1. Liquidity:
Liquidity is an important principle of bank lending. Bank lend for short periods only because they lend public money, which are supposed to be withdrawn at any time by depositors. They, therefore, advance loans on the security of such assets, which are easily marketable and convertible into cash at a short notice. A bank chooses such securities in its investment portfolio, which possess sufficient liquidity. It is essential because if the bank needs cash to meet the urgent requirements of its customers, it should be in a position to sell some of the securities at a very short notice without disturbing their market prices much. There are certain securities such as central, state and local government bonds, which are easily saleable without affecting their market prices. The shares and debentures of large industrial concerns also fall in this category. However, the shares and debentures of ordinary firms are not easily marketable without bringing down their market prices. Therefore, the banks should make investments in government securities and shares and debentures of reputed industrial houses.
2. Safety:
The safety of funds lent is another principle of lending. Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. The repayment of the loan depends upon the nature of security, the character of the borrower, his capacity to repay and his financial standing. Like other investments, bank investments involve risk. However, the degree of risk varies with the type of security. Securities of the central government are safer than that of the state governments and local bodies and the securities of state government and local bodies are safer than those of the industrial concerns are. This is because the resources of the central government are much higher than the state and local governments and of the latter higher than the industrial concerns. In fact, the share and debentures of industrial concerns are tied to their earnings, which may fluctuate with the business activity in the country. The bank should also take into consideration the debt repaying ability of the governments while investing in their securities. Political stability, peace, and security are the prerequisites for this. It is very safe to invest in the securities of a government having large tax revenue and high borrowing capacity. The same is the case with the securities of a rich municipality or local body and state government of a prosperous region. So, in making investments the bank should choose securities, shares and debentures of such governments, local bodies and industrial concerns which satisfy the principle of safety.
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