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Credit Management
Bank's loan policies, and other aspects of credit management, are influenced to a great extent by these unwritten principles, which are as under:
1. safety of funds
2. purpose
4. liquidity
3. profitability
5. security
6. risk spread
The laws applicable to different kinds of borrowers are different.
Type of Borrower - Applicable Law
Individuals - Indian Contract Act
Partnership firms - Indian Partnership Act
Hindu undivided family - Customary laws pertaining to Hindus
Companies - Companies Act
Statutory corporations - Acts that created them
Trusts - Indian Trusts Act, Public Trusts Act, Religious
and Charitable Endowments Act, Wakf Act
Co-operative Societies - Co-operative Societies Act or Societies Registration Act.
Types of Credit
Fund Based |
Non-Fund Based |
Actual transfer of money from the bank to the borrower |
there is no transfer of money, but the commitment by the bank on behalf of the client, may result in future transfer of money to the beneficiary of such a commitment |
Can be divided into short term credit or long term credit |
Example - bank guarantee, letters of credit, co-acceptance of bills, forward contracts, and derivatives |
Working Capital, Project Finance, Export Finance, Crop Loan
Priority sector 40%(agr 18%),weaker sector 10% foreign banks 32%, small enterprises 10%, export credit 12% of ANBC/off balance sheet expo, whichever is higher. Agr, MSE, housing(20 lacs), Education(10 lacs/20 lacs abroad), Export credit, SHG, KVI, Retail
Weaker sec. –small/marginal farmers, artisans, SGSY, SC/ST, DRI, SJSRY, SLRS, SHG
Mfg sec: Micro upto 25 lacs, Small 25 lacs to 5 crs, Medium 5 crs to 10 crs
Service : Rs 10 lacs, 10-2 crs, 2-5 crs
Financial statements
Balance-sheet
P&l a/c / income & expenditure a/c
Auditors report
Fund flow statement/cash flow - AS 3 std makes compulsory for listed/to above 50 cr cos. As-17 – segmentwise reporting. Banking co – formats of b/s and p&l prescribed by BR Act /Co Act for companies (no p&l prescribed)
Basic Concepts Used in Preparation of Financial Statements
1. Entity Concept
2. Money Measurement Concept
3. Stable Monetary Unit Concept
4. Going Concern Concept
5. Cost Concept
6. Conservatism Concept
7. Dual Aspect Concept
8. Accounting Period Concept
9. Accrual Concept
10. Realization Concept
11. Matching Concept
Bankers mostly use three methods for analysis of financial statements.
(a) Funds Flow Analysis
(b) Trend Analysis
(c) Ratio Analysis
While different users of financial statements are interested in different ratios, the ratios which interest a banker most, are the following:
(a) Profitability Ratios
(b) Liquidity Ratios
(c) Capital Structure Ratios
(d) Ratio Indicating Ability to Service Interest and Instalments
(e) Turnover Ratios
(1) Inventory Turnover Ratio
(2) Debtors’ Turnover Ratio
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