Every bank or financial institution must follow certain principles of lending to carry their lending business smoothly. As they are indulged in the business where they accept money as a deposit from the public and lend that deposited amount to the borrowers who require funds that too at a fixed rate of interest. The banks and financial institutions are responsible for the flow of money in the whole economy. So they have to follow basic principles to perform their functions adequately.

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Here are the basic important principles of lending:

Safety

Safety is the most important principle of lending by banks and institutions. As they deal with public money so the safety of money generated from the public in the form of deposits is their priority. The deposits are disbursed by the banks / financial institutions in the form of loans to the borrowers who are in need of funds. So they must be sure before lending money to any random borrower. They should check the credit score, repayment capability, income stability, and history of the borrower to keep the money safe and secure.

Liquidity

The basic function of lenders is that they take money as deposits and lend that money on a certain percent of interest rate. Banks and other financial institutions need to maintain certain liquidity to avoid any monetary crisis. They must ensure that the money lent to borrowers will come back on-demand or as per the repayment schedule of the amount.

Purpose

It is a must for every banker and lender that the underlying purpose is known to them for which the applicant is seeking a loan. They must ensure that the amount asked for a loan is for a productive purpose. The purpose of a loan helps in determining whether the risk level is high or low. As it will directly impact the working of the banks. If a loan is raised for a productive purpose then it will ensure that the funds are safe and will be repaid as per the decided terms and tenor.

Profitability

There is a complete process of working the whole lending function. The profit of the banks is the difference between the interest at which the bank accepts the deposit and the interest at which the bank lends money to borrowers. Usually, banks have higher interest rates when they lend money and give low-interest rates to the depositors. They ensure that they earn a certain percentage of profit for smooth functioning.