It’s not What to Lend But Where To Lend.

India has just celebrated  its  seventieth  Independence day a few months ago.  We are a proud nation with a hope and promise to carry forward the largest democracy with the youngest demographic dividend. A positive thought for the Banking system to capitalize and to deliver innovative financial  products along with best practices  for the modern markets.

About fifteen years ago Dr.Manmohan Singh paved way for reforms which transformed the financial landscape and integrated our economy with global markets. Since 1991 our  financial system  has developed vibrant markets and innovative products. Banking industry has created ecology for private banks, introduction of E-Banking and retail banking. Steady growth in Gross domestic produce has created demand for Investments, which has  led to increase in credit utilisation from banks.

Bankers have followed traditional practices in lending credit , i.e. against collaterals,  fine tuned financial statements and projections. Even though Economic parameters are studied and analysed their weight age are relatively less emphasized. Competitiveness amongst banks in credit lending has instilled myopic view of the market conditions and depended heavily on the collateral and audited financial statements.  Such practices in credit lending  has detrimental effects on the quality of the advances made during bouts of recession, depressions and in short economic cycles, rather than  large ones as in the past.

I would to like highlight a point based on the current practices of the bankers on credit lending. A manufacturer approaches the bank for term loan towards purchase of machinery and  bankers obliges with acceptance and offers  to lend for the machinery provided additional collateral is offered along with machinery.  As explained above less emphasis on market conditions has limited the bankers in most cases  in not offering solutions for market conditions in place of machinery finance. Finally, it is not what you lend for  but where to  lend.

In modern market conditions traditional practices of lending has dented the creditability of the bankers.   Time is ripe for the Bankers of tomorrow to adopt fresh strategies in credit lending by emphasising on economics of markets in addition to statutory requirements.

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