

This principle helps maintain stability in the face of unforeseen challenges that may affect specific industries or regions.

10. Loan Repayment Structure

The repayment structure of a loan is designed to align with the borrower’s cash flow and financial capacity.

Sound lending involves tailoring repayment schedules to match the borrower’s income stream, ensuring that they can comfortably meet their repayment obligations.

Flexible repayment options, such as grace periods and step-up or step-down repayment plans, may be considered to accommodate borrowers’ changing financial circumstances.

11. Transparency and Disclosure

Transparent communication is crucial in lending transactions.

Lenders are bound by sound lending principles to provide borrowers with clear and comprehensive information about the terms and conditions of the loan.

This includes details about interest rates, fees, repayment schedules, and potential penalties. Transparency helps borrowers understand their financial commitments and prevents any potential misunderstandings.

12. Sustainability Assessment:

Lending decisions have broader economic and social implications.

Sound lending principles extend to evaluating the sustainability of the projects or activities for which borrowers are seeking financing.

Lenders may assess the environmental, social, and governance (ESG) impact of projects to ensure that the borrowed funds are being used responsibly and contribute positively to the overall well-being of society.

13. Margin Money

In the case of secured loans, the bank should carefully examine and value the security.

There should be a sufficient margin between the number of loans and the value of the security.

If an adequate margin is not maintained, the loan might become unsecured in case the borrower fails to pay the interest and return the loan.

The amount of the loan should not exceed 60 to 70% of the value of the security. If the value of the security is falling, the bank should demand further security without delay.

In case a person fails to do so, the loan might become unsecured and the bank has to suffer a loss on account of bad debt.

14. National Interest

Banks were nationalized in India to have social control over them.

As such, they are required to invest a cetin percentage of loans and advances in priority sectors, viz, agriculture, small scale, and tiny sector, and export-oriented industries, etc.

Again, the Reserve Bank also gives directives in this respect to the scheduled banks from time to time.

The banks are under obligation to comply with those directives.

15. The Character of the Borrower

Last, but not least, the bank should carefully examine the character of the borrower.

principles of sound lending
principles of sound lending

Character implies honesty, integrity, creditworthiness, and the capacity of the borrower to return the loan.

In case a person fails to verify the character of the borrower, the loans and advances might become bad debts for the bank.

16. Stress Testing

Stress testing is a risk management practice that involves assessing how a lending portfolio would perform under adverse economic scenarios.

By subjecting their portfolios to hypothetical stressors like economic recessions or interest rate hikes, lenders can identify vulnerabilities and develop contingency plans.

Sound lending institutions regularly conduct stress tests to ensure their resilience in the face of unexpected challenges.

17. Regulatory Compliance

The financial industry is heavily regulated to maintain stability and protect both lenders and borrowers.

Sound lending principles encompass strict adherence to regulatory requirements and guidelines.

Lenders must ensure that their lending practices align with legal frameworks governing interest rates, consumer protection, anti-money laundering, and other relevant aspects of lending.

18. Continuous Monitoring and Review

Sound lending is an ongoing process that extends beyond loan origination.

Lenders should establish mechanisms for continuous monitoring and review of the borrower’s financial health and adherence to repayment schedules.

Proactive monitoring allows lenders to identify early signs of distress and take appropriate actions to prevent defaults or minimize losses.

19. Risk Management

Risk is an inherent part of lending. Sound lending principles emphasize the importance of robust risk management strategies.

Lenders must identify, assess, and manage various risks, including credit risk, market risk, liquidity risk, and operational risk.

Adequate risk management practices help lenders maintain stability and ensure their ability to fulfill their obligations even during challenging times.

20. Ethical Lending Practices

Ethics and integrity are integral to sound lending. Lenders are expected to uphold ethical standards and treat borrowers with fairness, respect, and dignity.

This includes avoiding predatory lending practices, such as excessive interest rates or hidden fees, which can exploit vulnerable borrowers.

Ethical lending practices contribute to the overall reputation and credibility of the financial institution.

21. Borrower Education and Support

Empowering borrowers with financial education and support is a vital principle of sound lending. Lenders should not only provide funds but also educate borrowers about responsible borrowing practices, budgeting, and managing debt.

Offering guidance and resources can help borrowers make well-informed decisions and improve their financial literacy.

Additionally, providing a supportive environment for borrowers facing financial difficulties can lead to better outcomes for both parties, as it increases the likelihood of successful repayment and long-term financial stability.

Conclusion:

Banks lend money as term loans when the repayment is sought to be made in fixed, predetermined installments.

This type of loan is normally given for acquiring long-term assets, namely, assets that will benefit the borrower over a long period (exceeding at least one year).

Financing for purchases of plants and machinery, constructing buildings for factories, setting up new projects purchasing automobiles and consumer durables, real estate, and creation of infrastructure all fall in this category.