CREDIT PORTFOLIO MANAGEMENT: WITH REFERENCE TO

PRIVATE SECTOR BANKS

ABSTRACT
Credit portfolio management refers to the process of building a series of investments
based upon credit relationships and managing the risks involved with these
investments. Such a portfolio gains its value from the interest from issued loans but is
susceptible to credit default. For that reason, credit portfolio management includes
assessing the risk involved with each potential loan and analyzing the total amount of
risk the portfolio incurs as a whole. The process is crucial to individual investors who
deal in bonds and to banks who issue loans as a major part of doing business. Banks
and other lenders often have a credit portfolio management team devoted to looking
at the big picture containing all of the loans issued by such an institution. These
managers can assign different risk levels to each of the loans and reach a final
assessment about whether or not the lender is too exposed to damage done by
potential defaults. This management team usually works in conjunction with
the personnel in charge of issuing loans on a case-by-case basis. To minimize the
risks involved with credit portfolio management, lenders usually look at the past
credit histories of the people and groups who come in looking for loans. If any of
these entities represents a risk of default too high for the lender's standards, they will
be refused. A bank or other loan may perhaps proceed with some risky loans, but only
by first attaching more favorable interest rates as a way of balancing out the risk.
This paper will reflect the mechanism which selected private sector banks takes in
managing credit portfolio with the help of credit management model. Selected private
sector banks, which will be included in the study, are: AXIS bank, HDFC bank, and
ICICI bank. It is also the aim of this paper to suggest more refine measures for quick
and convenient mode of maintaining their credit portfolio by applying statistical tool.

KEYWORDS
Portfolio, Receivables, Annual Statement, Ratio Analysis, Creditworthiness.

INTRODUCTION OF THE STUDY

The private-sector banks in India represent part of the Indian banking sector that is
made up of both private and public sector banks. The "private sector banks" are banks
where greater parts of stake or equity are held by the private shareholders and not by
government. Private Sector banks (PSBs) plays a pivotal role in meeting out the
credit needs of most of its customers. They provide credit subject to certain norms and
by analyzing the creditworthiness of customers.

OBJECTIVES OF THE STUDY

1) To study how private sector banks maintain due diligence in credit portfolio by
analyzing the

STEPS INVOLVED IN THE MANAGEMENT OF CREDIT

PORTFOLIO BY BANKS
When bank offers to sell its services on credit it must give serious thought as:
o To which customer the bank is prepared to offer credit?
o What factors should be taken into account while analyzing the
customers who are interested to take loan?
o What should be the credit terms?
o What collection policies should be adopted?
o What should be the system of monitoring and controlling the credit
accounts?
The following steps are involved in considering the preceding respective matters in
the case of receivables management:
a) Credit analysis
b) Credit standards
c) Credit terms
d) Collection policies
e) Control and Monitoring
a) Credit analysis

No bank can give credit blindly to each and every customer. It has to evaluate
and examine the ability of the customer whether he can make the payment at the
time as per promise or not. If bank ignores the analysis of customers financial
position and his status, it finds itself in trouble because adequate resources may
not be generated to meet the daily requirements for fund. Therefore, an analysis
of those risks, which may arise on account of non- payment or late payment,
must be undertaken before granting credit facilities to the customers. Credit
analysis involves the study of three aspects- (1) collection of information about
the customers, (2) analysis of collected information, and (3) decision on the
basis of analysis.
1) Collection of information about the customers: both financial as well as
qualitative type of information are needed relating to customers. There are
various sources of information available to the bank to help in assessing the
financial health of a customer.

Financial Statements: These are published accounts containing the

Profit and Loss account and Balance Sheet. In the case of corporate
bodies, these accounts are available for public inspection and provide
useful information.

Trade References: some bank may request the potential customers to

furnish them with references from other customers who have ha
dealings with them.

Bankers Enquiries: It is possible to ask the potential customer for a

bank reference.

Credit Rating Agencies: Specialist agencies now exist to provide

information, which can be used to assess the creditworthiness of a
potential customer. The information which a credit agency supplies,
may be gleaned from various sources including the accounts of the
customer, court judgments and news items relating to the customer
from both published and unpublished sources. These agencies
sometimes provide ratings also after relevant analysis.

Market Reports: Relevant and valuable information can also be

collected from the market reports. Such reports are prepared in such a
way that they contain meaningful data relating to financial position and
repaying ability.

Own Experience Of The Bank: the bank may use its own experience in
collecting information about the potential customers.

Other Sources: Like trade associations, commercial trade directories,

public documents, etc., may also be used for collecting information
about the customers.

2) Analysis of collected information:

This analysis attempts to measure the creditworthiness of the customer as

well as risk involved. Normally, Following six Cs are considered for the
analyzing the creditworthiness:
1) Character
2) Capacity
3) Capital
4) Conditions
5) Cost
6) Collateral
Character
The analysis of creditworthiness starts with the assessment of customers
character, i.e. willingness to pay that will depend on the honesty and integrity
of the individual customer. If the customer is company, this will mean
assessing the characters of Board of Directors.

Capacity
Capacity is the ability of the customer to pay the amounts owing. One should
be sure that customer meets the obligations out of funds generated from the
business operations.
Capital
In case the customer is not in a position to generate adequate funds for
meeting the obligations, then the Capital base of the customer should be
examined. Capital base should reflect in net worth position of the customer.
Conditions
Conditions also play an important role in credit analysis. While making credit
analysis of the customer, the expected trends in the market, growing
competition, and other market factors should be considered.
Costs
Costs associated with credit extension should also be taken into account.
Sometimes it may be very high for a given set of conditions. Increasing bad
debts, default in payments, delinquency costs, etc., may constitute the cost.

Collateral
The analyst has also to examine the kind of security, collateral in the form of
assets, which customers may provide when asked to do so.
After making detailed analysis of the collected information, a decision is taken
whether to grant credit to a customer in question or not. For this purpose, the
assessed creditworthiness of the customer is compared with the credit
standards. If the customer creditworthiness is lower than the credit standard of
the enterprise, credit facility is not provided to him.

3) Credit Standards:
An important component of credit policy is well-defined credit standards.
Such credit standards provide a base for deciding whether to grant credit to
customer or not. Credit standards may be defined and explained in both
conservative (1) or strict manner and aggressive (2) or liberal manner.
4) Credit terms:
Another important decisional area in receivable management in terms of
credit, which must be decided in advance. After analyzing the customers
creditworthiness and setting up bank credit standards, one has to determine
the terms and conditions on which credit will be made available to the
customers. Credit terms include the terms on which payment from
receivables may be received and it has three variable components: Credit
period, Cash discount, Cash discount period.

1.(conservative policy: in this case credit facility is not granted to each and every customer,
only marginal customers( i.e., those customers whose financial position is doubtful though
not bad) are refrained from getting credit under strict credit standards.)
2. (Aggressive policy: in this case even the marginal customers may avail the credit facility.

5) Collection Policies:
Another aspect is collection policies, which is basically concerned with the
procedure to be followed in collecting the accounts not realized within the
credit period allowed. A good collection policy should always imply clear
instruction regarding the steps and efforts to be taken. Such efforts may
include dunning letters, telephone, personal visit, help from collecting
agencies and ultimately legal action.
5) Control and Monitoring:
Once the bank has set credit standards, credit terms, collection policies etc.,
it is important for the bank to control and monitor effectiveness of the

collections. For this purpose the bank may set up some targets in terms of
average collection period as well as ratio of bad debts to sales and monitor
the debtor with reference to these ratios.