Credit Analysis- Meaning Etc

8/4/2019 Credit Analysis- Meaning Etc

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CREDIT ANALYSISCREDIT ANALYSIS


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MEANINGMEANING

It is an investigative frame work that It is an investigative frame work that

permits the systematic and comprehensivepermits the systematic and comprehensive

assessment of an enterprise s capacity andassessment of an enterprise s capacity and

willingness to pay its financial obligations inwillingness to pay its financial obligations in

a timely mannera timely manner


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CR EDITCR EDIT

It is a prime function of a bank/financialIt is a prime function of a bank/financial

institution due to:institution due to:

1. Regulatory prescriptions and1. Regulatory prescriptions and

2. Need for profitable sustenance2. Need for profitable sustenance


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NEED FO R CR EDITNEED FO R CR EDIT

1. On the demand side of the economy1. On the demand side of the economy

there are consumers of goods andthere are consumers of goods andservices, who need credit services, who need credit

2. On the supply side of the economy,2. On the supply side of the economy,there are providers of such goods andthere are providers of such goods andservices who also need credit services who also need credit


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CL ASSIFI C ATION OF CR EDITCL ASSIFI C ATION OF CR EDIT

1 Credit extended to the supply side of the1 Credit extended to the supply side of theeconomy can be termed as Commercialeconomy can be termed as Commercial

loanloan

2. Credit extended to the demand side of 2. Credit extended to the demand side of the economy can be termed asthe economy can be termed as

Individual loan Individual loan


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C OMME RC IAL LOANSC OMME RC IAL LOANS

1. To acquire fixed assets &1. To acquire fixed assets &

2. To run the business2. To run the business


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INDIVIDUAL LOANSINDIVIDUAL LOANS

1. Consumption and acquisition of durables1. Consumption and acquisition of durables

2. Housing finance2. Housing finance


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TYPES OF CR EDITTYPES OF CR EDIT(FUND BASED)(FUND BASED)

1. TERM LOANS1. TERM LOANS

2. CASH CREDIT2. CASH CREDIT

3. EXPORT CREDIT (for exports)3. EXPORT CREDIT (for exports)

4. OVERDRAFT4. OVERDRAFT


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TE R M LOANSTE R M LOANS

ACQUISITION OF FIXED ASSETS ACQUISITION OF FIXED ASSETS (except land)(except land)

N ew enterprisesN ew enterprisesExisting enterprises for expansion, modernization,Existing enterprises for expansion, modernization,diversificationdiversificationSick and defunct enterprises for revivalSick and defunct enterprises for revival

Joint ventures Joint ventures domestic and internationaldomestic and international


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TE R M LOANS contdTE R M LOANS contd

1.Term loans are referred to as Long term1.Term loans are referred to as Long termloans which are granted on the premiseloans which are granted on the premise

that the fixed assets acquired by such loanthat the fixed assets acquired by such loanbenefit the borrower over a long periodbenefit the borrower over a long period(exceeding at least one year)(exceeding at least one year)

22.. They bear a prescribed interest rate,They bear a prescribed interest rate,predetermined schedules for payment of predetermined schedules for payment of interest and installments of principalinterest and installments of principal


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C ASH CR EDITC ASH CR EDIT

The bank fixes a cash credit limit to aThe bank fixes a cash credit limit to aborrower s account permitting him/her toborrower s account permitting him/her todraw funds within that limit.draw funds within that limit.

This facility is mostly for the purposes of This facility is mostly for the purposes of meeting the working capital requirementsmeeting the working capital requirementsof an enterpriseof an enterprise


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EXPO R T CR EDITEXPO R T CR EDIT

1.1. Pre shipment creditPre shipment credit offered to an exporteroffered to an exporterby way of packing credit to enable him toby way of packing credit to enable him tofinance purchase/import of raw materials,finance purchase/import of raw materials,processing and packing of the goods meant forprocessing and packing of the goods meant forexportsexports ..

2.2. Post shipment credit Post shipment credit offered to an exporter tooffered to an exporter tofinance export sales receivables after the datefinance export sales receivables after the dateof shipment of goods till the date of realisationof shipment of goods till the date of realisationof export proceeds.of export proceeds.


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OVE R DR AFTOVE R DR AFT

Offered at the discretion of the bankOffered at the discretion of the bank

against securities like shares, units of against securities like shares, units of mutual funds, surrender value of LICmutual funds, surrender value of LICpolicies etc., and some times even onpolicies etc., and some times even on

perceived worth of an individual perceived worth of an individual


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TYPES OF CR EDITTYPES OF CR EDIT(NON FUND BASED)(NON FUND BASED)

1.1. FactoringFactoring : It : It is a financial service

covering the financing and collection of accounts receivables in domestic as wellas in international trade. It is anarrangement in which receivables onaccount of sale of goods or services aresold to the factor at a certain discount


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TYPES OF CR EDITTYPES OF CR EDIT(NON FUND BASED) contd..(NON FUND BASED) contd..

2. Forfaiting : is a source of trade finance

which enables exporters to get fundsfrom the institution called forfaitee ontransferring the right to recover the

debts from the importer


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3.3. Bill discountingBill discounting : S: Seller of the goods draw

a bill of exchange on the buyer(who accepts and returns the same tothe drawer). Subsequently seller of the

goods discounts the bill of exchangewith bank or finance company and availthe finance accordingly.


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4.4. Letter of Credit:Letter of Credit: It is a letter addressedIt is a letter addressed

by the buyer s bank to the seller s bankby the buyer s bank to the seller s bankstating that they would vouch for thestating that they would vouch for thebuyer and that they would pay the sellerbuyer and that they would pay the sellerin case the buyer defaultsin case the buyer defaults


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Procedure in Letter of Credit:Procedure in Letter of Credit:1. The buyer and seller agree on terms &1. The buyer and seller agree on terms &

conditions of saleconditions of sale2. The buyer approaches his bank for LC, to2. The buyer approaches his bank for LC, to

the extent of invoice price/deliveredthe extent of invoice price/deliveredpriceprice

3. The buyer s bank (Issuing bank) verifies3. The buyer s bank (Issuing bank) verifiesand approves and sends LC to theand approves and sends LC to theseller s bank (Advising bank)seller s bank (Advising bank)


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4. The advising bank accepts the LC and4. The advising bank accepts the LC andintimate the seller to that effect intimate the seller to that effect

5. The seller then dispatches the goods and5. The seller then dispatches the goods andhands over the invoice, transport hands over the invoice, transport documents etc., to the advising bankdocuments etc., to the advising bank

6. The advising bank pays the seller and6. The advising bank pays the seller andforward the documents to the issuingforward the documents to the issuingbankbank


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7 . The issuing bank debits the buyer s7 . The issuing bank debits the buyer saccount and releases the transport account and releases the transport documents etc., to enable the buyer takedocuments etc., to enable the buyer takedelivery of the goods from the transporterdelivery of the goods from the transporter

8.8. The communication between the banks isThe communication between the banks is

through through swift swift ** code/e mail etc.code/e mail etc.**S S oci ety f or oci ety f or W W orldwid eorldwid e I I nte rnational nt e rnational F F inancial inancial T T ransactions ransactions

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Credit Analysis- Meaning Etc