Credit and Lending

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1. The main function of a bank is to take in funds from surplus units, whom are persons that have excess funds (depositors) and lend to deficit units, whom are persons who are in need of funds to finance a need (borrowers).The main reason for a bank to lend is to make a profit. Banks take in deposits and in turn pay interest on these deposits. A bank is unable to pay interest if they do not have a source of income or a way of making a profit. Apart from paying interest, a bank has a demand to staff, shareholders and society. When lending funds the bank pose a risk of not only interest payable but also losing the depositors original funds. Therefore, the lending process is a critical decision amongst lenders due to the risk involved. “The general principles of good lending, or canons of lending, if consistently applied with a structured, analytical approach and sound judgment will reduce the risk involved in lending to the customer.” The canons of lending are guidelines the lenders follow in assessing the creditworthiness of a client or potential borrower. There are many different canons of lending, from Campari, 5 C’s, Parsers and Parts, however they all pose the same components and information required to complete an assessment and assist with making a credit decision. Whilst completing an assessment for Mr. and Mrs. Shepherd, I will use the canon of lending tool Campari to make a decision on their proposed request. Character- Mr. and Mrs. Shepherd are husband and wife and both at aged 45. They are new clients of our bank, however they have reported that they are good long standing customers of their existing bank and are seeking financing through our bank due to their existing bank not having a local presence in Scotland. They do not have any experience in the hotel industry, however Mr. Shepherd is a Freelance Illustrator, whom also has experience as a Salesman and Ms. Shepherd has experience in the restaurant trade. Ability- Mr. Shepherd advised that he earns £60,000 per year from his freelance illustrating, which he is seeking to continue to do whilst running the hotel. Both Mr. and Mrs. Shepherd are seeking to run the hotel together as a partnership; however they have no experience in this business. Based on profit and loss statements provided by the previous hotel owner, the hotel seems stable and had only drop profits within the last year due to his illness.
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