Credit Management | ABM Free Notes

These Credit Management free notes will help you understand the types of credit and borrowers, the principle of lending, RBI’s role, and the insolvency resolution process and bankruptcy process.

Principles of credit

For lending operations, banks have developed certain basic principles. These principles greatly influence loan policies and other aspects of credit management. For instance, the safety of funds, purpose, profitability, liquidity, Security and risk spread.

Types of borrowers

The following can be categorised into borrowers:

1. A private individual: Governed by the Indian contract act, 1872
2. A sole trader: Unincorporated business having only 1 owner who pays personal income tax on profits earned from the business.
3. Partnership firms: Governed by the Indian partnership act, 1932
4. Joint ventures through special-purpose vehicles 
5. Clubs and association
6. Local authorities
7. Trusts 
8. Institutions
9. Government departments
10. Institutions 
11. Limited liability partnership: Governed by LLP act 2008
12. Private and public limited companies
13.  Statutory companies
14. Real estate investment trusts
15. Cooperative societies
16. Hindu undivided family: Treated as a person under Section 2(31) of the Indian tax Act, 1961
17. Person companies: that only has one person as a member under section 2(62) of the Companies Act, 2013
18. Companies
19. Statutory corporations
20. Trusts and cooperative Societies

Types of credit

Bank credit can be fund-based or non-fund based.

Let’s understand this. 

In non-fund-based credit, there isn’t any transfer of money but the commitment by the bank on behalf of the client, which may result in a transfer of money to the beneficiary in the future.  

For example, a Bank guarantee issued in favour of government departments (or any other beneficiary) on the behalf of a contractor, who’s a bank’s customer. 

If the beneficiary invokes the guarantee, the bank will have to remit the amount to it and the client, for whom the guarantee was issued, will be liable to pay this amount to the bank.

Thus, a non-fund credit always has a possibility of getting converted into fund-based credit. 

Other than guarantees, the following are forms of non-fund Based credit:

1. Letter of credit 
2. Co-acceptance of bills 
3. Forward contract 
4. Derivatives 

Often, fund-based credit is classified based on:

1. Period (short-term or long-term)
2. Purpose (working capital finance, fixed asset, crop loan etc)
3. Types of customers (MSME, Corporate, agriculture, international, institutional credit etc)
4. Currency (rupee credit and foreign currency credit)

Read this article to get more information about this topic. 

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