OBJECTIVES-Credit Management

Presented By Group 2: Anchal Mittal Ankur Aggarwal Chandan Kumar Gauri Ghatge Harit Chawla Indrayudh 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 are high 20% - individuals, 50 % - groups limits

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 feasible legally permissible and economically

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
Prospect ing Credit monitori ng Credit Investiga tion

Credit Cycle
Credit Disburse ment Credit Approval Credit Proposal

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

TYPES OF FACILITIES

NON-FUND

FUND BASED

BANK GUARENTE E

LETTER OF CREDIT

DPG

CASH/OVE RDRAFT

BILL FINANCES

CREDIT DISBURSMENT
TYPES OF DISBURSMENT DIRECT DISBURSMENT WORKING CAP CHECK INVOICES, VERIFY RECEIPTS AND ISSUE PO/DD TERM LOAN COLLECT MARGIN FROM BORROWER AND ISSUE PO/DD TO SUPPLIER SAME

RE-IMBURSMENT

VERIFY INVOICES, CHECK RECEIPTS

CASH REIMBURSMENT

LLIMITED. DEPPENDS ON BUSINESS TTYPE. OBTAIN RECEIPTS, CREDIT ACC NOT DONE

DOESNOT HAPPEN

DISBURSTMENT IN PHASES

DONE IN PROJECTS , OBTAIN PROGRESS REPORT/ VALUE THE PROJECT

MONITORING

OFF SITE POSTDISBURSMENT MONITORING PRE-DISBURSMENT ON-SITE

Thank You