Discuss the Principles / Canons of Lending.

1.C – Character
This can be deduced from past relationship with the customer to find out:
i) How reliable is customer words regarding details of proposition and the promise
of payment.
ii) If customer’s track record; was there any previous borrowing and if so was it
repaid without trouble.
iii) If customer is new, why is he approaching the lender?
iv) Can bank statement be seen to assess conduct of the account?
2.A – Ability
This relates to borrowers capacity in managing financial affairs and it’s similar to
character as far as personal customers are concerned. The following points relate to
business customers:
i) Is there a good spread of skills and experience among management team e.g.
production, marketing and finance?
ii) Does the management team hold relevant professional qualifications?
iii) Are they committed in making the business successful?
iv) If the funds are earmarked for specific activity do they have necessary skills and
experience in that area?
3.M-Margin
Refer to the relationship between amount to be borrowed and value of security being
offered as collateral. If the proposal is risky the bank requires the security value to be
almost equal to the money to lend. Margin also relate to interest, commission and other
fees. Collateral required and charges like interest and other fees should reflect the
inherent risk in the proposal.
4.P-Purpose
The purpose should be legal and acceptable to bank policy. The facility should be the in
customers best interest and customers should be able to carry out the project successfully.
5.A-Amount
Evaluate whether the customer is asking too mush or too little. Establish the amount
required by the project and to cover other incidental expenses. The amount to be lent
should be in proportion with the customer’s resources and contribution. A reasonable
contribution by the customer in the project indicates commitment and acts as a buffer
against misuse of funds borrowed.
6.R-Repayment
The risk in lending is found in assessment of repayment proposals. It’s important that the
source of repayment is made clear by the customer and the lender must establish the
degree of certainty that the promised funds will be received. Where the source of income
/cashflow, the lender requirement projections to ensure that there are surplus funds to
cover repayment after meeting other commitments.
7.I- Insurance / Security
The cannons of lending should be satisfied irrespective of availability of security or
insurance. However, security is necessary in the event the repayment proposal fail to
materialize. It provides an alternative source of recovery or fall back position should the
promised source of repayments fails. It’s important that no advance is made until security
procedures have been completed or at least at a stage where the completion can take
place without the need to involve borrower.

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sharon kalunda answered the question on March 7, 2019 at 13:55