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: