Term Loan Appraisal

The primary task of a lending institutions before granting a term loan is to    assure itself that the anticipated rise in the income of the borrowing unit would  materialize, thus providing the necessary funds for repaying the loans according to the terms of amortization. The liquidity of term loans depends not so much on the short-run sale ability of the goods and commodities as on the increased term loan income of borrowing units resulting from a higher level of  utilization  of existing installed capacity. For assessing the risks involved in term lending, the normal criteria used for judging the soundness of short-term loans are often unreliable and inadequate.… Read the rest

Loan Against Securities

Considerations of security form an important basis of lending. In fact, they constitute necessary adjunct to financial appraisal. Lending institutions have to examine the loan proposals from the point of view of nature and extent of security offered. Sometimes, there is a greater reliance on security due to inadequate financial appraisal, which in its turn may be due to non-availability of the necessary data. The security cover of the loan should, however, not be regarded as a substitute for an adequate financial assessment.

Security considerations are of particular importance in less developed countries like India where information on the character, integrity and credit-worthiness of the borrowers is not readily available and much ground work has yet to be done in the establishment of credit information bureaus.… Read the rest

Measures of Selective Credit Control for Banking

Qualitative or selective credit control policy  refers to the set of policies implemented by the central bank in order to channelize the available credit in-the desired direction. For example, suppose in India the agricultural and small scale industry sectors are to be encouraged, then the RBI may direct the commercial banks to be more liberal in lending to these sectors and be strict while lending to other sectors. This will help the economy to provide ample opportunities for the priority sectors to grow. In other words, in every country the government determines in advance the priorities and to ensure that the banks conform to the priorities in their lending policies, the selective credit control policies are implemented.… Read the rest

Variable Cash Reserve Ratio and Credit Control

Considering the limitations of the bank rate policy and the open market operations, the need to develop a very effective method of credit control was felt. Especially  the need was to directly control the power of the commercial banks to create credit, Variable cash reserve ratio was suggested as one more method of quantitative credit control by Keynes. Further this method is considered necessary for promoting the overall liquidity and solvency of the banking system, apart from improving the public confidence on the banking system.

The process of working of this method of credit control can be easily understood with an example.… Read the rest

Open Market Operations by the Central Bank

The open market operations as a method of quantitative credit control are interpreted in two ways. In a broad sense, it refers to the buying and selling of government securities as well as other eligible papers like bills and securities of private concerns by the central bank. In a narrow sense it means the buying and selling of only government securities by the central bank in the money market. The process of open market operations affects the volume of credit, the level of business activity and the internal price level. The process is explained below.

Suppose in an economy there is inflationary tendency and the expansion of credit is very high and the central bank wants to control this.… Read the rest

Bank Rate or Discount Rate – Bank Rate Policy Defined

Bank Rate or Discount Rate  is one of the earliest methods of general credit control developed by the Bank of England and it was considered an effective method till the outbreak of First World War. After the war, Bank of England developed other methods as it found the bank rate policy to be not so effective. The essence of discount rate policy that commercial banks approach the central bank whenever they are in need of financial accommodation. They get the necessary assistance by re-discounting the eligible bills and other securities. The Central bank would re-discount these instruments at a rate which directly determines the volume of funds which the commercial banks can get through this method of financial accommodation.… Read the rest