David Harum's definition of banking, "Loaning your money and get-tin' it back" presents the gist of this chapter in a few words.

A bank must naturally expect to make some losses in its business but discrimination in making loans will reduce these losses to a minimum. The avoidance of losses is seldom a matter of good fortune, but rather of good judgment, and the time to avoid a bad debt is when the paper is offered for discount.

The ability to recognize the difference between a good loan and a poor one cannot be acquired from books or even from personal teaching; it can only be gained from experience supplemented by other necessary qualifications. True, there are certain fundamental principles to observe in analyzing any account, but, outside of these, no two accounts can be judged exactly alike; conditions are too varied.

Certain qualifications are essential to a manager in loaning money. He must be a man of pleasing address, able to meet with and draw out from men the information he desires, and above all must be able to say no without giving undue offense. He should have a fair knowledge of accounting, so as to be able to read between the lines of a statement, or detect a discrepancy. He should have a good memory, supplemented by a record of all essential information obtained verbally from a customer. As a rule, it is bad policy to take notes during a conversation, as it is likely to restrain a customer from giving information freely.

Credit has been defined as "A question of ability to pay coupled with an intention to pay." Both ability and intention must be assured in order that the loan may be considered a safe proposition; the latter of these requisites is one that must be settled on the basis of past experience, habits of life, character and the like. If a man has always paid his debts and is not living beyond his means his intention to pay would be practically assured. The ability to pay, however, is another matter and much more difficult to determine.

There are, therefore, certain facts that a manager must know in order to determine whether or not the bank will be willing to extend credit to a borrower:

(1) Antecedent and character of a borrower

(2) Nature of the business

(3) Organization

(4) Competition

(5) Business methods

(6) Outside opinion

(7) Net worth.

In addition to this general information the manager should know what kind of transaction every piece of paper discounted by him represents, and should make a practice of putting the following questions to himself:

1. For what purpose is the bank's money to be used?

2. Is the loan safe: would I lend my own money on the security offered?

3. Is it a transaction that the bank should undertake to, or which can legally or morally become a party?

4. Will the money be used for the purpose for which it is borrowed?

5. Will the paper be met at maturity, and from what source?

6. Would the indorser be able to pay the amount, if called upon to do so, without seriously impairing his means?

To sum up, is the transaction a good banking proposition? If all these questions can be answered satisfactorily, and are corroborated by an analysis of the borrower's statement, the manager is in a position to discount the paper if within his discretionary limits, or otherwise to recommend the loan to the head office for authorization.

A simple rule is never to give out the bank's money without having rational or common sense reasons for knowing that it can be repaid within a reasonable time. It is the first principle of banking science that money must not be locked up in land, buildings, mines or similar non-banking ventures, or so loaned that it can only be paid out of future profits by being transferred to another bank.