INTRODUCTION AND RESEARCH DESIGN OF THE STUDY

 

INTRODUCTION AND RESEARCH DESIGN OF THE STUDY

Introduction

            Credit management helps to analyze the important methods toreduce the various risks associated with the granting of loans and advances. This helps to determine the financial strength of the borrowers, estimating the probability of default and reducing the risk of non-repayment to an acceptable level. In general, credit evaluations are based on the loan officer's subjective assessment.

 

            The process of credit management begins with accurately assessing the credit worthiness of the customer base and his or her business viability. This is particularly important if the company chooses to extend some type of credit line or revolving credit to certain customers. Hence, proper credit management is setting specific criteria that a customer must meet before receiving the proposed credit arrangement. As part of the evaluation process, credit management also calls for determining the total credit line that will be extended to a given customer. Several factors are used as part of the credit management process to evaluate and qualify a customer for the receipt of some form of commercial credit. This includes gathering data on the potential customer’s current financial condition, including the 12 current credit track record that discloses the character of a customer in meeting obligations as well as collateral value.

 

            The current ratio between income and outstanding financial obligations will also be taken into consideration. Competent credit management seeks to not only protect the bank or any financial institution involved from possible losses, but also protect the customer from creating more debt obligations that cannot be settled in a timely manner. When the process of credit management functions efficiently, everyone involved in the process will be benefited from the efforts. A financial institution such as a bank has a reasonable amount of assurance that loans granted to a client will be paid back within terms, or that regular minimum payments will be received on credit account balances. Customers have the opportunity to build a strong rapport with the creditor and thus create a solid credit reference.

Chart 1.1 describes the different types of lending in the banking sector, the lending is classified as retail and wholesale on the size of advances, and on the bases of regulations, the lending is classified as directed lending and normal lending. Retail lending refers to the lending by banks to noncorporate borrowers, such as individuals, and small and medium businessmen. Wholesale lending refers to the financing of corporate customers and institutional finance. The size of the advance is large and the borrowers are small, due to the different products and the documentation procedures and requirements to meet the needs of clients.

 

            The major source for the banks is advances which are received in the form of deposits, which belongs to customers, the banks should have surety about the repayment of the advances with interest.The banks should monitor their funds, the sound credit policies should be framed for pre and post-disbursement of loans. Credit management helps to frame sound credit policies and mechanisms for lending advances. In order to study the important credit policy strategies, loan review mechanisms, segmentation of portfolios, and NPAs issues, the researcher has selected the topic of credit management, which helps to take decisions about the safety of funds.Good credit policies and RBI guidelines help the banking sector to manage the funds properly, to earn a profit, and to have sustainable growth in the competitive world.

 

            One of the important qualities of sound lending is liquidity, which means the ability of banks to convert assets into cash. Effective credit management helps banks in maintaining the CRR (Cash Credit Ratio) and SLR (Statutory Liquidity Ratio) as per the RBI guidelines. Security and the purpose of the loan credit management plays a vital role in obtaining the security for the sanction of the loan and also the purpose for which the loan is sanctioned, and for which the priority should be given, to take proper decisions in lending the advances to the borrowers.

 

            It is essential to make a thorough credit investigation of the borrower before sanctioning the loan. The field officer should be very tactful in gathering information about the client because the recovery of funds is very important for the bank for their profitability. Effective and efficient credit policies help the banking sector to decide the parameters for credit approval and credit disbursementof loans. Before the disbursement of loans, the banks should make a thorough investigation of the validity of sanctions, types of facilities, commission, rate of interest, and securities should be verified properly by the loan approval department of banks.