Objective

The objective of this course is to provide the students with adequate knowledge about the management of
Credit portfolio in banks. It will provide sufficient inputs to enable the student to develop an insight
regarding the different phases of Credit management.

Reference Books Author / Publication

Credit Management ICFAI
Practical Banking Advances H.L.Bedi and V.K. Hardikar/ UBS Publishers
The Bank Credit Analysis Jonathan Golin/John Wiley & Sons
Frontiers in Credit Risk Gordian Gaeta/ John Wiley & Sons
Money, Credit and Capital James Tobin/McGraw
Credit Risk Michael Hanke/Springer
Credit and Banking K.C.Nanda/Response
Credit Appraisal, Risk Analysis & Decision Mukherjee/Snow White
making
Detailed Curriculum
Overview: Lending Activity – Basic Requirements for Lending.
Principles of Credit Management: Principles of Lending – Evaluation of Borrower – The 6 Cs – Fair Practices
Code.
Objectives of Credit Management: Credit Allocation – Credit Evaluation – Credit Discipline – Credit
Monitoring.
Credit Policy in Banks: Need for Credit Policy – Components of Credit Policy – Credit Policy Pursued by the
Government – Credit Culture.
Regulatory Framework: Government Regulation of Banks – Institutional Structure – Need for Statutory
Reserves – Cash Reserve Ratio (CRR) – Statutory Liquidity Ratio (SLR).
Credit Deployment: Role of Bank Credit – Types of Credit – Bank Credit for Various Sectors – Credit
Deployment Scenario – Post Financial Sector Reforms.
Prudential Norms: Capital, Adequacy of Banks – Prudential Norms for Ensuring Greater transparency –
Capital Tiers.
Types of Borrowers: Various Categories – Features of a Company as a Borrower – Special Types of
Customers.
Documentation: Importance of Documentation – Security of Documentation – Renewal of Documents –
Security Offered for Documents.
Credit Evaluation: Term Loans: Sources of Finance – Term Loans – Project Appraisal – Capital Budgeting.
Credit Evaluation: Working Capital Finance: Concept of Working Capital – Factors Determining Working
Capital – Working Capital Cycle (Operating).
Credit Monitoring: Financial Supervision – Financial Follow-up – Financial Follow-up Reports –Physical
Follow-up.
Follow up and Recovery Management: Credit Risk – Identifying Problem Loans – Loan Classification –
Contingent Risk.
Debt Recovery Tribunals: Origin and Object of the Act – The Functioning of Debt Recovery Tribunal –
Modes of Recovery – Jurisdiction, Powers and Authority of Tribunals – Authority of Debt Recovery Tribunal.
Securitization Act: Securitization Company – Functions of Assets Reconstruction Company –Powers of
Central Registry.

Suggested Schedule of Sessions

Topic No. of Sessions
Overview 1
Principles of Credit Management 2
Objectives of Credit Management 2
Credit Policy in Banks 3
Regulatory Framework 2
Credit Deployment 3
Prudential Norms 2
Types of Borrowers 2
Documentation 2
 Credit Evaluation: Term Loans 3
Credit Evaluation: Working Capital Finance 3
Credit Monitoring 2
Follow up and Recovery Management 2
Debt Recovery Tribunals 2
Securitization Act 2
Total Sessions 33

EVAIUATION OF BORROWER – THE 6CS

CHARACTER – Every lender wants to assimilate what sort of borrower an person

submitting application will be in sequence to have smart, protected credit-granting decisions.
The longer the association has been in operation, the some-more the remuneration story as
great as superb credit exhibit management’s perspective toward debt as great as creation
timely payments. Public annals as great as references can come in to play; still, the many
arguable thirty-six-inch ruler is the impression of the not as big company’s owners. How they
conduct their personal monetary obligations is customarily the arguable indicator of the odds
of their creation timely payments. The some-more closely hold the company, the some-more
pleasantness since the personal credit story of those in assign as great as their before
commercial operation history. No have the difference how plain the commercial operation
devise appears as great as how arguable the company’s owners have been in the past, the
picturesque lender additionally wants the declaration of personal guarantees from the
company’s owners. This might take the form of the signature or the oath of income or
alternative collateral.

CAPACITY – Capacity is identical to the football team’s abyss chart. The genius to continue
bad times is similarly critical to the association looking funds. Capacity acknowledges which
infrequently variable things happen: the pass worker becomes incompetent to work; the vital
patron is lost; an mercantile turn-down drastically reduces direct for product or services. Any
series of alternative doubtful – nonetheless probable – disruptions can negatively start the
company’s income flow. And these disruptions can be proxy or permanent. So, genius
measures the company’s capability to compensate off an apparatus loan or franchise with
income pot or the capability to fast modify genuine estate, stock, or alternative resources in to
sufficient supports to cover debt.

COLLATERAL – How most collateral, upon top of as great as over the apparatus being
financed, the association needs to secure the loan or franchise depends mostly upon the inlet
of the lender as great as standing of the business. A normal bank mostly requires the
sweeping garnishment upon all resources of the commercial operation whilst an apparatus
financial association routinely uses usually the apparatus for collateral. A couple of lenders
additionally suggest sale-leasebacks as great as refinancing of existent apparatus debt. This
allows the association to giveaway up income upsurge or reduce their monthly remuneration
by apparatus loans or leases.

Capital ±Capital is an owner's personal investment in his business which

could be lost if the business fails. Most lenders want to see at least 25% of
capital so that owners are more motivated to make the business a success.
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 Conditions ±Economic conditions at the time the loan is requested. For
example if the borrower seeks loan for a specific industry which is in growth. The
lender will grant the loan and if condition is reverse, the chances for loan approval
are negative.

COMMON SENSE – Every preference to squeeze as great as each preference to accede to financing
contingency be formed upon usual sense. A lender needs to assimilate how one more apparatus
will enlarge the company’s fortitude as great as growth. Notwithstanding the risk each lender takes
as great as the play each association creates when purchasing brand brand brand new equipment,
for both lender as great as borrower, the substructure of the preference to financial apparatus
starts as great as ends with usual sense.

CASH FLOW – Lenders wish to see which any association requesting for the loan earns
sufficient income to encounter payroll, cover bound handling expenses, as great as absolutely
have timely payments upon the brand brand brand new apparatus loan or lease. While there
have been the series of ways to conclude income flow, lenders many mostly work out the
income upsurge accessible to compensate off brand brand brand new debt as net distinction
as well as such non-cash losses as amortization as great as depreciation.

Definition=“Credit refers to granting of money by one party to another generally for a

long time period , thereby generating debt.”

Role of Bank Credit

• Channelizing the savings of • Credit creation in the

• An important driver of a
country’s economy
• Credit expansion helps the
financial system to acquire
more assets and eventually
boost the economy.
the household sector to
organized and unorganized
sector.
• Helps in distribution of
resources i.e. from savers to
users
economy helps in maintaining
aggregate demand and keeps
the industries busy.
• Credit expansion ultimately
increases banks profitability
Lending Activity Of Bank

“Credit Lending is the mainstay for a financial institution like bank. It is the most crucial activity as
it enables the bank to generate income”

Accepting deposit Lend the money

from public deposited

Paying interest Earning interest

on deposit on money lend

“The difference between the rate which the interest is paid on deposit and is charged on loan is
known as Spread.”

Requirements For Lending

Capital Borrower’s Documentation

Constitution

•Banks need it for •Banks thrive on lending •Banks need customer

commencing operations activity. details to bind them legally
with the help of documents.
•It acts as a buffer providing
•Bank serve varied customers
margin of safety. •In case of proper
with different requirements.
•Cushion to absorb possible documentation there will not
losses. be any problem in enforcing
•Requirement of borrower a claim by the bank.
•Requirement for capital sometimes typically depend
depends on various factors upon constitution of •Documents should be
like servicing depositors, borrowers account. properly filled and contain
maintain net worth etc. complete information.
 Continued

Credit Legal Risk

Monitoring Remedy Management

•A very important activity •Banks provide financial •Banks exposed to risk

since the health of assets
is determined during this
phase.
•To ensure that the amount
sanctioned is safe, generates
income and does not turn
out to be sick.
•It includes Financial, Physical
and legal follow up
facility under a valid
contract.
•Legal remedy in the form of
enforcement through a court
of jurisdiction, the rights
arising out of the contract.
•Banks facing slow recovery
of debt.
not by chance but by
choice
•Credit risk being the
foremost risk faced by banks.
•Risk Management helps in
improving asset quality by
minimizing and managing
the credit risk.

Credit Management

“Credit management includes a skillful review of existing credit files and a close
monitoring of the credit department to be able to structure a practicable
solution”

Important Features

• Core Process for banks and their key to success depends on their
ability to manage this process.
• It goes beyond the ordinary dimension of loan administration and
involves anticipation of problem loans.
• Effective credit management separates loan review form credit
analysis, execution and administration.
• Appropriate incentive schemes, consistent credit policy, a proactive
approach to constantly review the system are essential for
comprehensive credit management.
Why Credit Management --“Understanding Subprime Crisis”

Types of
Borrowers
Prime Borrowers Sub-Prime Borrowers

•Below par track record in

•Good credit rating. loan repayment
•Loans given at normal
•Higher interest charged
interest rate
•Low risk category •High risk category

Investment in
House Property
•Real estate boom doubled home prices in U.S.
•Banks started giving loans to sub-prime
borrowers
•Sub prime loan market became fast growing
segment

“The Housing Bubble”

•Increase in default rate

•House prices
among sub prime
started to fall.
borrowers.

•Housing boom led to •Home being the collateral,

massive increase in supply defaults increased supply
while lowering demand.

•Lenders left with less than

the value of their loans &
hence have to book losses