Theoretical Background of Lending System
1.1 Introduction
There is a meticulous proverb about the bank’s lending –“if you owe the bank taka 100, that’s your problem. If you owe the bank taka 100 million, that’s the bank’s problem.” To be frank, lending to the businesses, governments, and individuals is one of the most important services banks and their closest competitors provide, and it is the riskier.
The principal reason banks and many competitor lenders are issued charter of incorporation by government is to make loans to their customers. Banks, thrift institutions, and other chartered lenders are expected to support their local communities with an adequate supply of credit for all legitimate business and consumer financial needs and to price that credit reasonably in line with competitively determined market interest rate.
Indeed, making loans to fund consumptions and investment spending is the principal economic function of banks and their closest competitors. How well a lender performs in fulfilling the lending function has a great deal to do with the economic health of its region, because loan support the growth of new business and jobs within the lender’s trade territory.
Despite all the benefits of lending for both the institutions that makes loan and for their customer, the lending process bears careful internal and external monitoring at all the times. When a bank or other lender gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement, illegal manipulation, misguided landing policies or an unexpected economic downturn. No wonder, then, that when examiners appear at a bank or other regulated lending institution they conduct a thorough review of its loan portfolio. Usually this involves detailed analysis of the documents and collateral for the largest loan, a review of a sample of small loans, and an evaluation of loan policies to ensure their sound and prudent in order to protect the public funds.
1.2
There is a meticulous proverb about the bank’s lending –“if you owe the bank taka 100, that’s your problem. If you owe the bank taka 100 million, that’s the bank’s problem.” To be frank, lending to the businesses, governments, and individuals is one of the most important services banks and their closest competitors provide, and it is the riskier.
The principal reason banks and many competitor lenders are issued charter of incorporation by government is to make loans to their customers. Banks, thrift institutions, and other chartered lenders are expected to support their local communities with an adequate supply of credit for all legitimate business and consumer financial needs and to price that credit reasonably in line with competitively determined market interest rate.
Indeed, making loans to fund consumptions and investment spending is the principal economic function of banks and their closest competitors. How well a lender performs in fulfilling the lending function has a great deal to do with the economic health of its region, because loan support the growth of new business and jobs within the lender’s trade territory.
Despite all the benefits of lending for both the institutions that makes loan and for their customer, the lending process bears careful internal and external monitoring at all the times. When a bank or other lender gets into serious financial trouble, its problems usually spring from loans that have become uncollectible due to mismanagement, illegal manipulation, misguided landing policies or an unexpected economic downturn. No wonder, then, that when examiners appear at a bank or other regulated lending institution they conduct a thorough review of its loan portfolio. Usually this involves detailed analysis of the documents and collateral for the largest loan, a review of a sample of small loans, and an evaluation of loan policies to ensure their sound and prudent in order to protect the public funds.
1.2