This lesson covers the fundamental principles of lending and the structured process of extending credit.

4.1 Principles of Lending

The H.L. College of Commerce curriculum identifies the “approaches of bank lending” and “factors affecting bank deposits” as core topics . The Tennessee Bankers Association commercial lending programme establishes a framework for analysing a commercial loan . Key principles include :

  • Safety: Ensuring that loans are made to creditworthy borrowers who can repay.

  • Liquidity: Maintaining sufficient liquidity to meet deposit withdrawals and other obligations.

  • Profitability: Earning a return on lending activities.

  • Diversification: Spreading risk across a range of borrowers and sectors.

4.2 The 7 Cs of Credit

The 7 Cs of Credit is a framework used to evaluate borrower creditworthiness :

  • Character: The borrower’s willingness to repay.

  • Capacity: The borrower’s ability to repay.

  • Capital: The borrower’s net worth and financial reserves.

  • Collateral: Assets pledged to secure the loan.

  • Conditions: The purpose of the loan and broader economic factors.

  • Compliance: Adherence to regulations and internal policies.

  • Coverage: Adequate insurance and protection.

4.3 Stages of the Lending Process

The lending process follows a structured lifecycle :

  1. Loan Origination: The borrower initiates the loan application, and the bank collects necessary information.

  2. Underwriting and Credit Analysis: The bank assesses the borrower’s creditworthiness and the loan’s risk.

  3. Loan Structuring and Documentation: The loan terms are finalised and legal documents are prepared.

  4. Approval: The loan is approved by the appropriate authority.

  5. Loan Servicing: The bank manages the loan through its lifecycle, collecting payments and monitoring compliance.

  6. Loan Monitoring and Collection: The bank tracks the borrower’s performance and manages collections.

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