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PRINCIPLES-OF-LENDING | JAIIB NOV STUDY MATERIAL 2023

SHORT NOTES FOR JAIIB MAY 2023

This article discusses the JAIIB exam 2023, the JAIIB material, and the topic of ‘principles of lending.’

JAIIB exam in MAY 2023 is one of the main flagship courses offered by IIBF. This is held twice a year. JAIIB MAY 2023 is one of the most challenging exams to crack, so worry not; we have your back. We have excellent JAIIB study material in MAY 2023 available for your preparation of Principles & Practices of Banking Paper. This study material includes May 2023 mock tests, short and easy notes, and video lectures. The details of our JAIIB study material MAY 2023 are discussed later in this article.

Now we will talk a bit about the Principles of lending.

PRINCIPLES OF LENDING

Any banking institution’s lending procedure is founded on fundamental concepts like security, liquidity, variety, stability, and profitability, which are discussed below:

  • STABILITY 

A bank should invest in equities and assets with high price stability as another fundamental tenet of its investment strategy. Any reduction in the value of its securities is unaffordable to the bank. Therefore, it should place its money into shares of reputable businesses where there is little chance of a price decrease.

Fixed interest rates apply to government bonds and corporate debentures. Their value fluctuates along with the market interest rate. However, due to the financial crisis, the bank is compelled to liquidate some of them to satisfy its cash needs. Otherwise, they complete their full term of 10 years or longer and are not significantly impacted by fluctuations in the market rate of interest. As a result, bank investments in bonds and debentures are more reliable than those in company shares.

Read Also: JAIIB NOVEMBER EXAM 2023 | SCHEDULE OF LIVE CLASSES

  • PROFITABILITY 

This is the fundamental guideline for any investment a bank makes. It must generate enough revenue. Therefore, it should invest in securities that would guarantee a fair and consistent return on its investment. The earning potential of stocks and shares is influenced by the interest rate, dividend yield, and tax advantages they offer.

The government securities of the federal, state, and local governments are primarily responsible for exempting their interest from taxes. Instead of investing more in shares of young companies that are also tax-exempt, the bank should do more in such securities. This is due to the risky nature of investing in new company shares.

  • LIQUIDITY 

A critical guiding factor of bank lending is liquidity. Banks only make short-term loans because depositors can withdraw the public funds they lend at any time. As a result, they create loan advances secured by readily tradable assets that can be quickly converted for cash.

A bank selects investments for its investment portfolio that have enough liquidity. It is crucial because the bank must be able to quickly sell part of the securities without significantly changing its market pricing if it needs cash to cover its clients’ immediate demands. Some assets can be quickly sold without impacting their market pricing, such as bonds issued by the federal, state, and municipal governments.

Large industrial firms’ shares and debentures also fit into this group. However, ordinary firms’ shares and debentures are challenging to sell without lowering market prices. Therefore, banks should invest in reputable industrial houses’ shares, debentures, and government securities.

  • SAFETY 

Another lending tenet is the security of the money lent. Safety refers to the ability of the borrower to make timely, scheduled payments of the principal and interest without defaulting. The loan’s repayment is based on the type of security, the borrower’s personality, his ability to pay back the loan, and his financial situation.

Bank investments carry risk, just like other investments. The level of risk, however, varies depending on the security. 

Securities held by the central government are more secure than those held by state and local governments. Additionally, local and state governments have safer investments than industrial organisations. This is due to the fact that the central government’s resources far outweigh those of the state, municipal, and even industry concerns.

In actuality, the shares and debentures of industrial concerns are correlated to their profits, which may change in accordance with the nation’s economic activity. When investing in government securities, the bank should also assess the government’s capacity to service their loan. The necessary conditions for this are political stability, peace, and security.

Investing in the securities of a government with significant tax revenue and high borrowing capacity is relatively safe. The same holds for a wealthy municipality or local body’s securities as well as the state government in an affluent area. To satisfy the principle of safety, the bank should choose securities, shares, and debentures from such governments, local organisations, and industrial concerns when making investments.

Therefore, from the bank’s perspective, the type of security is crucial when making a loan decision. Even then, it must take into account the borrower’s creditworthiness, which is determined by his moral character, ability to repay, and financial situation.

  • DIVERSITY

An investment portfolio for a commercial bank should adhere to the variety concept. It should diversify its investments rather than placing all of its surplus money in one kind of security. It should select the stocks and bonds of various industries with locations in various parts of the nation. State governments and local organisations should adhere to the same rule. The goal of diversification is to lower the risk in a bank’s investment portfolio.

The notion of diversity also applies to the lending of money to different kinds of businesses, industries, and professions. A bank ought to abide by the saying, “Don’t put all your eggs in one basket.”

Read Also: Benefits of Passing JAIIB | IIBF | MAY 2023 EXAMS

JAIIB MAY STUDY MATERIAL 2023

Our experts have compiled the JAIIB study material for 2023 according to your needs for preparation for the JAIIB exam MAY 2023. We offer various services, which include:

  • Recorded video lectures, which can be downloaded offline.
  • Live sessions are also available.
  • We have short and easy notes for JAIIB MAY 2023 in the form of epdfs, which can be accessed on our apps, for which the links are given at the end of the article.
  • Mock tests are available so that you can practice and get an idea about what kind of questions you are going to face in the JAIIB exam MAY 2023.
  • Previous year memory recalled questions are also discussed in our JAIIB study material MAY 2023

I hope this article helps! 

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