Chapter 1 – Overview of Credit Management

Principles of Lending

In order to protect the interest of all the stakeholders, banks need to adopt six basic principles viz., Safety, Liquidity, Profitability, Purpose, Risk Diversification and Security

Safety

Safety means that the borrower should be able to repay the loan and interest in time at regular intervals without default. Banks are trustee of public money. Bank‘s deposits are always payable on demand. Bank has to maintain trust of depositor forever. It is just not the capacity of the borrower to repay but also his willingness to repay. The former depends on his tangible assets and the success of his business. The latter depends on the borrower‘s character

Liquidity

The term liquidity refers to the extent of availability of funds with the banker for providing credit to borrowers. It is to be seen that money lent is not going to be locked up for a long time. The money should return to the bank as per the repayment schedule. This schedule that is drawn up by the banker has to adhere to the requirement that at any point of time the banker should possess liquidity to meet the withdrawals of the depositors. The concept of liquidity entails the banker to look for easy salability and absence of risk of loss on sale of asset, which has been taken as collateral.

Profitability

Banks are not charitable institutions. All banks are profit-earning institutions. The ultimate objective of lending is to earn profits. Banks receive interest on loans and advances lent, and they pay interest to their depositors. This difference between the receipts and payments will be the bank‘s gross profit. Banks have to earn reasonable amount as net profit (NIM) so that dividends can be paid to its shareholders.

Purpose of loan

The purpose should be productive so that the money not only remain safe but also provides a definite source of repayment. Loans may be required for productive purposes, trading purposes, agriculture, transport, self-employment etc. If a loan is required for a non-productive or speculative purpose, the banker should be very much cautious in entertaining such proposals. It is very difficult to ensure that the loan has been utilized for the purpose for which it was sanctioned. Banker should take follow-up measures to ensure end use of fund exactly for the same purpose for which it is borrowed.

Diversification of Risk

A prudent banker always tries to select the borrower very carefully and takes tangible assets as security to safeguard his interests. While this is no doubt an adequate measure, there are other unforeseen contingencies against which the banker has to guard himself. If the bank lends large amounts to a single industry or borrower, then the default by that customer can affect the banking industry as a whole and will affect the basic survival of the industry. Banks have to lend to a large number of industries and borrowers so that the risk gets diversified.

Types of Credit Facilities

1. Fund Based Credit Facilities
   1. Cash Credits/Overdraft
   2. Term Loan/Demand Loan
      1. Short Term Loans
      2. Medium Term Loans
      3. Long Term Loans
   3. Bill Finance
      1. 1. Bill Discounting and Bill Purchase
         2. Drawee Bill Acceptance
         3. Bill Co-Acceptance – Non-Fund Base Facilities

2. Non-Fund Base Credit Facilities
   1. Bank Guarantee
   2. Letter of Credit
   3. Underwriting and Credit Guarantee
   4. Derivative Products

Priority Sector Lending

• Agricultural Finance
• Education Loan – Upto Rs.10 Lakhs
• Housing Loan

Metropolitan – Rs.35 Lakhs (Cost of Dwelling – Rs.45 Lakhs)

Other – Rs.25 Lakhs (Cost of Dwelling – Rs.30 Lakhs)

For Repair – Metropolitan – Rs.5 Lakhs & Other – Rs.2 Lakhs

• Khadi and Village Industries Sector
• Loan sanction by banks to MFIs for on-lending to MSME sector
• Overdraft of Rs.10,000/- under PMJDY – Household income does not exceed  Rs.1 Lakh for ruler and Rs.1.6 Lakhs for non-ruler
• Factoring transaction With Recourse basic
• Social Infrastructure – Rs.5 Crore
• Renewable Energy – Rs.15 Crore, For individual House hold Rs.10 Lakhs
• Loan up to Rs.50,000/- to individual or SHG/JLG – Household income does not exceed Rs.1 Lakh in ruler and Rs.1.6 Lakhs in non-ruler
• Loan to Distressed Person up to Rs.1 Lakh to prepay their debt to non-institutional lenders

Micro, Small and Medium Enterprise

Weaker Section Under Priority Sector

• Small and Marginal Farmers
• Artisans, Village and Cottage Industries- Credit limit do not exceed Rs.1 Lakh
• Beneficiaries under Government Sponsored Scheme – NRLM, NULM & SRMS
• Scheduled Castes and Scheduled Tribes
• Beneficiaries of Differential Rate of Interest (DRI) scheme
• Self Help Groups
• Distressed farmers indebted to non-institutional leaders
• Distressed persons with loan amount not exceeding Rs.1 Lakh per borrower to prepay their debt to non-institutional leaders
• Individual Women beneficiaries up to Rs. 1 Lakh per borrower
• Persons with Disabilities
• Overdraft upto Rs.10,000/-under PMJDYwith age limit 18-65 year
• Minority Communities

Credit Exposures Norms

For Individual/Group Borrower

• 15% of capital funds (Tier-I and Tier-II) in case of a single borrower
• 40% of capital funds (Tier-I and Tier-II) in case of a borrower group
• In case of infrastructure project additional 5%  for a single borrower(20%)
• In case of infrastructure project additional 10% for a borrower group(50%)

For Exposures to NBFCs

• NBFC – 10%
• NBFC-AFC – 15%
• NBFC- lend to infrastructure – 15%
• NBFC-AFC –  lend to infrastructure – 20%
• Infrastructure Finance Company(IFCs) – Same as Above