Why does commercial bank disburse loan? What principles a bank must follow in loan disbursement? Explain.

 Commercial Bank

A commercial bank is a financial institution that is incorporated as per Section 49 of the Bank and Financial Institution Act, 2073 in order to conduct financial transaction mentioned Subsection 1 of Section 49 of the same act. Such financial institution operates various financial transactions on daily basis, among them one of the most important transactions is disbursement of loan. A commercial bank disburse loan for many reasons which are clearly mention below;

Purpose to disburse loan

             To generating revenue from the investment or loans and advances

             To overcome administrative and miscellaneous expenses incurred while conducting financial transactions

             To distribute dividend and bonus to their existing shareholders from the distributed profit of a certain financial year

             To ensuring improvement in the health of overall all economy of the county

             To encouraging small farmers and entrepreneurs of the country in order to increase economic activities.

             To circulating money and increase flow of cash within the country for capital formation

             To assist Government of Nepal in developing infrastructure throughout the country

             To follow rules, regulation, and policies issued by regulatory authority regarding a loan.

 Principles a bank must follow before disbursing loan

            A bank must disburse loan on secured securities or sectors

             A bank must disburse loan on profitable securities or sectors

             A bank must disburse loan on those securities which price are stable

             A bank must maintain enough liquidity to meet short-term liabilities

             A bank must follow the principle of diversity in choosing investment

             A bank must verify weather given information is authentic or not

             A bank must know the source of repayment of loan as promised

             A bank must have enough collateral to back up a loan amount

Since loan is a life blood of commercial bank. A complete absence of it, a bank cannot survive in a cut-throat competitive market, and it literally helps to enhance banks’ financial condition as well as country’s overall economy.