this ppt provides crisp details regarding loan policy

1. Loan policy

2. Loan policy
• It is also called as lending policy
• used to control the consumption & size of loan
amount.
• It can be in written or oral format
• Top management formulates the loan policy

3. Factors affecting loan policy
1. PORTFOLIO
• It is the appropriate distribution of assets and
liabilities of a bank according to its objectives.
• The objectives can be solvency, liquidity, and
profitability.
2. CAPITAL POSITION OF THE BANK
• More capital then more loans can be provided
• Specially long term loans

4. 3. MONETARY POLICY
• If the Cash Reserve Ratio(CRR) is high then the
lending rate will be low
4. Deposit variety
• More term deposits then more loans can be
provided.
5. EARNING REQUIREMENTS
• Based on goal
• If the principal goal is income more loans are
given
• If the principal goal is liquidity less loans are
provided.

5. 6. CREDIT REQUIREMENTS OF THE SOCIETY
• Local customers and their needs should be
ascertained.
7. ECONOMIC CONDITIONS
• Stable economy more loans and advances can be
given
• Seasonal and fluctuating economy less loans are
provided.
8. AVAILABILITY OF HR
• More number of experts: more loans
• Less number of experts: less loans

6. Portfolio management
• Portfolio management refers to appropriate
distribution of assets and liabilities of a bank on the
basis of its objectives.
• According to Ranlett “the object of commercial
banks portfolio management is to achieve the
pattern and distribution of assets and liabilities
necessary to satisfy bank needs for liquidity ,
solvency, and income. These needs are competitive
because, eg: the assets optimum balance between
the conflicting objectives of liquidity, solvency and
profitability.

7. Objectives of portfolio management
• LIQUIDITY
• It is the capacity of the bank to make the cash
available on demand to its repayment.
• FACTORS AFFECTING LIQUIDITY
• Ownership of demand deposits :
• Individual deposits are stable so low degree of
liquidity is needed
• Firms and corporate deposits are flexible so high
degree of liquidity is needed

8. • LIQUIDITY RESERVES
• More cash reserve then high liquidity
• BANKING HABITS
• Developed country more transactions are dealt
through cheque and other credit instruments so
liquid assets needs are less.
• SEASONAL REQUIREMENTS
• Festival and other special seasons, more liquid
assets are needed hence more withdrawals will
be there.
• STRUCTURE OF BANKING
• Unit banking system then highly liquid in
nature
• Branch banking system then less liquidity

9. • STATE OF MONEY MARKET
• If money market is developed banks need less
cash reserves
2. SOLVENCY
• It is the capacity of the bank to meet its
liabilities in the long run
• It depends upon the ratio/relationship between
total liabilities and total assets
Factors affecting solvency
1. Loss or misappropriation of asset like cash
reduces the solvency

10. 2. Risk of default
• If the borrower fails to pay then bank will be
under risk
3. Rate of interest rate
• If the market value of an investment have an
inverse relationship with the interest rate
• For those securities with long maturity period
there will be higher risk.