Transcript
8/3/2019 Ch2 Principles of Credit Management
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The principles of credit management isnothing but sound lending.
The sound lending is based on
(1) Activity (2) Individuals.
Activity consists:(a) Ensuring Safety (b) Providing
Liquidity(c) Generate profit (d) Purpose
(e) Adequate security (f) Risk Management.
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Safety The Banker should lend to reliable customer who can repay
the loan within prescribed period. Banks try to ensure principle of safety by obtaining
collateral.
In post- nationalization period has given new dimensions tothe principle of safety . Now the emphasis on collateral security has eased. Banks assume the role of being forerunners in contributing
to socio-economic development. Consequently , bankers have begum to concentrate more on
business aspects of borrowers. The viability of business is now important than the
collateral. The principle of good lending therefore is that borrowers
should create surplus to repay the loan.
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Safety Post-nationalization lending to non
traditional sectors and neglected areas Project viability and project capacity to
generate income is more important
Concept of development Bankingreplaced the principles of commercialBanking
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Providing Liquidity Liquidity with Bank is very important. Any point of time Bank should able to meet the withdrawal of deposits
and provide the credit to borrowers . While lending the Bank should see that borrower should generate
adequate surplus to repay the loan
The liquidity of borrower ensured the liquidity of banker.
Advances should be reasonably liquid.
Liquidity also refer the quality of assets which would be easilyconvertible into cash without any loss of value. Thus the concepts of liquidity entails the banker to look for easy sale
ability and absence for risk of loss on sale of assets which has beentaken as collateral.
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Generate Profit Bank operate for earning the profit as any other enterprises. The ultimate
aim of lending is to earn profit
Bank receive the interest income on loan and pay interest to depositors.
Bank also incurs the expenditures on establishment/wages/operatingexpenses.
After accounting all expenses the bank has to earn the profit
Bank should earn the profit to pay the dividend and continue to survive.The confidence level of investors and customers will be high with the bankwhich has a proven track record of profit and dividend rate.
Interest rate are based on competition and regulatory frame work.
Credit management has to be framed accordingly. The banks are lending various types of borrowers, it is better that bank
should carry out customer profitability analysis.
This approach helps the banker to attracts more customers and retainexisting one.
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Purpose Lend to productive purposes.
Should not lend for speculative purpose
Bank should watch the utilization of loan.
Bank should grant consumption+ Productive purpose
loan for small borrwers.
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Adequate Security Grant the loan based on adequate security.
Banker should check the nature of security. Check
whether it is adequate the loan grated.
The security should be free from charges.
The collateral security should be utilized only under
extreme circumstances. Apart from collateral, the bank has also to consider other
factors such as capital of the borrowers, character and
capacity.
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Risk Management Diversify the portfolio
Exposure to industry/group/individuals.
Loan policies and fair credit practices.
In US the federal laws and regulations protects consumers fromdishonest lenders.
The regulations regulate the disclosure of credit information,
credit discrimination or denial, credit dispute, errors in credit
billing and protection against collector harassment.
The creditors are required to send the statements on all credit
accounts which have a debit or credit balance at the end of the
billing cycle.
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IndividualCharacter:i. Appraise the personal character of borrowers.
ii. Honesty, attitude, willingness to repay the loan.
iii. There is no stipulated gaudiness character of the
person.
iv. It may not be possible some time to judge theborrowers, bank may collect the information
from various sources.
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Capacity Borrower should have the potential to repay the loan from
his own resources.
It includes the borrowers success in running a business or
managing cash flow
Examine the capacity of physical assets, plant and
equipments.
Labor Management skills and ability to handle the situation.
Banks generally insist upon their prospective borrowers to
submit financial statement to determine the credit
worthiness.
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Capital The banker ahs to asses the financial strength of the
borrower and his net worth.
The borrower's equity capital that firm can liquidate forthe payment of debt.
Borrowers capital in relation to debts is easy to compute.
Liquid assets, share/ other investments.
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Condition The banker need to evaluate condition in which borrower
is operating his business.
For this purpose ,Social, technology, economic and
political conditions. (STEP) analysis has to be carried out. Growth prospects: the competitiveness of the firm , the
market potentials of the products, and growth prospectsdetermine the ability of the borrowers of repay the loan.
The changes in interest rate, recession and legal
environment may adversely affect the repayment capacityof the borrowers. These factors should also taken in toconsideration.
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Collateral safety of the fund can be achieved by retaining the
proper security.
The quality of the assets that are pledge shouldbe properly examined.
The valuation of collateral requires expertise inproperty.
If the repayment is not coming, bank can takeoverthe assets
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Compliance The loans given to borrowers should be in accordance to
the bank's rules and procedures as stipulated.
The banker has to check whether all formalities have been
met by the borrowers.
The loan has to be given in compliance of regulatory
framework.
Bank must see that the borrowers compliance all
stipulated conditions.
Compliance of the statuary requirements.
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The concept is more prevalent in USA. Equal creditopportunity Act prohibits:
The credit application can not request the information
pertaining the consumer sex, race, color, religion, or nation
origin. Deny of credit must notify within 30 days, the reasons for
denials.
Another protective Act in the US is Fair Credit Reporting
Act. Under this Act the Banker has to give the Reasons for deny
of credit
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The credit Bureau is maintains the credit history.
The consumer right to know the source of
information used by the Bank
If credit Bureau learns that the information isinaccurate, the information may be corrected or
deleted.
Generally the banks are using the credit Bureau
information for examining the creditworthiness.
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Based on Working Group on lenders Liability Law the fair practicescodes are issued to improve the quality of banking services.
Loan application from for priority sector advances should indicateprocessing fee and repayment options.
Acknowledgement should be given for the application.
The reasons for rejection should be conveyed to applicant. Lender should ensure proper assessment of credit of the borrowers.
Lender should ensure timely disbursement of loan sanctioned.
Post disbursement supervision should be constructive.
Consent or objection for transfer of borrower account should be
conveyed within 21 days.
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