Credit management is one
of the core processes for all banks and therefore, the ability to manage its
process is essential to augment interest income and to enhance its
profitability. The success of a
bank crucially depends how it manages its Asset Portfolio as it is the major
source of income and has direct bearing on the bottom-line of the Bank. This
demands an ability to perceive the early warning signals, which necessitates
control of both the quantitative and qualitative aspects of credit evaluation.
Thus, managing credit risk
plays an important role and its effectiveness lies in proper identification of
borrower and appraisal besides adopting an efficient recovery and exit
strategy.
1. Know Your
Customer (KYC): Proper
identification of the borrower attains utmost importance in the entire credit
cycle for which adoption of KYC guidelines is a must. It is observed that
majority NPA accounts pertain to either new customers or introduced by
strangers or middlemen or consultants. Thus, it is desirable for the banks to
approach the customers rather they approach the banks. It is the responsibility
of the bank to look into the identity & residential proof, business
address, PAN, TAN, GST etc., before inviting the customer into bank’s fold.
Photocopies of all these must be verified with original and also get them
signed by the borrower and kept on record. Due diligence is to be done either
by the bank staff or external agencies as per extant guidelines. With regard to
firms/companies etc., the profile of the partners/directors must be checked
thoroughly along with the history of the organization. One can get good
information from the web about the partners/directors, borrowings and the
health of the organization. Obtain confidential
reports from other banks and financial institutions.
2. Credit Appraisal: The objective of credit appraisal is to extend the required credit limits to the borrowers to meet their genuine financial/business requirements. To address the issue, banks are required to look in to the following financial aspects with utmost care while appraising the credit requirements of the borrowers: