CREDIT MANAGEMENT (Notes)

- Introduction to Credit Management

- Function of Bank
- Classification of Lending
- Requirements for Lending
- 6 C’s of Borrower

Introduction

Credit Management is the process of granting credit, setting the term it granted on, recovering this credit
when its due and ensuring compliance with company credit policy.

The difference in the rate of interest that a bank charges on the amount lent and the rate it pays to the
depositors is technically called spread or interest rate spread.

This spread bank has to use to meet its overheads and interest on deposit but also provide for NPA.

Function of Bank

1. Primary Function

 Accepting depositors
 Lending/Credit

2. Secondary Function

 Remittances
 Cross selling
 Bank Guarantee/Letter of Credit
 Safe Deposit Vault

Classification of Lending

1. On the Basis of Size of Advance

 Retail Lending – It refers to the lending by banks to individual customers and SMEs. The ticket size
of these advances would be small but the number of accounts would be high.

 Wholesale Lending – It refers to financing corporate customer and institutional finance. Here, the
size of advance is large and the number of borrowers is relatively small.

2. On the Basis of Regulation

 Directed Lending – Banks are required to lend 40% of net bank credit to priority sectors which are
necessarily mandated by government for development of economy.

 Normal Lending – Loans and advances other than directed lending is termed as Normal Lending.
Requirements for Lending

Sources of Funds

Efficient System
Trained
and Procedures
Manpower

Delegation of
Credit Policy
Power

6 C’s of Borrower

 Character – The most important requirement for granting credit to a customer is his integrity.

 Capacity – A prospective client for credit must have knowledge of the business process for which
loan is being granted.

 Capital – Bankers insist that the client has to bring some portion of total investment which is
technically termed as margin.

 Collateral – Banks take collateral security in the form of mortgage of property, pledge of shares etc.
as guarantee for loan repayment.

 Condition – Condition refers to macro-economic factors of country like political stability, demand
and supply, legal environment etc.

 Credit history – Past records credit transactions of client.