Bank Credit:

 The money that Banks have lent or available to lend

• Credit Management is the process of controlling and collecting payments from the customers. This function within the Banks or company to improve credit policies and reduce the risk of credit.

Types of Credit There are two types Loan in terms security;

• Secured (b) Unsecured Loans are consists in two categories namely;

• Short term (b) Long Term

And Loans are two Types in terms of Transition;

• Revolving (b) Fixed

CREDIT PROCEDURE Definition of Credit Application

Documentation that is completed by an individual or business seeking to apply for a line of credit with a lending institution. The information on the application is used to determine the borrower’s credit history, employment status, and his/her ability to repay the loan amount.

Credit appraisal: It is the process by which the lender assesses the credit worthiness of the borrower.

Procedures of credit appraisal: It revolves around character, collateral capability and capacity. It takes into account various factors like income of the applicants, number of dependents, monthly expenditure, repayment capacity, employment history, number of years of service and other factors which affect credit rating of the borrower.

Credit analysis is  the  quantitative  and  qualitative  analysis  of  a  company,  which  help  to  determine  the  company’s  debt service capacity, or how capable it is to pay back its principal payments to the bank or other creditors. Credit analysis is concerned with identifying, evaluating and mitigating those risks which may result in a company not being able to meet its creditors’ claims.

Credit  analysis  involves  the  examination  of  the  link  between  management  performance  or  capacity  and  the  working relationship  of  a  company’s  assets,  liabilities  and  equity  as  shown  on  its  balance  sheet,  the  result  of  its  operations  as reflected in its income statement and cash flow. The evaluation of the company’s financial statements and the ratios that indicate the efficiency of the company’s performance will thus provide an indicator of the probability of success of the ability to service its debt in the future.

Credit risk grading is an important tool for credit risk management as it helps the Banks & financial institutions to understand various dimensions of risk involved in different credit transactions. The aggregation of such grading across the borrowers, activities and the lines of business can provide better assessment of the quality of credit portfolio of a bank or a branch. The credit risk grading system is vital to take decisions both at the pre-sanction stage as well as post-sanction stage. At the pre-sanction stage, credit grading helps the sanctioning authority to decide whether to lend or not to lend, what should be the loan price, what should be the extent of exposure, what should be the appropriate credit facility, what are the various facilities, what are the various risk mitigation tools to put a cap on the risk level. At the post-sanction stage, the bank can decide about the depth of the review or renewal, frequency of review, periodicity of the grading, and other precautions to be taken. Types Credit Facilities Banks Credit Facility is an agreement with bank that enables a person or organization to be taken credit or borrow money when it is needed. All types of credit facilities may broadly be classified into two groups on the basis of Funding – 1. Fund Base Credit  2. Non Fund Base Credit

Fund Base Credit is the any credit facility which involves direct outflow of Bank’s fund to the borrower. Various types of it are as follows :-

(i)      Loan: – It refers to credit facility that is repayable in a definite period. (e.g. Term Loan , Demand Loan)

(ii)     Term Loan:-A loan from a bank for a specific amount that has a specified repayment schedule. Term loans almost always mature between one and 10 years.

(iii)    Demand Loan:- A demand loan is a loan that the lender may require the borrower (a brokerage house) to repay at any time.

(iv)    Cash Credit: – It refers to credit facility in which borrower can borrow any time with in the agreed limit for certain period for their working capital need. It secured by way of Hypothecation of Stock(goods) and Debtors and all other current Assets of the business generated during the course of business. Cash credit can also be secured by way of mortgage of immovable properties (as collateral security).

(v)     Over Draft: – An overdraft allows a current account holder to withdraw in excess of their credit balance up to a sanctioned limit. It secured by way of Mortgage of immovable properties and pledge of F.D., Bonds, Shares securities , Gold & silver and any physical asset and  Hypothecation of Stock and Debtors and all other current Assets of the business generated during the course of business.

(vi)   Packing Credit: – It is a credit facility which sanctioned to an exporter in the Pre-Shipment stage. Such credit facilitates the exporter to purchase raw materials at competitive rates and manufacture or produce goods according to the requirement of the buyer and organize to have it packed for onward export. It secured by way of Hypothecation of Stock of goods and Debtors and all other current Assets of the business generated during the course of business.

(vii)   Some other fund based credit facilities are Bill Discounted , Bill Purchased , Advance against hypothecation of Vehicles ( Transport Loan) , House Building Loan , Consumer Loan , Agriculture Loan -Farming -Non Farming , Consortium Loan , Lease Financing , Hire Purchase ,  Import Financing – Loan Against Imported Merchandise (LIM) – Payment Against Document (PAD) .

Non Fund Base credit is a credit facility where there is no involvement of direct outflow of Bank’s fund on account of borrower rather the outflow of Bank’s fund on account of Third party on behalf of borrower. Types of it are as follow:

(i)     Letter Of Credit: – When a buyer or importer wants to purchase goods from an unknown seller or exporter. He can take assistance of bank in such buying or importing transactions. Bank issues a LETTER OF CREDIT in addressed to the supplier or exporter after it, supplier or exporter will supply the goods to such unknown buyer or importer. A signed Invoice with Letter Of Credit is presented to the bank of buyer/importer and the payment is made to the seller/exporter DIRECTLY by the bank.

(ii)    Bank Guarantee: – It is a guarantee issued by a banker that, in case of an occurrence or non-occurrence of a particular event, the bank guarantees to fulfilled the loss of money as stipulated in the contact. It may of various types like Financial Guarantees, Performance Guarantees and Deferred Payment Guarantee.

(iii)    Buyer Credit: – It is the credit availed by an Importer from overseas lenders (i.e. Banks & Financial Institutions) for payment against his imports. The overseas bank usually lends the Importer based on letter of credit, bank guarantee issued by the importer bank.

(iv)   Suppliers Credit: – Under such credit facility an exporter extends credit to a foreign importer to finance his purchase. Usually the importer pays a portion of the contact value in cash and issues a Promissory note as evidence of his obligation to pay the balance over a period of time. The exporter thus accepts a deferred payment from the importer and may be able to obtain cash payment by discounting or selling such promissory note created with his bank. (v)  payment against documents:- Arrangement under which a buyer can get the delivery (shipping) documents only upon full payment of the invoice or bill of exchange.

(vi)    Trust Receipt:-Notice of the release merchandise to a buyer from a bank, with the bank retaining the ownership title to the released assets. In an arrangement involving a trust receipt, the bank remains the owner of the merchandise, but the buyer is allowed to hold the merchandise in trust for the bank, for manufacturing or sales purposes.