Presentation f (1)

Effective Credit Management

  • Effective and strong credit management is crucial for decreasing Nonperforming Loans (NPL).

  • Course: Diploma in Credit Management; Subject: Credit Operations & Marketing; Lecturer: Mr. Methsiri S. Somachandra; Group No: 01.

Understanding Nonperforming Loans (NPLs)

  • Definition: Loans or credit facilities classified as non-performing when payments are overdue by 90 days.

  • Characteristics: NPLs do not generate interest or principal repayments and serve as indicators of financial instability.

  • Key Causes of NPLs:

    • Poor borrower identification.

    • Weak collateral evaluation.

    • Inefficient credit policies and controls.

What is Credit Management?

  • Key Components:

    • Pre-approval assessment.

    • Decision-making framework.

    • Post-approval monitoring.

  • Purpose: To ensure risk-free lending, minimize defaults, and improve asset quality.

Effective Credit Management in Action

  1. Borrower Assessment: Evaluating creditworthiness based on the 6Cs of Credit.

  2. Decision Making: Implementing standardized approval processes.

  3. Collateral Evaluation: Conducting proper valuation and verification.

  4. Monitoring: Utilizing early warning systems and proactive recovery strategies.

  5. Policies and Controls: Adopting defined rules and ensuring compliance.

Impact on NPL Reduction

  • Benefits of Effective Credit Management:

    • Minimization of lending errors and risk exposure.

    • Improved borrower screening processes.

    • Strong collateral recovery methods.

    • Reduced default rates lead to better institutional performance.

What is Credit Assessment?

  • Credit assessment evaluates the creditworthiness of potential borrowers using financial and credit-related information.

  • Benefits include:

    • Risk evaluation and sound decision making.

    • Protection of financial assets and regulatory compliance.

    • Enhanced customer relationship management.

Credit Evaluation Models

  • Common Models:

    • 06 Cs: Character, Capacity, Capital, Condition, Collateral, Cash Flow.

    • CCC PARTS: Character, Capacity, Capital, Purpose, Amount, Repayment, Terms, Society.

    • CAMPARI: Character, Ability, Margin, Purpose, Amount, Repayment, Insurance.

    • PARSER: Person, Amount, Repayment, Security, Expediency, Recommendation.

Character

  • Description: Borrower's reputation and track record regarding repayment.

  • Assessment methods:

    • Credit reports, credit scores, references, interviews, background checks.

Capacity

  • Description: Borrower’s ability to repay the loan based on income and debt obligations.

  • Assessment methods:

    • Income statements, cash flow statements, bank statements, and debt service coverage ratios.

Capital

  • Description: Financial reserves and investments indicating financial strength.

  • Importance of capital contribution in strengthening lender trust.

  • Assessment methods:

    • Net worth statements, savings, investments, and Loan to Value ratio (LTV).

Condition

  • Description: Terms of the loan and any economic conditions affecting the borrower.

  • Types of Covenants:

    • Affirmative Covenants: Actions that borrowers must take.

    • Restrictive Covenants: Prohibitions against certain borrower actions.

Collateral

  • Definition: Assets offered to secure a loan, serving as security against default.

  • Important factors affecting collateral value:

    • Liquidity, valuation, asset type, location, marketability.

  • Examples of collateral:

    • Property, vehicles, machinery, fixed deposits.

Cash Flow

  • Definition: The movement of money into and out of accounts reflecting financial health.

  • Importance of cash flow statements over income statements.

  • Benefits of assessing cash flow:

    • Enhances liquidity, aids in planning, ensures financial stability, supports decision-making.

Decision Making

  • Definition: Evaluating and choosing appropriate credit actions based on creditworthiness.

  • Key Points:

    • Sound decisions derived from comprehensive assessments.

    • Risk management focusing on mitigation of potential risks.

    • Regulatory compliance to legal standards.

Credit Committees and Multi-Level Approval

  • Description: Decision-making processes ensuring thorough evaluation.

  • Key Points:

    • Credit committees consist of experienced officers reviewing high-risk applications.

    • Multi-level approval for larger or higher-risk loans involving multiple evaluators.

    • Collaborative approaches encourage diverse perspectives.

Data Driven Decision Making

  • Importance of data analytics in credit management for informed decisions:

    • Predictive analytics for forecasting default risks.

    • Scenario analysis for varying economic impacts.

    • Insights to reduce bias in decision-making.

Continuous Improvement in Decision Making

  • Essential for adapting to market conditions.

  • Key Points:

    • Feedback mechanisms to learn from past decisions.

    • Training for credit officers on latest practices.

    • Benchmarking against industry standards for improvement.