high. If a bank lends Rs. 100,000 and the bank’s earning (rate of interest charged less cost
of funds) on it is 5%, the bank would need to lend Rs. 20,00,000 for one year if the loan
• Additionally, in retail credit the risk is that the loan is usually given to an individual and
often there is no information on the credit worthiness of the person easily available. In
corporate lending one has balance sheets, profit and loss accounts and other data.
Principles of Sound Lending
The factors one should look at are:
• The purpose the loan is being sought for.
• The ability of the borrower to repay.
• The term the loan is sought for and
• The integrity of the borrower. If there is any doubt on this score, the loan should not be
• Loan given to individuals.
• Very often there is no collateral.
• Given often on a gut feeling that the individual will repay.
• The individual is a risk. The person may not want to repay. As a rule employed person
are better risks than selfemployer/ unemployed persons. Women are better risks than
• The class of society the person comes from has an effect on the risk. Middle class
persons are better risks than affluent/ poor people.
• The area a person stays is significant. Certain areas have a higher rate of default.
• The profession the person pursues is important.
• Sales are being done to direct selling agents. The risk in this instance is that they have a
vested interest in the loan being disbursed (as they are remunerated on the number of
• The asset may be difficult to repossess.
• Determine the nature of the work done by the person.
• The individual’s past credit history (if available).
• Do not lend to people in certain professions.
• Check the area the person stays in.