Answer One
An effective Credit planning should include the following considerations:
§ Objectives of the credit function
§ Opening procedures and obtaining information for new accounts
§ Assessing &
evaluating the proposals
§ Terms and
conditions
§ Authority levels and
responsibilities
§ Invoicing
procedures
§ Monitoring borrowing and paying behavior of customer
§ Procedure relating to complaints and
disputes
§ Targets, benchmarks, and deadlines for the credit function
§ Defining & collecting of
dues, overdues and bad debts
The credit planning should be considered by internal and external factors and
should be reviewed on an ongoing
process. These are:
§ Customer’s buying patterns, needs and
requests
§ Type of industry
§ Competitors’ offers
§ Type of products or services provided to customers
§ Production and
warehouse management
§ Distribution systems
§ Credit terms from trade suppliers and the bank’s overdraft limits
§ Costs of
third parties involved, such as factoring, debt collection agencies, etc.
Answer Two
The components that
should consider when formulating a lending policy that
should
influence to extend credit are discussed below:
A. Terms of Sale
The conditions under which a firm sells its goods & services-
1. The period for which credit is granted: The factors that influence the credit period are-
a) Predictability
b) Consumer Demand
c) Cost, profitability and
standardization
d)
Credit risk
e) Size of
the account
f) Completion
2. The type of credit instrument
3. Credit Function
a) Running a credit department
b) Chose to contract all or part
of credit to a factor
c) Manage internal credit operations are insured against default
B. Credit analysis
Refers to the process of deciding, it usually involves two steps:
1. Relevant information
a) financial statements b) credit agency
c) banks credit
d) market good will
2. Credit Worthiness a) Character
b) Capacity
c) Capital
d) Collateral
3. Credit scoring: The process of quantifying the probability of default when
granting consumer credit
C. Collection Policy
Collection policy is the final factor in credit policy. Collection policy involves monitory receivables to spot trouble and obtaining payment on past due accounts.