What factors are to be taken into consideration by a bank while making a credit planning

  A credit planning is to set out procedures for defining and measuring the credit-

risk exposure within the Group and to assess the risk of losses associated with credit extended to customers, financial investments and counterparty risks with respect to derivative instruments. The main aspects of a credit planning are- 1) the terms and conditions on credit, 2) customer qualification criteria, 3) procedure for making collections, and 4) steps to be taken in case of customer delinquency.

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.

Do you think that all banks should give top priority in financing SME sector for creating employment, reduction of poverty and overall development of the country

 Small & Medium Enterprise (SME) plays a pivotal role in the economic growth and development of Bangladesh. Actually, SME works as the platform for job creation, income generation, and development of forward and backward industrial linkages and fulfillment of local social needs. SMEs occupy a unique position in the economy of Bangladesh. Mainly private sector development depends on them.

 In view of present economic development effort in Bangladesh the SME sector plays an important role.  These are reflected in the following performance

activities of this sector:

   SME contributions to value addition in manufacturing is in the range of 20 to 25 percent of GDP

     There are approximately six million SMEs, which include enterprises with up to 100 workers employing a total of 31 million people – equivalent to 40 per cent of the population of our country aged 15 years and above. Some private survey also found that the industrial structure of SMEs consisted of primarily wholesale,  retail  trade  and  repairs  (40  per  cent),  agricultural goods (22 per cent), services (15 per cent) and manufacturing (14 per cent).

     During the Fourth Five year plan, a total of 0.35 million jobs were created against the target of 0.4 million.

   SME sector help alleviate poverty, increase income level of rural people and promote agro-industrial linkage in Bangladesh.

     SME sector requires lower energy supply, lower infrastructure facilities and this sector imposes less environmental risk.

   They contribute towards better utilization of local resources and skills that might otherwise remain unutilized.

     Small  industries  being  labor  oriented  are  capable  of  generating  more employment.

     They are necessary to maintain and retain traditional skills and handicrafts.

   They are the only medium for diversification of rural economy and for peaceful  and  concurrent  socio-economic  development  of  all  classes  of people

 

To put it simply, SMEs are the heart of the industrial sector of the country, employs the bulk  of the working population and are owned  by Bangladeshi entrepreneurs.  They  provide  a  huge  range  of  goods  and  services  to  the Bangladeshi population, especially in the rural areas, alongside providing vital support in the production chain to large industries. From the above discussion, we can say that SMEs are playing an important role in our economy in various ways.

From the above discussion it is easier to say that as sme plays an important role for creating employment, reduction of poverty and overall development of the country all banks should give top priority in financing SME sector