Credit Policy refers to the guidelines and principles set by a financial institution to manage its lending operations effectively. It ensures risk management, regulatory compliance, and profitability while maintaining credit quality.
Key Components of a Credit Policy:
- Credit Objectives: Defines the goals of lending activities, such as portfolio diversification and risk minimization.
- Eligible Borrowers: Specifies who can apply for credit, including individuals, businesses, and industries.
- Loan Types & Limits: Details various loan products, terms, and maximum exposure limits per borrower.
- Interest Rate & Pricing: Determines how interest rates and charges are set based on risk assessment.
- Collateral & Security Requirements: Outlines acceptable forms of collateral and loan security conditions.
- Risk Assessment & Creditworthiness: Establishes criteria for evaluating borrowers, including credit scores and financial health.
- Loan Approval & Documentation: Defines the process for reviewing applications, required documents, and approval authority.
- Credit Monitoring & Recovery: Ensures periodic reviews, risk mitigation strategies, and loan recovery procedures.
- Regulatory Compliance: Ensures adherence to banking regulations set by central banks and financial authorities
Credit Procedures
Credit Procedures define the step-by-step process of granting, monitoring, and recovering loans within a financial institution.
Standard Credit Process:
- Loan Application: Borrower submits a request with necessary documents (financial statements, business plans, etc.).
- Initial Screening: Bank officers assess the applicant’s basic eligibility and credit history.
- Credit Analysis & Risk Assessment: In-depth evaluation of repayment capacity, financial stability, and risk exposure.
- Loan Structuring & Terms Agreement: Finalizing loan amount, tenure, interest rate, and repayment schedule.
- Approval Process: Loan is reviewed and approved based on the institution’s internal hierarchy.
- Loan Documentation & Disbursement: Borrower signs necessary agreements before receiving funds.
- Credit Monitoring: Regular follow-up to ensure timely repayments and detect early signs of default.
- Loan Recovery & Collection: Actions taken for overdue payments, including restructuring, legal actions, or asset seizure if needed.
A well-defined credit policy and procedure helps banks minimize risks, improve financial stability, and enhance customer confidence.
