Credit is temporary capital and the objective of credit is to lend with the purpose of
increasing profits and sales.
A sound credit policy in business is the blue print to managing by measurement and
benchmark
The question then arises is 'What is a Credit Policy and how does one write a Credit Policy for
their specific nature of business operations?
Writing an effective Credit Policy begins with an understanding of the financial exposure
that you or your business can endure and the amount of your working capital that you would
be willing to risk, or call it 'invest' in your customers.
3. I am of the firm belief that 'what gets measured gets managed'. Therefore as a matter of
policy one should manage by measuring results.
The contents of each section can be written to best fit the nature of your franchise:
1. The set-up of credit function.
2. Objectives of the credit function
.3. Obtaining Information on new customers.
4. Process of assessing the information to arrive at line of credit and credit terms that will be
offered.
5. Monitoring your investment in your customers
6. Defining past-due and bad debts
.7. Targets, benchmarks and deadlines for the credit function
.8. Analyzing the changing needs of your markets/customers.
6. But as a credit adage goes "get the calculations right in a calculated risk" and remember that
'A sale is not complete till the money is collected.
3. Banks should take heed of the credit history and should provide the loan
accordingly.
4. The essential output from the credit approval process is the setting of the
bank’s credit limits
5. Some recent discussions have concluded that credit limits are insufficiently
flexible and limit the scope of a bank’s traders, and that they should be
replaced by sophisticated return on risk measures.
Using this approach, traders are allowed to deal up to any level, provided they
generate an adequate return to compensate for the risk taken.
The greater the value of the trades, the higher the return demanded. But this can
give rise to extra dangers by encouraging excessive leverage, and is too reliant
on the use of value-at-risk measures
8. The decision to extend credit to any client or company depends on five “C”s.
they are character , collateral, capacity, capital, conditions.
10.If used in right manner trade and consumer credit gives immense growth to all
the sectors.
1. Ind ust ry bo dies Ficci, CII , Assoch am , PH DCCI and FI EO today gav e a mixe d
reaction to the 50 b asis point incre ase in ca sh res erv e r atio (CR R) announced b y
the Rese rve B ank of In dia in its mid-te rm mone ta ry policy review .
4. The Re serv e Bank of India 's (RB I) decision to hike ca sh res erv e r atio (CR R) to
7. 5 perc ent and keep t he ban k ra te unchang ed h as disa ppoint ed large section s of
Indi an indu str y, pa rtic ula rly expor te rs and small and medi um bu siness es.
5. Anil Bh ard waj , secre ta ry gener al of Fede ration of Indian Micro , Small and
Medium En ter pri ses , told I ANS: 'S mall and mediu m bu sinesse s will be ar t he
consequ ences of R BI 's move to rai se CRR .
6. He s aid tha t bec aus e of the r eduction in liquidity, ba nks migh t b ecom e aver se to
lending to thi s seg ment , w hich is su ppo sed to be a rel atively ris ky grou p.
8. He ho weve r said th at this me as ure wo uld h elp slow the a pp recia ting r up ee and
cont ain inflation
9. RBI gove rnor Y . Venugo pal Re ddy left all ke y b an k r at es unchang ed in the mid-
te rm r eview of t he monet ar y p olicy for financial ye ar 20 07- 08 announced ea rlie r
Tuesd ay .
Credit policy
RBI measures
1. The credit policy for April-October 1998, aimed to accelerate industrial investment
and output, keep inflation under control, continue financial sector reforms, reduce
interest rates and improve credit availability to meet business requirements.
2. Key reference rates were reduced by one percentage point each, sending a strong
signal that commercial banks should lower interest rates for commercial borrowers.
Banks responded by reducing prime lending rates to 13 percent. The Cash Reserve
Ratio requirement was left unchanged at 10 percent.
3. Under the new credit policy, FIIs were allowed to invest up to 30 percent of their
assets in treasury bills, and banks were given freedom to fix penalties on premature
withdrawal of deposits. In January 1998, the rupee hit a low of Rs 40.45/ dollar, due
in large part to concerns about the Asian currency crisis
.
4. The RBI adopted a number of measures that stopped the rupee's slide and actually
led to some appreciation.
5. The interest rate on short-term domestic deposits was also deregulated and banks
were allowed to set different prime lending rates.