OVERVIEW CREDIT MANAGEMENT:::
Credit plays an important role in driving the national economy. It provides leverage to an entrepreneur to
undertake a project larger than what he could have undertaken without availability of credit. This results in
accelerated industrial production/services. It also enables individuals to first purchase/create assets and
repay the loan from their future earnings. Credit enables a consumer to spend more than what he would
have otherwise spent. The increased demand drives the producers to step up the production. Thus,
adequate and cheap availability of credit propels the economy to higher growth trajectory. But, there is
always a time lag between increase in demand and creation of supply to meet that demand. That is why
excessive availability of credit, specially, for non-productive purposes, puts inflationary pressure of the
economy.
Principles of Credit: (a) safety of funds (b) purpose (c) profitability (d) liquidity (e) security (f) risk spread
Types of Borrowers: A borrower can be (a) An individual (b) Sole proprietary firm (c) Partnership firm and
joint ventures (d) Hindu undivided family (e) Companies (f) Statutory corporations (g) Trusts and co-operative
Societies
The laws applicable to all these different kinds of borrowers and different. Individuals are governed by the
Indian Contract Act, partnership firris by the Indian Partnership Act, Hindu undivided family by the customary
laws pertaining to Hindus, companies by the Companies Act, statutory corporations by the Acts that created
them, trusts by the Indian Trusts Act, Public Trusts Act, Religious and Charitable Endowments Act, Wakf Act
and Co-operative Societies by the Co-operative Societies Act or the Societies-Registration Act.
Types of Credit: Bank credit can be either fund-based or non fund-based.
1. Fund based credit: In fund-based credit, there is actual transfer of money from the bank to the borrower.
2. Non Fund based credit: In non fund based credit, there is no transfer of money, but the commitment by
the bank on behalf of the client, may result in future transfer of money to the beneficiary of such a
commitment. For example, a bank guarantee issued in favour of government departments (or any other
beneficiary) on behalf of a contractor. If the beneficiary invokes the guarantee, the bank will have to remit
the amount to it and the client, for whom guarantee was issued, will be liable to pay this amount to the bank.
Thus, a non fund-based credit always has a possibility of getting converted into a fund-based credit. Other
of non fund based credit are letters of credit, co-acceptance of bills, forward contracts, and derivatives.
3. Periodwise classification: The fund based credit can be short term credit or long term credit (term loan)
4. Purposewise classification: (a) working capital finance, (b) project finance, (c) export finance, (d) crop
loan, etc.
5. Customerwise classification: Banks classify their credit portfolio on the type of the customers like,
Corporate, retail, agriculture, international, institutional credit, etc.
Segmentwise classification: As per RBI guidelines, banks have to report their business, based on the
geographical segments, as 'domestic' and 'international'. In addition, as per RBI guidelines, banks have
adopted the following business segments, for public reporting purposes, from March 31, 2008:(a) Treasury
(b) Corporate/Wholesale Banking (c) Retail Banking (d) Other Banking Business
1. Treasury: 'Treasury' for the purpose of Segment Reporting should include the entire investment
portfolio.
2. Retail Banking: The Retail Banking .would include exposure which fulfill the following four criteria of
orientation, product, granularity and low value of individual exposures for retail exposures laid down in Basel
Committee on Banking Supervision document 'International Convergence of Capital Measurement and_
Capital Standards: A Revised Framework':
(a) Orientation Criterion: The exposure is to an individual person or persons or to a small business;
Person under this clause would mean any legal person capable of entering into contracts and would
include but not be restricted to individual, HUF, partnership firm, trust: private limited companies, public
limited companies, co-operative societies, etc. Small business is one where the total annual turnover is
less than Rs. 50 crore. The turnover criterion will be linked to the average of the last three years in the
case of existing and projected turnover in the case of new entities.
(b) Product Criterion: The exposure takes the form of any of the following: revolving credits and
lines of credit (including overdrafts), term loans and leases (e.g. instalment loans and leases, student and
educational loans) and small business facilities and commitments.
(c) Granularity Criterion: No aggregate exposure to one counterpart should exceed 0.2 per cent of
the overall retail portfolio, 'Aggregate exposure' means gross amount (i.e. not taking any benefit for credit
risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually
satisfy the three other criteria. In addition, 'one counterpart' means one or several entities that may be
considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the
limit would apply to the bank's aggregated exposure on both business).
(d) Low Value of Individual Exposures: The maximum aggregated retail exposure to one
Counterpart should not exceed the absolute threshold limit of Rs.5 crore.
3. Corporate/Wholesale Banking: Wholesale Banking includes all advances to trusts, partnership firms,
companies and statutory bodies, which are not included under 'Retail Banking'.
4. Other Banking Business: Other Banking Business' would include all other banking operations not
covered under 'Treasury', Wholesale Banking' and 'Retail Banking' segments. It will also include all other
residual operations such as banking transactions/activities.
Credit plays an important role in driving the national economy. It provides leverage to an entrepreneur to
undertake a project larger than what he could have undertaken without availability of credit. This results in
accelerated industrial production/services. It also enables individuals to first purchase/create assets and
repay the loan from their future earnings. Credit enables a consumer to spend more than what he would
have otherwise spent. The increased demand drives the producers to step up the production. Thus,
adequate and cheap availability of credit propels the economy to higher growth trajectory. But, there is
always a time lag between increase in demand and creation of supply to meet that demand. That is why
excessive availability of credit, specially, for non-productive purposes, puts inflationary pressure of the
economy.
Principles of Credit: (a) safety of funds (b) purpose (c) profitability (d) liquidity (e) security (f) risk spread
Types of Borrowers: A borrower can be (a) An individual (b) Sole proprietary firm (c) Partnership firm and
joint ventures (d) Hindu undivided family (e) Companies (f) Statutory corporations (g) Trusts and co-operative
Societies
The laws applicable to all these different kinds of borrowers and different. Individuals are governed by the
Indian Contract Act, partnership firris by the Indian Partnership Act, Hindu undivided family by the customary
laws pertaining to Hindus, companies by the Companies Act, statutory corporations by the Acts that created
them, trusts by the Indian Trusts Act, Public Trusts Act, Religious and Charitable Endowments Act, Wakf Act
and Co-operative Societies by the Co-operative Societies Act or the Societies-Registration Act.
Types of Credit: Bank credit can be either fund-based or non fund-based.
1. Fund based credit: In fund-based credit, there is actual transfer of money from the bank to the borrower.
2. Non Fund based credit: In non fund based credit, there is no transfer of money, but the commitment by
the bank on behalf of the client, may result in future transfer of money to the beneficiary of such a
commitment. For example, a bank guarantee issued in favour of government departments (or any other
beneficiary) on behalf of a contractor. If the beneficiary invokes the guarantee, the bank will have to remit
the amount to it and the client, for whom guarantee was issued, will be liable to pay this amount to the bank.
Thus, a non fund-based credit always has a possibility of getting converted into a fund-based credit. Other
of non fund based credit are letters of credit, co-acceptance of bills, forward contracts, and derivatives.
3. Periodwise classification: The fund based credit can be short term credit or long term credit (term loan)
4. Purposewise classification: (a) working capital finance, (b) project finance, (c) export finance, (d) crop
loan, etc.
5. Customerwise classification: Banks classify their credit portfolio on the type of the customers like,
Corporate, retail, agriculture, international, institutional credit, etc.
Segmentwise classification: As per RBI guidelines, banks have to report their business, based on the
geographical segments, as 'domestic' and 'international'. In addition, as per RBI guidelines, banks have
adopted the following business segments, for public reporting purposes, from March 31, 2008:(a) Treasury
(b) Corporate/Wholesale Banking (c) Retail Banking (d) Other Banking Business
1. Treasury: 'Treasury' for the purpose of Segment Reporting should include the entire investment
portfolio.
2. Retail Banking: The Retail Banking .would include exposure which fulfill the following four criteria of
orientation, product, granularity and low value of individual exposures for retail exposures laid down in Basel
Committee on Banking Supervision document 'International Convergence of Capital Measurement and_
Capital Standards: A Revised Framework':
(a) Orientation Criterion: The exposure is to an individual person or persons or to a small business;
Person under this clause would mean any legal person capable of entering into contracts and would
include but not be restricted to individual, HUF, partnership firm, trust: private limited companies, public
limited companies, co-operative societies, etc. Small business is one where the total annual turnover is
less than Rs. 50 crore. The turnover criterion will be linked to the average of the last three years in the
case of existing and projected turnover in the case of new entities.
(b) Product Criterion: The exposure takes the form of any of the following: revolving credits and
lines of credit (including overdrafts), term loans and leases (e.g. instalment loans and leases, student and
educational loans) and small business facilities and commitments.
(c) Granularity Criterion: No aggregate exposure to one counterpart should exceed 0.2 per cent of
the overall retail portfolio, 'Aggregate exposure' means gross amount (i.e. not taking any benefit for credit
risk mitigation into account) of all forms of debt exposures (e.g. loans or commitments) that individually
satisfy the three other criteria. In addition, 'one counterpart' means one or several entities that may be
considered as a single beneficiary (e.g. in the case of a small business that is affiliated to another small business, the
limit would apply to the bank's aggregated exposure on both business).
(d) Low Value of Individual Exposures: The maximum aggregated retail exposure to one
Counterpart should not exceed the absolute threshold limit of Rs.5 crore.
3. Corporate/Wholesale Banking: Wholesale Banking includes all advances to trusts, partnership firms,
companies and statutory bodies, which are not included under 'Retail Banking'.
4. Other Banking Business: Other Banking Business' would include all other banking operations not
covered under 'Treasury', Wholesale Banking' and 'Retail Banking' segments. It will also include all other
residual operations such as banking transactions/activities.
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