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    Credit Management

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    The Cultural Committee
    This document discusses credit risk management and the credit management process. It outlines 8 steps in the credit management process: 1) building the credit file, 2) project and financial appraisal, 3) qualitative analysis, 4) due diligence, 5) risk assessment, 6) making a recommendation, 7) credit delivery and administration, and 8) credit review and monitoring. It also discusses secured and unsecured loans, modes of security like pledge, hypothecation, and assignment, and common securities for bank loans in India.

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    © All Rights Reserved
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    Credit Management

    Uploaded by

    The Cultural Committee
    112 views14 pages
    This document discusses credit risk management and the credit management process. It outlines 8 steps in the credit management process: 1) building the credit file, 2) project and financial appraisal, 3) qualitative analysis, 4) due diligence, 5) risk assessment, 6) making a recommendation, 7) credit delivery and administration, and 8) credit review and monitoring. It also discusses secured and unsecured loans, modes of security like pledge, hypothecation, and assignment, and common securities for bank loans in India.

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    Credit Management 609d45513f6025d3f49bd2736f5cc088

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    This document discusses credit risk management and the credit management process. It outlines 8 steps in the credit management process: 1) building the credit file, 2) project and financial appraisal, 3) qualitative analysis, 4) due diligence, 5) risk assessment, 6) making a recommendation, 7) credit delivery and administration, and 8) credit review and monitoring. It also discusses secured and unsecured loans, modes of security like pledge, hypothecation, and assignment, and common securities for bank loans in India.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    112 views14 pages

    Credit Management

    Uploaded by

    The Cultural Committee
    This document discusses credit risk management and the credit management process. It outlines 8 steps in the credit management process: 1) building the credit file, 2) project and financial appraisal, 3) qualitative analysis, 4) due diligence, 5) risk assessment, 6) making a recommendation, 7) credit delivery and administration, and 8) credit review and monitoring. It also discusses secured and unsecured loans, modes of security like pledge, hypothecation, and assignment, and common securities for bank loans in India.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 14

    CREDIT MANAGEMENT

    CREDIT RISK MANAGEMENT


     Concept of secured & unsecured loan

     For secured & unsecured loan credit analysis process


    will have some different elements to take into
    consideration.
    CREDIT MANAGEMENT PROCESS
    Building the credit file

    Project & financial appraisal

    Qualitative analysis

    Due diligence

    Risk assessment

    Making the recommendation

    Credit delivery and


    administration

    Credit review and monitoring


    CREDIT MANAGEMENT PROCESS
     Step-1:Building the credit file:
     Depending on type of the project, the information needs to be
    collected.
     Preliminary information obtained would go into file.
     Credit file should contain all necessary information such as
    call report summaries, past financial statements, cash flow
    projections, credit reports, insurance coverage, types of
    assets, value of collateral, security documents etc.
     Step-2: Project and financial appraisal:
     Appraisal process focuses on financial statements, cash flow
    statements analysis.
     Analyzing liquidity position of the firm.
    CREDIT MANAGEMENT PROCESS
     Financial ratio analysis to identify risk involved & financial
    health of the company.
     Step-3: Qualitative analysis:
     Assessment of quality of the management team.
     Integrity of the promoter by check the credit repayment history.

     Step-4: Due diligence:


     Due diligence is time consuming but extremely worth-while
    activity.
     Starting from checking out borrower’s address, doing pre-
    approved inspection of the work place, interaction with key
    stake holders like customers, employees, suppliers etc. review
    of technology, analysis of planned capital expenditure etc. are
    part of due diligence.
    CREDIT MANAGEMENT PROCESS
     Step-5 : Risk assessment:
     All potential internal & external risks are to be identified.
     Bank has to analyze the impact of various risk on the future
    cash flows of the firm as well the survival of the firm.
     Risk classification has to be done to identify proper measure
    to deal with various classified risk.
     Credit rating agencies (CRAs) also play crucial role in risk
    assessment.
     Step-6: Making the recommendation:
     After all the analysis & examination the ‘fit’ of the credit
    with ‘loan policy’ of the bank, team makes the
    recommendation of accepting or rejecting the proposal.
    CREDIT MANAGEMENT PROCESS
     In some of the cases, when client has long relationship with
    the bank, team may advise client to re-submit the proposal
    after taking into consideration of the suggestions.
     Step-7: credit delivery & administration:
     Based on the bank’s ‘discretionary limits’ – monetary ceilings
    officers at various layers are having sectioning power for the
    loan.
     Larger the pool of borrowing amount, higher authority will
    get involved in the sectioning of the loan.
     Once the loan is approved, official communication will be
    made along with section letter which will consists of all the
    details regarding the loan. Loan documentation and term &
    conditions of the loan, warranties, event of default etc. will be
    importance part of it.
    CREDIT MANAGEMENT PROCESS
     Step:8 –Credit review & monitoring:
     It focuses on monitoring the performance of existing loans.
     Monitoring is done through 1) continuous monitoring by bank 2)
    Monitoring done by external & internal audit teams on periodical
    basis.
     This helps in identifying if borrower is behaving as per required (any
    breach of covenant), if the firm is operating an generating similar
    cash flows which were projects or there are any troubles.
     Identifying any incidences of increased credit risk etc.
     Keep close observation of the borrower’s over all financial
    conditions in changing markets, industry dynamics etc.
    THE CREDIT MANAGEMENT
    PROCESS
     Two distinct processes
     Before sanction of credit limits – credit appraisal
     After sanction of credit limits – credit review

     A sound credit review process is necessary for the long


    term sustenance of the bank.
    WHY CREDIT REVIEW?
     To check
     If loan policy being followed meticulously

     Identify problem accounts at incipient stage

     Assess bank’s exposure to credit risk

     Assess bank’s future capital requirements


    AN EFFECTIVE CREDIT REVIEW
    SYSTEM MEANS
     The bank will periodically check
     Borrower’s financial health
     Security coverage
     Violation in covenants
     Payment defaults
     And initiate remedial action at the first signs of problems
     Additionally, the bank will monitor the overall quality of
    credit
    MODES OF SECURITY
     Pledge
     Defined under Indian Contract Act, 1872.
     It means ‘ bailment of goods as security for payment of a debt or
    performance of a promise’.
     The main benefit of a pledge is, bank is in possession of the goods has
    preventing the dilution of security.
     Bank has to take care of the goods taken under pledge & if any damage
    happens to the goods bank has to compensate for the damage.
     Hypothecation
     Hypothecation is not governed by any identifiable act in law.
     It is legal transaction involving movable assets.
     Hypothecated movable asset is considered banks’ security with transfer of
    possession of the asset to bank.
    MODES OF SECURITY
     Assignment:
     Borrowers ‘assign’ actionable claims to the bank.
     Once borrower assigns his claims to the bank, other creditors of the

    borrower can not get priority over the bank in the realization of their
    dues from the assigned debts.
     Mortgage:
     Sec.58 of the Transfer of Property Act, 1882, defines mortgage.
     It includes only immovable property such as land, commercial

    buildings, infrastructure, home etc.


    SOME COMMON SECURITIES FOR
    BANK LOANS IN INDIA
     Land / real estate
     Goods

     Documents of title to goods

     Stocks / shares and debenture

     Inventories

     Fixed deposit receipts

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