Page 33 - Banking Finance August 2019

ARTICLE

NEW LENDING

APPROACH -

CASH IS KING

Abstract:
In traditional banking approach, lending is backed by security. When a business owner applies for loan, one of the first
question which he/she encounters is "what is the security which you can offer of the loan".

However, it is observed security based lending approach has several limitations such as marketability of the security
may be less, too much attention on security may lead to wrong credit decision, repayment capacity is not assessed as
it cannot support the repayment of credit facility.
The limitation in "security obsessed lending" approach is one of the reason for mounting NPA across banking industry.
In order to overcome the limitation of this method, banks/FIs have started adopting "Cash based lending" .
In cash flow based loan, the documented cash flow plays a key role in determining the loan limit. At the end of the day,
cash is the only factor that can repay a loan. Hence, it is a more practical assessment approach for lending.

Introduction: on demand or otherwise, and withdrawable by cheque,
draft, order or otherwise.
As per Section 5(b) of the Banking Regulation Act, 1949,
"banking" means acceptance, for the purpose of lending or
investment, of deposits of money from the public, repayable Thus, from the above definition we understand that "banks"
were established for two primary reasons - acceptance of
About the author deposit from public and lending & investing the deployable
fund collected from public.
R Sumitra
Faculty, Baroda Apex Academy, It is the responsibility of the bank to invest/lend the funds
Bank of Baroda collected from the public in profitable deal so that the public

BANKING FINANCE | AUGUST | 2019 | 33