Lending is one of the most important functions of a bank and with the modern concept of social order and participation of commercial banks in various phases of commercial, industrial, agricultural, and other economic activities of the country, it is of paramount importance that bank has to be very careful while choosing a borrower. So, here we going to discuss the credit investigation of the bank in the following paragraph.
Credit investigation of bank
Security is not the only thing to be relied upon. There have been cases where forged share certificates were offered as security and the banker found to his utter bewilderment that the advance was really on an unsecured basis.
There are also instances where the same godown was placed to two different bankers and the respective bankers were taken to the godown for inspection through two different entrances, creating an impression on each that it was the godown pledged to him.
A variety of commercial commodities are being offered as security for the advance. It is neither possible nor feasible for the banker to conduct a detailed inspection of all the stocks to ascertain their quality and quantity.
He has to depend upon the borrower’s records and can conduct only what is known as a “test check” by physically verifying some of the stocks in bags or tins out of many pledged or hypothecated goods.
In the event of non-payment by the borrower, when the securities are brought for sale, a portion of sticks may not be in a saleable condition or the borrower may contest the banker’s right of stock under one pretext or the other and, thereby, causing a delay in disposal of the goods.
The advances may not be entirely liquidated in such cases. If the banker has to realize every advance by going to a court or selling the securities, it will mean considerable expenditures and waste of time, apart from the loss which may occur in a forced sale.
Thus, in the affair of bank credit, nothing is more significant than the character and responsibility of the borrower. Practical bankers, and theoreticians alike, suggest that the safest and the most dependable security that could be obtained are the integrity and business-like dealings of the customers.
It is not the tangible/collateral security offered by a borrowing firm which should govern its creditworthiness, rather its own promise and potential to generate earnings and maintain solvency.
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