OBJECTIVES &

ADVANTAGE OF
CREDIT
MANAGEMENT
 ADVANTAGES OF CREDIT
• Capital Formation
• Creates Employment
• Increases consumption
• Encourages savings
• Development of entrepreneurs
• Priority sector development
• Ensures economic growth of the country.
 OBJECTIVES OF CREDIT
MANAGEMENT
• CREDIT ALLOCATION
• CREDIT EVALUATION
• CREDIT DISCIPLINE
• CREDIT MONITORING
• CREDIT BUREAU
• CERSAI
• CRILC
• CREDIT CULTURE
 CREDIT ALLOCATION
• Bank credit plays an important role in the development of the
country.
• Efficient credit allocation is important for developing countries
since there is a shortage of capital.
• Credit Allocation is the process of how much funds a bank
decides to lend to different industries / segments / geographies.
• Government usually directs banks to provide credit to important
sectors of the economy like agriculture, small scale industries etc
• This imposes two costs on the banks – lower profitability and
higher NPAs.
• In the best interests of the economy, RBI in consultation with
the government, often imposes some lending norms to promote
the growth of various sectors.
• Sec 21 of the RBI act, empowers RBI to issue directions to
banks with respect to the purposes of lending. The general
guidelines on deployment of credit include public food
procurement, exports, and important sectors like agriculture,
small scale industries and self employment schemes.
• To ensure that the banks manage their credit risk properly, RBI
has also come out with guidelines on loans which can be given
to a single borrower and group borrowers.
 PRIORITY SECTOR LENDING
• Priority sectors refers to those sectors of the economy which
may not get timely and adequate credit without any special
dispensation. These sectors impact large sections of the
population and sectors which are highly employment
intensive.
• PLI is an important role given by the RBI to banks for
providing a specific portion of the bank lending to a few
specific sectors like agriculture, small scale industries,
affordable housing, education loans etc.
• This is meant for the all round development of the economy
and to ensure that the banks do not focus on a few sectors
only.
 CATEGORIES OF PRIORITY SECTOR
• AGRICULTURE
• MICRO AND SMALL ENTERPRISES
• EXPORT CREDIT
• HOUSING
• EDUCTION
• SOCIAL INFRASTRUCTURE
• RENEWABLE ENERGY
• OTHERS
 PRIORITY SECTOR LENDING NORMS
• Total priority sector lending should be 40% of the
incremental lending of the bank.

• Agriculture sector should get minimum of 18% of the

incremental lending.

• MSME sector should get a minimum of 7.5% of the

incremental lending.
 CREDIT EVALUATION
• It is the process by which the lender assesses the credit
worthiness of the borrower. The main objective of the
evaluation is to ensure the safety and liquidity of the funds
lent and profitability from the loan extended.
• All banks have a standard credit evaluation process which is
followed diligently.
• The credit evaluation process is usually done in three stages
• Information gathering
• Credit analysis
• Credit Decision
 CREDIT APPRAISAL

PREPARING DUE CREDIT CREDIT

CREDIT FILE DILIGENCE APPRAISAL DECISION

FINANCIAL INDUSTRY MANAGEMENT

PARAMETERS PARAMETERS PARAMETERS
BUILDING THE CREDIT FILE
• The first step is to gather all the information that is essential
for decision making.
• The credit file should contain all the necessary financial
documents like past and present financial statements, future
projections, documents relating to the collateral offered, its
valuations etc.
• The extensive information in the credit file will enable the
credit officer to arrive at a opinion about the borrower’s
future repayment capacity and potential.
 DUE DILIGENCE
• The bank has to verify the factual information in the
documents provided.
• It will check the authenticity of the financial statements and
various certificates provided.
• They will visit the borrower’s factory and offices to check the
level of activity.
• Verification of all approvals and licenses.
• Verification of the ownership status of all the collaterals
offered to the bank by the borrower.
 FINANCIAL PARAMETERS
• Past financial statements – presented in the banks own format
along with estimates for the future.
• Cash Flow Statements – This would reveal the usage of own
and borrowed funds
• Based on the above financial data, banks use certain financial
ratios to arrive at the liquidity, debt and tangible net worth of
the company.
• Most banks recast the financial statements of the borrower –
to reveal the true picture of the company. For example,
remove old receivables or slow moving inventory from
current assets.
 FINANCIAL PARAMETERS
• Once the current financial health is determined, the
projections are examined.
• The banks check whether the future projections are realistic,
achievable and the cash flows are sufficient to service the
debt.
• Sensitivity analysis is carried out to test the strength of the
underlying assumptions.
• The overall financial risk is assessed in terms of the current
financial status, future prospects and the valuation and
liquidity of the collaterals offered.
 INDUSTRY PARAMETERS
• Here the banks check the risks in the industry in which the
borrower is operating in. Some of the parameters are
• Competition and Market Risk
• Industry Outlook
• Regulatory Risk
• Threats from imports
• Repayment record of other companies in the same industry
which the bank has financed earlier.
 MANAGEMENT PARAMETERS
• The management of the borrower is rated on the following
parameters
• Corporate Governance / Integrity
• Previous repayment record / Credit bureau reports
• Experience in the industry
• Managerial competence / commitment
• Succession plan / Key person
• Length of relationship with bank
 CREDIT DECISION
• Most banks have a comprehensive risk rating system.
• It serves as a single point indicator of the diverse risk factors
of the borrower.
• The risk rating system is designed such that there is a
substantial degree of standardization across borrowers.
• This helps taking credit decisions in a consistent manner.
• The rating system also defines the pricing and related
terms and conditions for the credit exposure.
• The rating system also ensures that loans with low ratings
are closely monitored after disbursement.
 IMPORTANT TOOLS
FOR CREDIT
APPRAISAL

CIBIL CERSAI CRILC

 CREDIT INFORMATION COMPANIES
• Popularly known as Credit Bureaus are specialized financial
institutions licensed by the Reserve Bank of India, to collect and
maintain data related to the credit behavior of both individuals
and commercial entities in India.
• The data is used by the companies to generate a credit report and
credit score of individuals across various lenders and loan types.
• All banks and financial institutions are required to report the
actions of their customers to the credit bureau in a specified
format.
• Credit reports have become an important tool for banks in their
credit appraisal.
 CREDIT BUREAUS IN INDIA
• There are four credit bureaus in India
• TRANSUNION CIBIL – This is the oldest and the most
widely used database in the industry. It started its operations
in 2000.
• EQUIFAX – Equifax is the oldest credit bureau in the world.
It started operations in India in 2010.
• EXPERIAN – It is headquartered in Ireland and operates
in 38 countries. It started operations in India in 2010.
• CRIF HIGH MARK – It started its operations in 2011. It
has the largest database of microfinance borrowers in India.
FACTORS AFFECTING THE CREDIT
SCORE
 CERSAI
• It stands for Central Registry of Securitization Asset
Reconstruction and Security Interest of India.
• Government of India holds 51% of the shares while public sector
banks and National Housing Bank are the other share holders.
• Earlier banks used to face a lot of frauds where the borrowers
would take multiple loans using the same property as a
collateral.
• This lead to a huge amount of NPAs.
• Cersai was formed to identify and check fraudulent activity in
lending transactions against equitable mortgages.
• Before giving loans, banks can check whether any other lender
has created a mortgage on the property.
 CRILC
• It stands for Central Repository of Information on Large Credits.
• Banks have to provide credit information to CRILC about
borrowers with fund / non fund based exposure of Rs. 5 crores
and above.
• Banks also have to mention about the SMA status of the
accounts.
• Its main objective is to strengthen offsite supervision of
borrowers and early recognition of financial distress.
• After the PMC Bank scam, the RBI has decided to bring Urban
Cooperative Banks with assets of Rs. 500 crores and above
under the CRILC reporting framework.
 CREDIT MONITORING
• Credit Monitoring is an important part of the lending activity.
• Its main objectives are to
a) Ensuring compliance of pre disbursement terms and
conditions
b) Keeping the loan documents legally enforceable
c) Monitoring end use of funds to prevent diversion of funds
d) Obtain early warning signals of deterioration of financial
health of the borrower.
e) Take timely measures to ensure the safety of their loan.
 POST SANCTION AND PRE
DISBURSEMENT MONITORING
• Ensuring proper and complete execution of all documents
• Obtaining letters of guarantees
• Creation of mortgage on collateral and registering it with
CERSAI
• Checking credentials of suppliers of plant and machinery in
case of term loans.
• Vetting of agreements by the Legal department.
 DISBURSEMENT STAGE
• Disbursement should be commensurate with progress of the
project / business activity.
• Ensuring direct disbursement to suppliers.
• Ensuring that the required margin has been brought in by the
promoters
• Adequate insurance has been taken for the financed assets.
• Banks board of hypothecation clearly displayed on
machinery / stocks.
 POST DISBURSEMENT MONITORING
• Ensuring that the end use of funds is as per the terms and
conditions of the loan
• Periodic inspection of factory / office premises of the
borrower to check the level of activity
• Regular inspection of stock / inventory levels.
• Verification of transactions and turnover in the borrower’s
accounts.
• Regular meeting with promoters to understand progress of
project, sales projections, market happenings which may
affect the company.
 MONITORING TOOLS
• Stock Statements
• Factory inspection and visit reports
• Audit reports including stock and receivable audit
• Quarterly / half yearly statements under various information
systems
• Audited financial statements
• Comments of regulatory authorities
• Minutes of consortium meetings
The focus of the monitoring process is to ensure the safety of the
funds lent that the account is conducted as per the terms of the
sanction. It follows the saying – “Prevention is better than cure”
 EARLY WARNING SIGNALS FROM
OPERATION OF ACCOUNT
SIGNALS PROBABLE CAUSE
Low levels of operation in the account Lesser demand / transactions routed through
other banks

Frequent return of cheques Liquidity problems

Overdue instalments Liquidity problems, diversion of funds

Unrelated / unusual debits Diversion of funds

Unrelated / unusual credits Borrowing from external sources

Frequent return of sales bills Poor quality of products / increased competition

Low credit summations Sales transaction routed through other accounts

 CLUES FROM STOCK / BOOK DEBTS
STATEMENT
CLUE PROBABLE CAUSES
Increased levels of debtors Non payment by debtors / poor quality of
products / legal disputes / poor receivables
management
Increased level of other liabilities Non payment to creditors / diversion of funds /
liquidity crunch

Non submission / delayed submission of bank Reluctance to disclose full details / poor stock
statements position / casual attitude towards bank

Elevated stock levels Slow moving / poor quality / poor marketing

Delay / failure to submit periodical statements Creditors not paid / debtors not paying
 SPECIAL MENTION ACCOUNTS
• Special Mention Accounts are those accounts which show
symptoms of bad asset quality before being classified as an
NPA.
• The classification of SMA was introduced by RBI in 2014 to
identify those accounts that has the potential to become an
NPA.
• The logic was that the early identification of stressed assets
would help to tackle the problem better.
 SMA CLASSIFICATION

SMA CATEGORY PRINCIPAL / INTEREST OVERDUE

FOR
SMA - 0 1-30 DAYS

SMA - 1 31-60 DAYS

SMA - 2 61-90 DAYS

SMA - NF Where account is regular but there are non

financial signals of stress
• THANKS