Lesson-1 on Credit

Dear friends,

I discussed about different issues of General Banking in my earlier lessons. Now , I will discuss about credit of a Bank. I will discuss different type of credit, principle of sound lending, borrower selection criteria etc step  by step to provide you idea about Banker's loan appraisal.

Question: What is credit?

Answer:

Credit is the confidence of the lender (Bank) on the ability & willingness of the Borrower to repay the debt as per terms & conditions of sanction advice.

Question: What are different types of Credit?

Answer:

01.  Funded Credit

v    Loan (G)/ Term Loan

v    Hire Purchase

v    Lease finance

v    Cash Credit (Hypo)

v    Loan against Trust Receipt (LTR)

v    Payment against documents (PAD)

v    Packing Credit (PC), etc.

02.  Non Funded Credit

v    Letter of Credit (L/C)

v    Guarantee (BG, PG)

Question: What is Difference between Loans & Advance?

Answer:

Loan

Ø     A credit made in lump sum for a specific period and repaid by specific repayment schedule. Once repayment is made in part or full loan can’t be withdrawn by the borrower. For example. Hire Purchase

Advance

Ø     Borrower can withdraw as many times as he wants upto the limit within the validity. For example, CC(Hypo).

Question: What is Principles of Sound Lending ?

Answer:

1. Safety

*    Credit should be given at right person at right time at right quantity.

*    It must be come back.

2. Liquidity

*    Bank should not have negative Duration Gap or Asset Liability Mismatch.

3. Profitability

*    Lending must reflect costs+earnings+ long term goal of a bank.

4. Purpose

*    Purpose must be productive & generates adequate cash for repayment.

5. Security

*    Security means things deposited as a guarantee of undertaking a loan to be forfeited in case of default.

6. National Interest

*    It should play a role for the economic development of the country.

7. Diversification

*    Don’t put all of your eggs in one basket

*    It reduces risks

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