CAIIB ABM Unit 26 - Overview of Credit Management

Bank's loan policies, and other aspects of credit management, are influenced to a great extent by these unwritten principles, which are as under:

1. safety of funds
2. purpose
4. liquidity
3. profitability
5. security
6. risk spread

A borrower can be:

1. An individual
2. Sole proprietary firm
3. Partnership firm and joint ventures
4. Hindu undivided family
5. Companies                                                                                                          
6. Statutory corporations
7. Trusts and co-operative Societies

The laws applicable to all these different kinds of borrowers are different.

Type of Borrower                  -           Applicable Law
Individuals                               -           Indian Contract Act
Partnership firms                    -           Indian Partnership Act
Hindu undivided family           -           Customary laws pertaining to Hindus
Companies                              -           Companies Act
Statutory corporations            -           Acts that created them
Trusts                                      -           Indian Trusts Act, Public Trusts Act, Religious
and Charitable Endowments Act, Wakf Act
Co-operative Societies            -           Co-operative Societies Act or Societies Registration Act.

Types of Credit

Fund Based	Non-Fund Based
Actual transfer of money from the bank to the borrower	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
Can be divided into short term credit or long term credit	Example - bank guarantee, letters of credit, co-acceptance of bills, forward contracts, and derivatives

Working Capital, Project Finance, Export Finance, Crop Loan

BUSINESS SEGMENTS

1. Treasury
2. Corporate/wholesale banking
3. Retail banking
4. Other banking business

Components of Credit Management

Loan Policy of the Bank

1. Influenced by market conditions, policies of other banks, own SWOT analysis, RBI guidelines
2. Exposure limits-single borrower/group
3. Exposure limits for sectors
4. Discretionary powers

Credit Appraisal

1. Five Cs - Character, Capacity, Capital, Conditions and Collaterals
2. Credit delivery-documentation, creation of charges
3. Control and Monitoring
4. Rehabilitation and Recovery
5. Risk management-identification,
6. Measurement & Evaluation

Delivery
Control and Monitoring
Rehabilitation and Recovery
Credit Risk Management
Refinance                                                       

RBI Guidelines

1. End use of funds
2. Priority sector 40%(agr 18%),weaker sector 10% foreign banks 32%, small enterprises 10%, export credit 12% of ANBC/off balance sheet expo, whichever is higher. Agr, MSE, housing(20 lacs), Education(10 lacs/20 lacs abroad), Export credit, SHG, KVI, Retail
3. Weaker sec. –small/marginal farmers, artisans, SGSY, SC/ST, DRI, SJSRY, SLRS, SHG
4. Micro, small and medium enterprises
5. Mfg sec: Micro upto 25 lacs, Small 25 lacs to 5 crs, Medium 5 crs to 10 crs
6. Service : Rs 10 lacs, 10-2 crs, 2-5 crs

Credit Exposure Norms –

1. For individuals/groups : 15/40 of capital funds- addl 5/10 for infra.
2. NBFC/NBFC-AFC 10/15%- 15/20% on lent infra

Base Rate System

1. Wef 1/7/2010 replaced BPLR
2. Banks may determine actual roi
3. Transparent, applicable to all except DRI, bank’s own employees, against deposits, qtrly review of BR
4. Existing loans with BPLR to continue, switch over option to be given

Credit Restrictions

1. Adv against bank’s own shares
2. Relatives of directors/sr officers
3. Industries consuming ozone depleting substances
4. Sensitive commodities
5. FDRs of other banks/CD
6. Buy back of shares

Credit Assessment/Delivery

1. MPBF method
2. For SME upto 5 crs limits turnover method
3. Working capital above 10 crs , loan component 80%
4. For seasonal/cyclical industrial bank may exempt with approval of board.

Fair practices code

Pertains to

1. Loan application, processing
2. Appraisal, terms and conditions
3. Disbursement
4. Post sanction supervision
5. Discrimination, harassment in recovery, takeover of accounts