OBJECTIVES-Credit Management

Presented By Group 2:Anchal MittalAnkur AggarwalChandan KumarGauri GhatgeHarit ChawlaIndrayudh Banerjee

THE OBJECTIVE• To ensure that the funds lent are repaid without default on

the due dates by doing proper evaluation of the client.

QUALITIES OF A GOOD BORROWER: THE SIX C’S

• Character: Not easily measurable, but really important to judge.

• Capacity: Must have KSA, and can generate sufficient profits.• Capital: A portion of fund required is needed from the owner.• Collateral: Something additional but subordinate.

CONTD.• Conditions: Political and economic stability of the country and

the product.• Credit Record: Past record of the client regarding payments

and availability of information from CIBIL.

Defining Objectives

• Safety:• It is a major concern for Banker.• Ensuring the safety of Funds and be paid as

per terms of sanction.• Banker should ensure amount lent are

received back with interest , deposits being the major source of funds.• For an Relationship Manager to take proper

decision mainly for safety of loan.

Continued…

• Liquidity:• It deals with Bankers ability to get advance

liquidated expeditiously.• Deposits are payable on demand or on short

notice and hence banker should not lock up funds in long-term.• Useful for ALM. The short term objective of

ALM in a bank is to ensure liquidity while protecting the earnings and the long term goal is to maximize the economic value of the bank.

Continued..• Security:• Assets acquired out of bank finance constitute primary

security for the loan.• Lending should be for an approved purpose.• Formulate its lending policy in respect of purpose.• Banker should ascertain that money lent has been

used for the purpose of which it has been granted.• For a higher risks in finance, banker seek additional

security in form of immovable property or shares/securities.• Collateral security is used as a last resort, if the

borrower defaults in repayment in any form.

Principles of good lending continued….

SPREAD• All advances should not be granted to one individual or one

type of industry

• Future performance of bank depends on the success/failure it

a)Financing of various industries

• RBI – maximum exposure levels

• Per individual- restricted to 15% of capital funds

• Group – upto 40 %

• To encourage financing of infrastructure projects – limits are high

• 20% - individuals, 50 % - groups

b) Geographical spread

• Not to concentrate on one particular region

• Helps in calamities E.g. Earthquake in Bhuj, Tsunami in coastal Tamil Nadu

PURPOSE• Loan should be for a productive activity

• Not for activities like speculative/gambling, anti-national interests

• Business purpose – legally permissible and economically feasible

• It must be capable of generating surplus

PROFITABILITY

• Proposal should be evaluated keeping in mind the earnings

• Cover cost of funds, cost benefit analysis

POLICY VALIDATION• The lending should be in tune with • RBI’s credit policy• Bank’s credit policy and various product specific

parameters• Not opposed to National Policy• National priorities – loans to priority sectors

CREDIT CYCLE

1. PROSPECTING

• Looking for new clients requiring bank finance

• Sources for acquiring new clients – leads from existing clients, market survey, well operated current acc. clients

2. CREDIT INVESTIGATION

• Thorough study about the prospect, his business, dealings with suppliers, bankers, customers

• Done by an RM

• Clients name should not appear in defaulters list of RBI/ECGC/Banks own defaulters

• Contents of Credit Investigation report – name of client, credit facilities sought, existing bankers & borrowings, ratings, unit visit observations, leading customers, suppliers etc

CLIENT ACCEPTANCE CRITERIA

• Parameters used for rating a client are:

• Clients business track record

• Industry and competition for the clients product

• Supply chain arrangements and no. of suppliers

• Customers for the product – wide base/niche segment

• Financial strengths on the basis of financial statement analysis

• Management structure (qualified, succession planning)

• Conduct of account (for customers having borrowings/ other accounts with the bank)

• Rating varies from bank to bank (on 5 or 10 point scale. 1 - excellent)

• This is also done for renewal of facilities of an existing client

Must analyze..

Priority for customers analysis• Business Environment• Industry• Management/Owner• Financials • Facilities/Structure• Price

CREDIT PROPOSAL• Once genuineness is proved – proposal is put for approval of

facilities• Limits within branch or higher authorities• Each bank has its own format

Things to be covered in proposal• Basic Information• Risk Assessment• Justification for sanctioning of loan

http://www.brs-seattle.com/loan%20proposal.pdf

Continued…..

1. Basic Information

• Static data…. E.g. name of firm, share holding pattern, ratings, address, proprietor/directors/guarantors

2. Risk Assessment

• Discussion on political, environmental, economic, managerial, structural risks

Points to check:

• Company manufactures hazardous substances

• Succession issues

Cont…• Supplier relations & SCM• Credit period allowed on sales made• SWOT• Alignment with banks parameters

3. Justification for sanctioning of loan

• A detailed write-up on the purpose of the loan security

• Includes – types of facilities to be sanctioned, interest rates, commission, covenants

• Methods of working capital assessment, calculations, sources of repayment, banks benefits

TYPES OF CREDIT

CREDIT DISBURSMENT

TYPES OF DISBURSMENT WORKING CAP TERM LOAN

DIRECT DISBURSMENT CHECK INVOICES, VERIFY RECEIPTS AND ISSUE PO/DD

COLLECT MARGIN FROM BORROWER AND ISSUE PO/DD TO SUPPLIER

RE-IMBURSMENT VERIFY INVOICES, CHECK RECEIPTS

SAME

CASH REIMBURSMENT LLIMITED. DEPPENDS ON BUSINESS TTYPE. OBTAIN RECEIPTS, CREDIT ACC

DOESNOT HAPPEN

DISBURSTMENT IN PHASES NOT DONE DONE IN PROJECTS , OBTAIN PROGRESS REPORT/ VALUE THE PROJECT

MONITORING

Thank You…