Principles of Advancing

Principles of Advancing

Bankers have framed certain rules or principles, which they observe strictly while lending some amount to a party in order to avoid any loss.

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Principle of Safety:

Banks are profit oriented institution, so that their first preference is to get the amount of loan bank. If the loan is likely to be unsafe the bank would not favor such loan. It is true in saying that the safety of loan is always preferred over profit.

Principle of Security:

Security is demanded to ensure the payment of loan with in the due time. Following qualities at essential for a good security:

• Easily Marketable
• Stable Price
• Non-perishable
• Reasonable Margin
• Easily transferable

Principle of Income:

The main object of a commercial bank is to earn profit. So, the granted loan should be a source of reasonable profit. Bankers try to lend their money at higher rates.

Principle of Diversifications:

It mean grant of loans to different sectors. Someone has truly said “All the eggs should not be in one basket”. If the advances are made to different persons of one party, or too many sectors, the risk is dividing. Hence there is least chance of loss.

Principle of Liquidity:

Liquidity means repayment of issued loan or its immediate conversion into cash at the time of need. Loan should be easily recoverable by the bank in case of emergency at short notice or on demand. While advancing loan, the bank must observe its liquidity.

Principle of Repayment:

Bank is not a non-trading concern. So, the bank must observe all the aspects regarding the repayment of issued loan.