What is Credit Planning, discus the importance of credit planning in the lending operation of a bank

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

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.

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.