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By Dr. P.R.

Kulkarni

The principles of credit management is nothing but sound lending. The sound lending is based on (1) Activity (2) Individuals.

Activity consists:
(a) Ensuring Safety
(c) Generate profit (e) Adequate security

(b)
(d) (f)

Providing Liquidity Purpose Risk Management.

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 to the 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.

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 Banking replaced the principles of commercial Banking

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 easily convertible 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 been taken as collateral.

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/operating expenses. 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 bank which 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 retain existing one.

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.

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.

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 from dishonest 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.


i.
ii. iii.

Individual
Appraise the personal character of borrowers. Honesty, attitude, willingness to repay the loan. There is no stipulated gaudiness character of the person. It may not be possible some time to judge the borrowers, bank may collect the information from various sources.

Character:

iv.

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.

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 for the payment of debt. Borrowers capital in relation to debts is easy to compute. Liquid assets, share/ other investments.

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 prospects determine the ability of the borrowers of repay the loan. The changes in interest rate, recession and legal environment may adversely affect the repayment capacity of the borrowers. These factors should also taken in to consideration.

Collateral

safety of the fund can be achieved by retaining the proper security. The quality of the assets that are pledge should be properly examined. The valuation of collateral requires expertise in property. If the repayment is not coming, bank can takeover the assets

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.

The concept is more prevalent in USA. Equal credit opportunity 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

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 is inaccurate, the information may be corrected or deleted. Generally the banks are using the credit Bureau information for examining the creditworthiness.

Based on Working Group on lenders Liability Law the fair practices codes are issued to improve the quality of banking services. Loan application from for priority sector advances should indicate processing 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.