Overview of Credit Management: Caiib Paper 1 (Module D), Unit 1

Overview of Credit Management: Caiib Paper 1 (Module D), Unit 1

Dear Bankers,
We all know that CAIIB exams are conducted by the Indian Institute of Banking and Finance (IIBF).  CAIIB is said to be one of the difficult courses to be cleared for the bankers. But we assure you that with the help of our “CAIIB study material”, you will definitely clear the CAIIB exam.
CAIIB exams are conducted twice in a year. Candidates should have completed JAIIB before appearing for CAIIB Exam. Here, we will provide detailed notes of every unit of the CAIIB Exam on the latest pattern of IIBF.
So, here we are providing “Unit 1: Overview of Credit Management of “Module D: Credit Management” from “Paper 1: Advanced Bank Management (ABM)”.

Credit

Credit is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately, but promises either to repay or return those resources at a later date.

Principles of Credit

Over a period of time, bankers have evolved certain basic principles for their lending operations. Bank’s loan policies, and other aspects of credit management, are influenced to a great extent by these unwritten principles, which are as under:

  • Safety of funds
  • Purpose
  • Profitability
  • liquidity
  • Security
  • Risk spread
Types of Borrowers

A borrower can be:

  • An individual
  • Sole proprietary firm
  • Partnership firm and joint ventures
  • Hindu undivided family
  • Companies
  • Statutory corporations
  • Trusts and co-operative Societies
Types of Credit
  • Fund Based: In fund-based credit, there is actual transfer of money from the bank to the borrower.
  • Non-Fund Based: In non fund based credit, there is no transfer of money, but the commitment by the bank on behalf of the client, may result in future transfer of money to the beneficiary of such a commitment. Example of this is a bank guarantee issued  in favour of  government  departments  (or any other beneficiary) on behalf of a contractor, who is bank’s  customer.
  • Credit can also be classified based on purpose, like working capital finance,  project finance, export finance, crop loan, etc. Banks often classify their credit portfolio based on the type of the customers like, Corporate, retail, agriculture, international, institutional credit, etc.

The laws applicable to all these different kinds of borrowers are different.

Type of Borrower  Applicable Law
Individuals Indian Contract Act
Partnership firms                     Indian Partnership Act
Hindu undivided family           Customary laws pertaining to Hindus
Companies Companies Act
Statutory corporations Acts that created them
Trusts   Indian Trusts Act, Public Trusts Act, Religious and Charitable Endowments Act, Wakf Act
Co-operative Societies            Co-operative Societies Act or Societies Registration Act.
Components of Credit Management
  • Loan Policy of the Bank
  • Appraisal
  • Delivery
  • Control and Monitoring
  • Rehabilitation and Recovery
  • Credit Risk Management
  • Refinance

Role of Rbi’s Guidelines In Bank’s Credit Management

End Use of the Funds:

  • It is the primary responsibility of banks to ensure proper end use of bank funds/monitor the funds flow. It is, therefore, necessary for banks to evolve such arrangements as may be considered necessary to ensure that drawals from cash credit/overdraft accounts are strictly for the purpose for which the credit limits are sanctioned by them.
Priority Sector:

The main sectors, included in the priority sector are as follows:

  • Agricultural finance
  • Finance to micro and small enterprises
  • Housing finance [( loans up  to  Rs 20 takh to individuals for  purchase  or construction  of dwelling unit), Loans up to Rs I lakh and Rs 2 lash for repairing of houses in rural or semi-urban and urban areas respectively].
  • Educational loans(up to Rs 10 lakh for studies in India and Rs 20 lakh for studies abroad)
  • Export credit: export credit by domestic banks is not treated as finance to priority  sector for the purpose of priority sector target. But, export credit by foreign banks is treated as finance to priority sector.
  • Micro-credit provided by banks either directly or through any intermediary: Loans to self help groups (SHGs) [Non Governmental Organizations (NGOs) for on-lending to SHGs
  • Retail trade
  • Khadi and Village Industries Sector (KVI);All advances granted to units in  the  KVI  sector irrespective of their size of operations, location and  amount  of  original  investment in plant and machinery, are covered under priority sector advances and are eligible for consideration under the sub-target (60 per cent) of the small enterprises segment within the priority sector.
Targets for Priority Sector Lending

The targets and sub-targets set under priority sector lending for domestic and foreign banks operating in India are furnished here: (Figures are given as per cent of Adjusted Net Bank Credit (ANBC) or credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher)

  • Segment ‘a’, Total Priority Sector advances, Target  for  Domestic  Banks,  both  public  and private sectors, 40 per cent and Target for Foreign Banks operating in India, 32 per cent.
  • Segment ‘b’, Total Agricultural advances,, Target for Domestic Banks, both public and private sectors, 18 per cent and Target for Foreign Banks operating in India, No target.
  • Segment ‘c’, Small enterprise advances,, Target for Domestic Banks, both public and private sectors, No target and Target for Foreign Banks operating in India, 10 per cent.
  • Segment ‘d’, Export Credit,, Export credit does not form part of priority sector.
  • Segment ‘e’, Advances to weaker sections,, Target for Domestic Banks, both public and private sectors, 10 per cent and Target for Foreign Banks operating in India, No target.

The weaker sections under priority sector include the following:

  • Small and marginal farmers with land holding of 5 acres and less and landless labourers, tenant farmers and share croppers.
  • Artisans, village and cottage industries where individual credit limits do not exceed Rs 50,000/-
  • Beneficiaries of Swarnjayanti Gram Swarojgar Yojana (SGSY)
  • Scheduled Castes and Scheduled Tribes
  • Beneficiaries of Differential Rate of Interest (DRI) scheme
  • Beneficiaries under Swama Jayanti Shahari Rojgar Yojana (SJSRY)
  • Beneficiaries under the Scheme for Liberation and Rehabilitation of Scavangers (SLRS).
  • Self Help Groups (SHGs)
  • Individual Women beneficiaries up to Rs 1lac per borrower.
  • Distressed persons other than farmer, with loan amount not exceeding Rs 1lac per borrowers to repay their to non-institutional lenders.

Note: No loan related ad andhoc service charges/ inspection charges should be levied on priority sector loans up to Rs 25000. In the case of eligible priority sector loan to SHGs/JLGs, this limit will be applicable per member and not to the group as a whole.

MSMED Act 2006

Enterprises engaged in the manufacture or production. processing or preservation of goods

  • A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh;
  • A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore;
  • A medium enterprise an enterprise where the investment in plant and machinery is more than Rs. 5 crore but does not exceed Rs.10 crore.

Enterprises engaged in providing or rendering of services

  • A micro enterprise is an enterprise where investment in equipment does not exceed Rs. 10 lakh;
  • A small enterprise is an enterprise where the investment in equipment is more than  Rs. 10 lakh but does not exceed Rs. 2 crore;
  • A medium enterprise an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs.5 crore.
RBI revises priority sector lending guidelines
  • The Reserve Bank of India (RBI) on 4th September 2020 said it has revised priority sector lending (PSL) guidelines to include entrepreneurship and renewable resources, in line with emerging national priorities.
  • Bank finance to start-ups (up to Rs 50 crore), loans to farmers for installation of solar power plants for solarisation of grid-connected agriculture pumps and loans for setting up Compressed BioGas plants have been included as fresh categories eligible for finance under priority sector.
Other Highlights of revised priority sector lending guidelines
  • The new guidelines are applicable to all commercial banks including regional rural banks, small finance banks, local area banks and primary (urban) co-operative banks other than salary earners’ banks. PSL guidelines were last reviewed for commercial banks in April 2015 and for urban co-operative banks in May 2018.
  • Higher weightage has been assigned to incremental priority sector credit in ‘identified districts’ where priority sector credit flow is comparatively low.
  • The targets prescribed for “small and marginal farmers” and “weaker sections” are being increased in a phased manner.
  • “Revised PSL guidelines will enable better credit penetration to credit deficient areas; increase the lending to small and marginal farmers and weaker sections; boost credit to renewable energy, and health infrastructure.

Statutory and Other Restrictions on Some Credits

The following credit restrictions have been placed on the banks:

(Details as per RBI circular No. Dir. BC. 13113.03.00/2009-10 dated 1, July 2009)

  • Advances against Bank’s own shares: In terms of Section 20(1) of the Banking Regulation Act, 1949, a bank cannot grant any loans and advances on the security of its own shares.
  • Restrictions on granting loans and advances to relatives of Directors
  • Restrictions on Grant of Loans & Advances to Officers and Relatives of Senior Officers of Banks
  • Restrictions on Grant of Financial Assistance to Industries Producing or Consuming Ozone Depicting Substances (ODS)
  • Restrictions on Advances against Sensitive Commodities under Selective Credit Control (SCC)
  • Advances against Fixed Deposit Receipts (FDRs) Issued by Other Banks
  • Loans against Certificate of Deposits (CDs)
  • Restrictions on Credit to Companies for Buy-back of their Securities

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