Bank's Lending Criteria

Bank's Lending Criteria

 Banks and other lenders tend to set their own internal rules. Nevertheless, all financial institutions are bound by general regulations and guidelines established by their national financial authorities (for instance, the central bank). There is usually a lending limit per customer: in many countries this is fixed at 25% of the institution's shareholders' funds. Also, as a general rule, lenders may not exceed a certain percentage of their credit portfolio (deposits from customers plus borrowings). This percentage is often around 75%. Banks may sometimes invoke their lending criteria or statutory regulations as a pretext for not granting a facility to a borrower.

There is nothing much you can do about this and, in any case, it is un-wise to insist on borrowing from an unwilling lender.

Your request for short-term credit will have greater chances of success if you can satisfy the lending criteria set out below:

 

Good Cash Flow

As a borrower, you must show that your performance is positive and that operation are not only profitable but also generate sufficient cash to cover all commitments.

 

Adequate Shareholders' Funds

In other words, you must not be already over-committed to other lenders, but have a reasonable proportion of your own capital in the business.

 

Adequate Security

You will not obtain credit from a bank if all your assets are already pledged to other lenders.

 

Experience in Trading

Most institution likes to know that you have a good record of successful trading. It is difficult to convince a banker to lend you money if you are complete beginner, or if you are starting a completely new trading activity with untried products and unknown customers or suppliers in countries you have never dealt with before.

 

Good Reputation

Your references and credentials must be acceptable to lenders. They would no doubt find it difficult to convince their loans committee or board to approve an advance to a bankrupt company or a known crook! But, even assuming that your past is without blemish, it is helpful to have the backing of a reputable sponsor. This could be a well-known person in business, your trade association or even your customer or supplier.

 

Specific Purpose

Although some lenders grant overdraft facilities on the basis of the security you offer, most institutions prefer to link their loans to specific transactions. Transactions must be explained in full detail and shown to be profitable and self-liquidating (money borrowed will be repaid from proceed of transactions to be financed).

 

Source: An Extract from “How to Approach Banks in India?” – A joint publication by International Trade Centre (Geneva) and SIDBI, 2002