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, over dues 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.