Source of Fund of a Bank

7/31/2019 Source of Fund of a Bank

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SOURCE OF FUND OF A BANK


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Source of Fund of a Bank

1. Paid-up Capital: The total amount of shareholdercapital that has been paid in full by shareholders.Paid-up capital is essentially the portion ofauthorized 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 coststhat may arise in the future as well as the futurecosts of upkeep. In most cases, the fund is simplyliquid asset, as it is impossible to predict when anunexpected cost may arise. However, if the fund isset up to meet the costs of scheduled upgrades, lessliquid assets may be used


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3. Undistributed fund: the amount of earnings that is notdistributed to shareholders as dividends. It is an internalsource of financing for organization.

4. Deposit (savings, current, fixed deposit, etc.): funds

collected by banks from the customers through variousaccounts such as savings, current and fixed depositaccount.

5. Borrow from other Bank: Banks will typically borrowmoney from each other to make sure they have the correctamount of money on deposit as mandated by the centralbank. The amount of money they must have will bedependent on their financial standing. Banks will charge arate to one another for the money they borrow.



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6. International Aid: international aid is avoluntary transfer ofresources from onecountry to another, given at least partly withthe objective of benefiting the recipientcountry.
http://en.wikipedia.org/wiki/Resourceshttp://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/Countryhttp://en.wikipedia.org/wiki/Resources


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PRINCIPLES OF SOUND LENDING


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A. Qualitative

1. Purpose: while lending his funds the bankerenquiries from the borrower the purpose for whichhe seeks the loan. Banks do not grant loans for every

purpose, they should ensure the safety and liquidityof their funds by granting loans for productivepurpose only.

2. Safety: as the bank lends the funds entrusted to itby the depositors, the first and foremost principal oflending is to ensure the safety of the funds lent. Bysafety is meant that the borrower is in a position torepay the loan, along with interest according to theterms of the loan contract.


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A. Qualitative

3. Social Responsibility:

4.Business Ethics

5.Spread & Risks Diversification: this is also a

cardinal principal of sound lending. A prudent bankeralways tries to select the borrower very carefully andtakes tangible assets as securities to safeguard hisinterests. 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 thatthe banker should not grant advances to a few bigfirms only or to concentrate them in a few industriesor in a few cities or regions of the country only.


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A. Qualitative

6.National Interest

7.Recovery Assurance: banks deal as intermediary betweenthe deposits and borrowers. They have to repay the moneyof the depositors with interest. So when they sanction loan

they must assure about the recovery of the loan. For thisthey can take mortgage of assets as collateral security.

8.Repayment on Demand: Banks basically provide loan forshort term basis because they have to the money ofdepositors if they demand. So when they sanction loan tocustomers they must have to check the ability of customerto pay the loan when the ban demand the money.


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B.Quantitative

1.Liquidity: banks are essentially intermediaries for short term funds.Therefore they lend funds for short period and mainly for workingcapital purposes. The loans are therefore largely on demand. The bankermust ensure that the borrower is able to repay the loan on demand orwithin a short period. This depends upon the nature of assets owned bythe borrower and pledged to the banker.

2. Profit & Profitability: commercial banks are profit earningsinstitutions, the nationalized banks are no exception to this. They mustemploy their funds profitably so as to earn sufficient income out ofwhich to pay interest of the depositors, salaries to the staff and to meetvarious other establishment expenses and distribute dividends to theshareholders.

3.Adequate Security: to ensure repayment of loan from the borrowersthe bank should ensure adequate security of the loan. They should takepersonal guarantee side by side collateral securities to ensurerepayment in the case default of the borrowers.


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SELECTION OF BORROWER 5 C


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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 andpromptness in fulfilling his promises and repaying his duties, sense ofresponsibility, good habits and the reputation and goodwill which heenjoy in the eyes of others. If a person possesses all these qualitieswithout any doubt or suspicion in the mind of others, he possesses anexcellent 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 borrowerpossesses necessary technical skill, managerial ability and experience torun a particular industry or trade, success of such unit may be taken forgranted and the banker will consider him a deserving case for grantingan advance.


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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 withoutsignificance. Banks are the repositories of the public moneyand lend the borrower money. The banker therefore does not

lend money to an entrepreneur who does not have adequatefunds of his own. In case of failure of the business enterprisethe banker will be able to realize his money if the borrowersown capital is sufficient.

4.Collateral (assets to secure the debt):

The cardinal principal of sound banking is to ensure safety offunds lent by a banker to his customer. So the banker takecollateral of asset through the means like Lien, Pledge,Hypothecation, Mortgage etc.


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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 thebanker have to consider other conditions such asoverall economic condition of the country, the

economic condition of the borrower etc. side by

side other characteristics of the borrower.

Documents

Source of Fund of a Bank