Ukrainian Academy of Banking of the National Bank of Ukraine

Banking Department

Banking

Lecture 2Bank lending

Anna Vladimirovna Buriak,Ph.D., Senior Lecturer at Banking Department

Agenda

1. Active vocabulary. 2. Rules of Bank lending.

3. Types of bank loans.

4. Peer to peer lending

1. Active vocabulary

overdraft:- overdraft facility (возможность овердрафта);- to obtain an overdraft (получить овердрафт);- to repay an overdraft (выплачивать овердрафт) collateral/security- To serve as collateral (служить обеспечением);- To pledge smth as collateral(заложить как

обеспечение);- Collateral securities (ценные бумаги под обеспечение) assets- Tangible/intangible (материальные/нематериальные

активы)- Personal assets (движимое имущество)- Real assets (недвижимое имущество) mortgage

- loan on mortgage (ипотечный кредит)

Main features of bank lending: the major source of bank income; the main part of bank assets; the riskiest type of bank asset

2. Rules of Bank lending

Bank lending

regulation

External (monetary policy of central bank)

Internal (credit

policy of bank)

minimum reserve requirements; refinancing, including open

market operations

a system of bank actions in lending its customers

Principles of Sound Lending:

1. Safety: The most important golden rule for granting loans is the safety of funds.

The main reason for this is that the very existence of the bank is dependent upon the loans granted by him. In case the bank does not get back the loans granted by it, it might fail.

2. Rules of Bank lending

Principles of Sound Lending:

2. Liquidity: The second important golden rule of granting loan is liquidity.

Liquidity means possibility of converting loans into cash without loss of time and money.

2. Rules of Bank lending

Principles of Sound Lending:

3. Return or Profitability: Return or profitability is another important principle.

The funds of the bank should be invested to earn highest return. However, a bank should not sacrifice either safety or liquidity to earn

a high rate of interest.

2. Rules of Bank lending

Principles of Sound Lending:

4. Diversification: ‘One should not put all his eggs in one basket’ is an old proverb which very clearly explains this principle.

A bank should not invest all its funds in one industry. In case that industry fails, the banker will not be able to recover his loans. Hence, the bank may also fail. According to the principle of diversification, the bank

should diversify its investments in different industries and should give loans to different borrowers in one industry.

2. Rules of Bank lending

Principles of Sound Lending:

5. Object of Loan: A banker should thoroughly examine the object for which his client is taking loans.

2. Rules of Bank lending

Principles of Sound Lending:

6. Security: A banker should grant secured loans only

In case the borrower fails to return the loan, the banker may recover his loan after realising the security. In case of unsecured loans, the

chances of bad debts will be very high.

2. Rules of Bank lending

Principles of Sound Lending:

7. Character of the Borrower: Last but not the least, the bank should carefully examine the character of the borrower.

Character implies honesty, integrity, credit- worthiness and capacity of the borrower to return the loan. In case he fails to verify the

character of the borrower, the loans and advances might become bad debts for the bank.

2. Rules of Bank lending

On the Basis of Object or Purpose

For which purpose a loan is being taken? It may be for the following purposes:

(a) Commercial Loans: This loan is taken to meet short term requirement of capital e.g., working capital.

(b) Consumer Loan: This loan is taken to finance household goods like fridge, T.V. etc.

3. Types of bank loans.

On the Basis of Time

(a) Short Term Loan: Such a loan is taken for a period of less than one year. For example, to meet working capital requirements.

(b) Medium Term Loan: Such a loan is taken for a period ranging from 1 year to 3 years. For example, to purchase equipments for professionals or furniture etc.

(c) Long Term Loan: Such a loan is taken to meet long-term requirements from 3 years to 20 years or more. For example, loans to purchase land, building, plant and machinery etc. However, banks provide long-term loans to a very limited extent only.

3. Types of bank loans.

On the Basis of Security

(a) Secured Loan: Such a loan is granted on the security of tangible assets

(b) Unsecured Loans: Such a loan is granted without any security.

3. Types of bank loans.

On the Basis of Form

(i) Loan,

(ii) Cash credit, and

(iii) Overdraft.

3. Types of bank loans.

Peer-to-peer lending (P2PL)

the practice of lending money to unrelated individuals, or "peers", without going through a traditional financial intermediary such as a bank or other traditional financial institution.

This lending takes place online on peer-to-peer lending companies' websites using various different lending platforms

4. Peer to peer lending.

Peer-to-peer lending (P2PL)

they are made to an individual rather than a company it is conducted for profit; intermediation by a peer-to-peer lending company; transactions take place on-line; lenders may choose which borrowers to invest in; the loans are unsecured and are not protected by government

insurance;

Crowdsourcing (англ. crowdsourcing, crowd — «толпа» и sourcing — «использование ресурсов»)

4. Peer to peer lending.

4. Peer to peer lending.

United Kingdom

4. Peer to peer lending.

The first company to offer peer-to-peer loans in the world was Zopa.

Since its founding in February 2005, it has issued loans in the amount of 500 million GBP

currently the largest UK peer-to-peer lender with over 500,000 customers

In 2010 Funding Circle became the first peer-to-business lender launching in August 2010 and offering small businesses loans from investors via the platform

United States

4. Peer to peer lending.

The modern peer-to-peer lending industry in US started in February 2006 with the launch of Prosper, followed by Lending Club and other lending platforms soon thereafter

Lending Club is currently also the world's largest peer-to-peer lending platform

The interest rates range from 5.6%-35.8%, depending on the loan term and borrower rating.

Advantages

Interest rates

One of the main advantages of person-to-person lending for borrowers has been better rates than traditional bank rates can

offer (often below 10%) The advantages for lenders are higher returns than obtainable

from a savings account or other investments.

4. Peer to peer lending.