No doubt the advancing of loan is also risk as well. If the loan is for a longer period then risk will be also greater. So before advancing the loan a banker should keep in view the following precautions :
1. Character :-
Character of the borrower depends upon honestly, family background, nature of employment, habits and the record of the past. So before advancing loan these things musty be considered.
2. Ability To Repay :-
Before advancing loan a banker must be satisfied with the sources of the repayment of the funds.
3. Check The Assets :-
The banker should also check the property capital and borrower. This property can kept as a security of loan. In other words if the businessman financial condition is sound then it can be lended otherwise not.
4. Purpose Of Financing :-
Funds should be provided for genuine requirements of the customers. Bankers should not advance the loan gambling or smuggling.
5. Amount Of Loan :-
The amount of loan must be according to the proportion of the customers own capital resources and it should be sufficient to meet the needs.
6. Period Of Loan :-
It should be kept in view that funds may not be locked up for a long term. A major part of the loan should be payable on demand.
7. Expansion Of Credit :-
A banker should not advance the loan to only one sector. It can be harmful. The bank should extend the loan various sectors of the economy. In this way there will be maximum safety for the banker.
8. National Interest :-
Banker should also keep in view the national interest before advancing the loan. If loan advancing is not suitable for the speculation then he should not advance. So central bank credit policy must be followed.
9. Security :-
Security is also demanded to ensure the payments on due date. So banker should take the security against the possibility of nonpayment.
10. Capability :-
It is also necessary that a borrower should be capable to use the funds, wisely. Banker can examine the management ability of the businessman of checking the past and present record of the business.
11. Profit Margin Of The Business :-
Banker should also keep in view the profit margin of business. If the demand and profit margin of the product is low, then loan may not be advanced.