Lending business is a risky activity. As banks' main function is lending, they must follow certain principles in order to protect their funds. The basic principles that banks follow while lending are....
Sub-prime lending
Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. Due to the increased risk associated with the takers, sub-prime loans are offered at a rate higher than market rates.
These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates, bad credit history, and often, murky financial situations of the takers.
1.safety: Banks need to consider the borrowers capacity to pay, willingness to pay , and income generation of the person or business entity . This is a safety check that bank needs to consider while lending
2.Liquidity: Lent amount is to be paid in proper repayment schedules and inflow towards the loan or advance must be proper in order to fulfil the demand of their depositors
3.Profitability: The activity of lending is done in order to make some profit out of it.
4.Purpose: The loans must be grant for some income generation purpose and not for speculation or some anti social activity. This purpose must be genuine.
5.Diversification of risks: Banks need to diversify their risk by lending to different type , sectors and areas of business.
6.Security: Security on the loan is the primary criteria for the bank . All secure loans are safe and can be recovered even the borrower is a defaulter.
Different types of lending..................
Fund based advances: Fund based advances are those where the bank give money as loans or advance. These are for business entities and individuals. These are like term loans and working capital loans. Those may be secure or unsecure loans.
Working capital loans: These are generally unsecure loans but vary from bank to bank and borrower to borrower
Different types of lending..................
Fund based advances: Fund based advances are those where the bank give money as loans or advance. These are for business entities and individuals. These are like term loans and working capital loans. Those may be secure or unsecure loans.
Working capital loans: These are generally unsecure loans but vary from bank to bank and borrower to borrower
Sub-prime lending
Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. Due to the increased risk associated with the takers, sub-prime loans are offered at a rate higher than market rates.
These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates, bad credit history, and often, murky financial situations of the takers.
