credit management in banks - basics

Bank Credit Bank Credit ManagementManagementBank Credit Bank Credit ManagementManagement

Dr. A. Muralidhar PrasadM.Com, MBA, M.Phil, CAIIB, PGDADR , Ph.D

Associate Professor and

Chairman, CIS at SSIMSSIM :: KOMPALLY

AgendaAgenda

• Overview of Lending Activity

• Principles and Objectives of Credit Management

• Credit Policy in Banks

Primary and Secondary FunctionsPrimary and Secondary Functions

College of Agricultural Banking, RBI, PUNE

Lending ClassificationLending Classification

College of Agricultural Banking, RBI, PUNE

Requirements for LendingRequirements for Lending

• Sources of Funds

• Credit Policy

• Systems and Procedures

College of Agricultural Banking, RBI, PUNE

Credit CreationCredit Creation

College of Agricultural Banking, RBI, PUNE

Credit CreationCredit Creation

College of Agricultural Banking, RBI, PUNE

Aggregate Deposits from the Banking System ( 10th Jan-2014 ) Rs. In Billions

77567.21

Aggregate Banking Credit (10th Jan- 2014)Rs. In Billions

59698.28

Credit CreationCredit Creation

• The All-India credit-deposit (C-D) ratio of all SCBs stood at 77.8 per cent in September 2013.

• Among the States/Union Territories, the highest C-D ratio was observed in Tamil Nadu (125.2 per cent) followed by Chandigarh (121.1 per cent) and Andhra Pradesh (111.3 per cent).

• At the bank group level, C-D ratios of Foreign Banks (89.0 per cent), New Private Sector Banks (84.5 per cent), and SBI and its Associates (78.9 per cent) were higher than the all-India average

College of Agricultural Banking, RBI, PUNE

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0QSCBS230114_F.pdf0QSCBS230114_F.pdf

Credit ManagementCredit Management

College of Agricultural Banking, RBI, PUNE

• Credit refers to Short Term Loans & Advances Medium / Long Term Loans Off-Balance Sheet Transactions

• Management refers to Pre-sanction appraisal Documentation Disbursement Post-lending supervision and control

Credit ManagementCredit Management

• Credit Management includes Capital adequacy norms Risk Management including ALM Exposure Norms Pricing policy and credit risk rating IRAC norms Appraisal, credit-decision making and loan review

mechanism

Approach for safety of loansApproach for safety of loans

• Safety of loans is directly related to the basis on which decision to lend is taken Type and quantum of credit to be provided Terms and conditions of the loan

• Two-pronged approach Pre-Sanction appraisal

To determine the ‘bankability’ of each loan proposal Post-Sanction control

To ensure proper documentation, follow-up and supervision

Qualities of a Good BorrowerQualities of a Good Borrower

College of Agricultural Banking, RBI, PUNE

Principles of Good LendingPrinciples of Good Lending

College of Agricultural Banking, RBI, PUNE

What is an Ideal AdvanceWhat is an Ideal Advance• According to L.C.Mather

Granted to a Reliable CustomerFor an Approved PurposeTo which the customer has adequate

experienceSafe in the knowledge that the money will be

used to the advantage, and Repayment will be made within a reasonable

period From trading / business receipts or other known

maturities

• The lending banker : a review of the principles of bank lending, unsecured advances and balance sheets and the banker

• Mather, L. C. (Leonard Charles)College of Agricultural Banking, RBI, PUNE

Credit CycleCredit Cycle

College of Agricultural Banking, RBI, PUNE

TYPES OF ADVANCESTYPES OF ADVANCES

CLASSIFICATION BASED ON THE CLASSIFICATION BASED ON THE NEEDS OF BORROWERSNEEDS OF BORROWERS

• FUND BASED FACILITIES

• NON FUND BASED FACILITIES

FUND BASED FACILITIESFUND BASED FACILITIES

• LOANS

• CASH CREDITS

• OVERDRAFTS

• BILL FINANCE

LOANSLOANS

• DEMAND LOANS

• TERM LOANS

DEMAND LOANSDEMAND LOANS

• To meet Short term financial needs• Usually disbursed in lump sum by way of

vouchers• Cheque book is not be issued • Repayable within a period of less than 36

months• Repayable in lump sum or in Installments• Repayment will permanently reduce the

liability of the Borrower

TERM LOANSTERM LOANS

• To meet long term financial needs• Usually disbursed in one or more stages• Disbursed by vouchers, No cheque book• Repayable in Installments, not in

lumpsum• Repayable in 36 months and above• Initial Holiday/Gestation period• Repayment will permanently reduce the

liability of the borrower

CASH CREDITSCASH CREDITS• An operative limit is sanctioned against the

security of Inventory/stock in trade• Sanctioned for a period of one or two years• It is not sanctioned for personal purposes• The security is stored outside the bank

premises• Borrower can draw funds by way of a

cheque upto to the limit & subject to the availability of Drawing Power

• Amount credited into the account can be withdrawn again by the borrower

CASH CREDITSCASH CREDITS

• The Cash Credit account may run in credit balance• Cash credits are of two types - OPEN CASH CREDIT (O.C.C) (Possession of security with borrower -

Hypothecation)

- KEY CASH CREDIT (K.C.C) (Possession of security with the Bank- Pledge)

OVERDRAFTSOVERDRAFTS

• SECURED OVERDRAFTS

• CLEAN OVERDRAFTS

• TEMPORARY OVERDRAFTS

SECURED OVERDRAFTSSECURED OVERDRAFTS(SOD)(SOD)

• Sanctioned against the security of Bank deposits, Real estate, Shares and securities etc

• Sanctioned for a period of 1 or 2 years• Facility is allowed as an operative account like

Cash Credit account• Drawings allowed upto the limit subject to the

Drawing Power

CLEAN OVER DRAFTS (COD)CLEAN OVER DRAFTS (COD)• Sanctioned to the borrowers based on their credit

worthiness• It is an Unsecured Advance• Limit is sanctioned and drawings are allowed within

that limit• Operative account like SOD/OCC• No Drawing Power• Sanctioned for a period of 1 or 2 years

TEMPORARY OVERDRAFTS TEMPORARY OVERDRAFTS (TOD)(TOD)

• It is a Clean Advance allowed in current accounts• Allowed for a maximum period of 7 days• No TOD in SB accounts

BILL FINANCEBILL FINANCE

• Allowed to meet the financial requirements during the time lag between sale of goods and receipt of proceeds

• It is a Post sale finance• These advances are self liquidating in nature• Augments Fees based income

TYPES OF BILLS & FACILITIES TYPES OF BILLS & FACILITIES ALLOWEDALLOWED

• Negotiable Instruments -Demand Bills -Usance Bills • Others -Supply Bills

DEMAND BILLSDEMAND BILLS

• Clean Bills Purchase (CBP) (Cheques, DDs, Pay Orders,Dividend warrants,

Refund Orders etc,.)• Documentary Bills Purchase (DBP) (Demand bills backed by invoices and Documents of

title to goods)

USANCE BILLSUSANCE BILLS

• Clean Usance Bills Discounting (CUBD) (Usance bills of exchange and promissory notes)• Documentary Usance Bills Discounting (DUBD) (Usance bills backed by Invoices and Documents of

title to goods)

SUPPLY BILLSSUPPLY BILLS

• Supply Bills Purchase (SBP) (Invoices arising out of execution of supply / works

contracts accompanied by Receipted challans / Inspection Notes / Certificates as per the terms of contract)

NON FUND BASED FACILITIESNON FUND BASED FACILITIES

• Bank Undertakes to pay a definite sum of money in case of contingency subject to certain terms and conditions

• Do not involve deployment of funds at the time of allowing these facilities

• Augments fees based income• At any time they may devolve on the Bank making

them as funded advances

VARIOUS TYPES OF NON FUND VARIOUS TYPES OF NON FUND BASED FACILITIESBASED FACILITIES

• LETTERS OF CREDIT

• GUARANTEES

• DEFERRED PAYMENT GUARANTEES

Thank youThank you