There are obvious risks involved therein apart from the anti-social nature of such transactions. Banks discourage advances for hoarding stocks or for speculative activities. The purpose should also be short termed so that it ensures liquidity.

The purpose should be productive so that the money not only remain safe but also provides a definite source of repayment. If, however, the recovery of the mortgage money has to be made through a court process, it may take a few years to do so. $111,354.60 USD) on the security of a legal mortgage of a bungalow of the market value of Rs. For example, an advance of Rs.50 lakhs (approx. If the banker lends a large portion of his funds to borrowers from whom repayment would be coming in but slowly, the ability of the banker to meet the demands made on him would be seriously affected in spite of the safety of the advances. The reason why bankers attach as much importance to ' liquidity' as to safety' of their funds, is that a bulk of their deposits is repayable on demand or at short notice. The source of repayment must also be definite. This can be possible only if the money is employed by the borrower for short-term requirements and not locked up in acquiring fixed assets, or in schemes which take a long time to pay their way. The borrower must be in a position to repay within a reasonable time after a demand for repayment is made.

It is not enough that the money will come back it is also necessary that it must come back on demand or in accordance with agreed terms of repayment. The banker ensures that the money advanced by him goes to the right type of borrower and is utilized in such a way that it will not only be safe at the time of lending but will remain so throughout, and after serving a useful purpose in the trade or industry where it is employed, is repaid with interest. Similarly, if the borrower suffers losses in his business due to his incompetence, the recovery of the money may become difficult. If, for example, the borrower invests the money in an unproductive or speculative venture, or if the borrower himself is dishonest, the advance would be in jeopardy.

When a banker lends, he must feel certain that the advance is safe that is, the money will definitely come back. 'Safety first' is the most important principle of good lending.

Principal definition banking