Rose, P. S. (1999). Commercial Bank Management. Boston: Irwin/ McGraw-Hill
UNIT 3 BANK LENDING
The bank lending concepts
Know the five C's for lending
Also determine the types of bank lending practices that are comm 3.0 MAIN CONTENT
3.1 BANK LENDING
Lending is the root of bank business, as soon as deposits are been taken. it is actually the cornerstone of the money creating functions of banks. From the three strongholds of banks – deposit, payment and lending, lending function is a major source of income to the bank . the quality of a bank’s loan portfolio determines to a reasonable extent its survival capacity because lending is actually one of the most traditional elements in bank-customer contractual relationship.
Over the years, commercial banks have been the major source of credits, but competitors have emerged thereby making finance companies, insurance companies, pension funds etc as other sources of credits. In recent times beyond commercial bank loans which is now offered even by savings banks, large corporate firms with excellent credit ratings borrow in the money market by using commercial papers and even banks borrow among themselves and from the central bank as a lender of last resort.
Importantly is the basic condition for lending, which are- (a) Character, (b) Capacity-contractual, (c) Capital, (d) Collateral and ( e) Condition-Economic.
Bank Roles as Lenders
Banks albeit remains the most important lending source and unarguably so. They provide a variety of loans ranging from short, medium and long term(even up to 20 years) and some are actually secured by collateral
3.2 TYPES OF BANK LENDING 1. Consumer loans
2. Business loans 3. Mortgage loans
4. Government sponsored loans
3.2.1 Consumer Loans: this is a part of full service lending; this is the demand for consumer loans to meet up basic consumption needs/ requirement and are referred as agreed. They come in two ways
Open End Credit: here a borrower is given a revolving time of credit where he can draw funds for a specific time frame and amount. This the balance to fluctuate between zero and the maximum limit. They are basically credit card and home equity line of credit.
Closed End Credit: this is a form of instalment loans, with specified amount, and maturity period and number of payment with due dates.
The borrower receives a lump sum upfront and payment are scheduled monthly and often times the bank automatically debits the account of the borrower. This type could be secured or unsecured e.g. A car purchased loan, where the bank holders on the title of the car within the tenure of the loan.
3.2.2 Business/Commercial Loans: This constitute the largest component of a bank’s total loan portfolio. This covers a variety loan products to cover a diverse area for example:
i. Working Capital Loan: A short term loan (30-70 days) for the provision of immediate daily needs of the firm
ii. Term Loan: this one has a typical maturity 1-5 years, which is normally used to acquire fixed assets at which repayment planning tied to the useful life span of the asset.
iii. Syndicate loan: usually when the amount
involved is very high and it is therefore shared and given out by more than one bank to a particular customer. This maybe due to the fact that the amount exceeds the capacity of one bank as regards the loans limit policy of the bank.
iv. Lease Financing: here the bank owns the
collateral and leased it to the customer for a specified period and receives monthly payments, depending on the forms of the lease, ownership may be transferred to the customer when the lease ends, and furthermore, it is generally known that financial lease are non-cancellable.
Letters of credit: this is a document issued by the bank to substitute the bank credit for the credit of buyer of goods, making the buyer no to pay in advance.
It should be known that bank lending starts with the application by the customer and does not end with the delivery of the credit to the customer, but entails constant monitoring by the bank until the expiration of the loan
3.2.3 Mortgage/Real Estate Loans
A mortgage loan is a long term and closed end credit facility, secured for the purpose building/acquiring residential houses, shopping centres and office building. Mortgage loans are usually requires the borrower to pledge his property as collateral security.
4.0. Summary
It's been confirm that without bank lending, banks won't operate successfully, and there will not also be proper investment and the wheel of economic development will stagnate. However in delivering credits, banks consider several factors among which are the identification of genuine areas of lack and need, sectoral balances and capability for payback.
5.0. Conclusion
Banks have been doing what they know how to do best, give credits to the deficits economic units of the system who have profitable, investable ideas that will help propel the economy. So far it has been working, especially as the determine the delivery along certain basic and very important lines like- Consumer, Business a new Mortgage routes
6.0. Tutor-marked Assignments
1 What constitute the basic characteristic of the types of loans that you know 2. Identify and explain the C' s for bank lending
3. Mention the different types of loan products, with emphasis on commercial loans 7.0. References/ further Reading
Jombo, O.C. (2003). Elements of Banking. Owerri: Barloz Publishers
Nzotta, S.M. (2004). Money, Banking and Finance: Theory and Practice. Owerri: Hudson-Jude Publishers
Oleka, C.D. (2006). Fundamentals of Money Banking and Financial Markets. Enugu:Academic publishing Company.
Otu, P.A. (2001). ; in Mbat, D. O. (ED). Topical Issues in Finance.Uyo: Domes Associates Publishers.
Rose, P. S. (1999). Commercial Bank Management. Boston: Irwin/ McGraw-Hill
MODULE 5 BANK CUSTOMERS AND ACCOUNTS