Credit management is essential for maintaining financial stability in various sectors, including households, SMEs, and corporations. This comprehensive guide explores different types of credit, such as fund-based and non-fund-based lending, and highlights key processes involved in credit management. It also discusses the role of institutions like SIDBI in supporting small-scale industries and the importance of directed lending in priority sectors. Ideal for finance professionals and students, this document provides insights into effective credit management strategies and practices.

Key Points

  • Explains fund-based lending types, including working capital finance and project finance.
  • Covers non-fund-based credit facilities like guarantees and letters of credit.
  • Details the role of SIDBI in providing financial assistance to small-scale industries.
  • Discusses the importance of directed lending and priority sector lending in the economy.
Subhathra Murali
39 pages
Language:English
Type:Presentation
Personal Finance
Subhathra Murali
39 pages
Language:English
Type:Presentation
Personal Finance
293
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Credit management
Types of Credit
Banks extend credit to different categories of borrowers for a wide variety of purposes. Bank credit is
provided to households, retail traders, small and medium enterprises (SMEs), corporates, the Government
undertakings etc. in the economy. Advances can be broadly classified into: fund-based lending and non-fund
based lending.
• Fund based credit
1. Working Capital Finance:
Working capital finance is utilized for operating purposes, resulting in creation of current assets.
Working capital finance consists mainly of cash credit facilities, short term loan and bill discounting.
• Banks carry out a detailed analysis of borrowers' working capital requirements. Credit limits are
established in accordance with the process approved by the board of directors. The limits on Working
capital facilities are primarily secured by inventories and receivables (chargeable current assets).
2. Project Finance:
Project finance business consists mainly of extending medium-term and long-term rupee and foreign
currency loans to the manufacturing and infrastructure sectors. Banks also provide financing by way of
investment in marketable instruments such as fixed rate and floating rate debentures. Lending banks usually
insist on having a first charge on the fixed assets of the borrower.
The project finance approval process entails a detailed evaluation of technical, commercial, financial and
management factors and the project sponsor's financial strength and experience. As part of the appraisal
process, a risk matrix is generated, which identifies each of the project risks, mitigating factors and risk
allocation.
Project finance extended by banks is generally fully secured and has full recourse to the borrower
company. In most project finance cases, banks have a first lien on all the fixed assets and a second lien on all
the current assets of the borrower company.
•
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Figures

Credit Management: Types, Processes, and Best Practices — BANKING OMBUDSMAN
Credit Management: Types, Processes, and Best Practices — Figure 2
Credit Management: Types, Processes, and Best Practices — Figure 3
Credit Management: Types, Processes, and Best Practices — Figure 4
Credit Management: Types, Processes, and Best Practices — Figure 5
Credit Management: Types, Processes, and Best Practices — Figure 6
Credit Management: Types, Processes, and Best Practices — Figure 7
Credit Management: Types, Processes, and Best Practices — Figure 8
Credit Management: Types, Processes, and Best Practices — Figure 9
Credit Management: Types, Processes, and Best Practices — Figure 10
Credit Management: Types, Processes, and Best Practices — Figure 11

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FAQs

What are the main types of credit provided by banks?
Banks extend credit to various categories of borrowers, which can be broadly classified into fund-based lending and non-fund based lending. Fund-based credit includes working capital finance, project finance, loans to micro, small and medium enterprises (MSMEs), and rural and agricultural loans. Non-fund based credit involves guarantees and letters of credit, where banks undertake risks to pay amounts on the occurrence of certain contingencies.
How is working capital finance utilized by businesses?
Working capital finance is primarily used for operating purposes, leading to the creation of current assets. It consists mainly of cash credit facilities, short-term loans, and bill discounting. Banks analyze borrowers' working capital requirements in detail and establish credit limits secured by inventories and receivables, which are considered chargeable current assets.
What role does SIDBI play in the development of small-scale industries?
The Small Industries Development Bank of India (SIDBI) provides financial assistance to small-scale industries through both direct and indirect assistance. Direct assistance includes micro-finance, venture capital, project finance, and marketing support for small-scale products. Indirect assistance is provided through refinance to commercial banks and other financial institutions, enabling them to lend to MSMEs effectively.
What is the concept of directed lending in banking?
Directed lending refers to the requirement set by the Reserve Bank of India (RBI) for banks to allocate a certain minimum amount of credit to identified sectors of the economy. This includes priority sector lending, which mandates commercial banks to lend at least 40% of their total advances to sectors like agriculture, small-scale industries, and education. Export credit is another aspect of directed lending, which provides loans to exporters at concessional interest rates.
What are the categories of priority sector lending as per RBI guidelines?
According to the RBI circular dated July 7, 2016, the eight broad categories of priority sector lending include Agriculture (18%), Micro, Small and Medium Enterprises (7.5%), Export Credit (2%), Education, Housing, Social Infrastructure, Renewable Energy, and Others (10%). These categories are designed to ensure that credit flows to sectors that require support for growth and development.
How does micro-financing through Self Help Groups (SHGs) operate?
Micro-financing through Self Help Groups (SHGs) involves groups of rural poor organizing to eradicate poverty among members. They agree to save regularly, creating a common fund known as the Group corpus. Once established, an SHG can open a Savings Bank account with a bank, which facilitates lending to the group or its members. This process enhances transparency and allows banks to recover loans conveniently.
What are the causes of bank frauds identified in the document?
The document outlines several institutional reasons for bank frauds, including incompetent database management, poor personnel policies, weak accounting practices, and inadequate reporting of frauds. Environmental factors also contribute, such as a sluggish legal process, job insecurity, and societal expectations for quick wealth. These issues create an environment where fraud can occur more easily.

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