Overview & Principles of

Credit Management By Prof. Divya Gupta

Need For Lending

Two reasons for the banks to extend credit: Profitability Purpose Regulatory prescriptions

Need for Credit

Two reasons for the demand of credit: On the demand side of the economy are the consumers of goods & services who require funds basically for acquiring certain assets like consumer durables. On the supply side, the need for credit arises from the corporate in the manufacturing, trading & services sector.

Methods of Lending:
Lending can be broadly categorized as: Retail lending and wholesale lending Directed lending and normal lending Fund based and non fund based

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Wholesale lending (Commercial Loans): a) To acquire fixed assets b) For the purpose of maintaining/ running the business. Retail Lending (Individual Loans): a) Consumption b) Acquisition of durables c) Housing Finance

Types of credit:
Short term, medium term and long term credit.

Nature of Credit
Installment Credit Operating Credit Receivable Credit

Installment Credit:
Disbursement process Repayment process Short term- 1 to 3 yrs- consumer durables Medium term- 3 to 5 yrs- small fixed assets Long term- More than 5 yrs- for large corporate/ projects.

Operating Credit:
Cash Credit facility Overdraft Facility Difference Time duration 1 to 2 yrs Roll over facility

Receivable Finance:
Other type of credit where the firm gets credit in the form of bill finance. Essential documents are Bills of exchange, documents of title of goods( railway receipt), invoice etc.

Process of Credit:
Appraisal Pricing Terms Sanctioning Documentation Disbursement Supervision Monitoring Recovery & Rehabilitation

Important Lending Concept

Bridge loans Consortium lending Loan syndication Multiple Banking Arrangement Mezzanine loans

RBI Directives:
General BPLR and spread Determination of BPLR (Base rate) Freedom to fix lending rates Fixed interest rate for loans Levying of penal interest Enabling clause

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Withdrawals against uncleared effects Loans under consortium arrangements Charging of interest at monthly rates Zero % interest finance scheme

Case
If a bank is charging in a borrowers account an interest rate of 12 percent with quarterly rests, the effective rate is 12.55 percent. If the bank charges in the same account an interest rate of 12 percent at monthly rests, the effective rate comes to12.68 percent. Banks should, therefore, adjust the 12 percent interest rate charged to the borrower in such a way that the effective interest rate to the borrower does not exceed 12.55 percent, as hitherto.

Solution
Thus, in the above example, banks should charge interest at 11.88 percent (and not 12 percent). If this is done, the effective rate, even after compounding at monthly rests will be 12.55 percent.

Advances:
Secured Advances1. Primary security 2. Collateral security
Unsecured Advances Character , Capacity and Capital

Securities offered for Loans

Charge on movable/immovable property can be created as:
a) b) c) d) e) f) Bankers Lien Pledge Mortgage Hypothecation Assignment Set-Off

Reverse Mortgage
A reverse mortgage (or lifetime mortgage) is a loan available to senior citizens. Reverse mortgage, as its name suggests, is exactly opposite of a typical mortgage, such as a home loan. In a typical mortgage, you borrow money in lump sum right at the beginning and then pay it back over a period of time using Equated Monthly Installments (EMIs). In reverse mortgage, you pledge a property you already own (with no existing loan outstanding against it). The bank, in turn, gives you a series of cash-flows for a fixed tenure. These can be thought of as reverse EMIs.

Set-off
Set-off is a legal right by which banks as a creditor is allowed to use its own debt obligation.

Such right exists when the amount of debts are certain, both the parties are same and when there is no contract, expressed or implied to the contrary.

Case: Set off

An Advocate has three separate accounts. Personal account, office account and clients account. A bank has given him an advance of Rs.25000 in his personal account. For some reasons bank grew unhappy with the arrangement and therefore recalled the advance. When the advocate failed to respond , bank decided to recourse against others account for recovery of Rs.15000 outstanding loan amount. The bank found there is credit balance of Rs.15000 in clients account and Rs. 2000 in the office account. The advocate has a safe deposit locker and he also has a fixed deposit of Rs. 5000 maturing after 4 months on his name. He had also left some shares with the bank of Rs.3000 with instruction to sell them at the same price. How a banker will deal in such a case??

Types of Borrowers:
Individuals & Joint Individuals Sole Proprietorship Firm Partnership Firm Limited Liability Partnership Firm Limited Companies Trusts Societies & Clubs

Principles of Sound Lending

Safety Liquidity Profitability Security Purpose of Loan Sources of repayment Diversification of risks Recent concept of sound lending

Thank You!!!