Unit 4: Granting Credit

4.1 Concept and nature of bank credit

The term bank credit refers to the amount of credit available to a business or individual from a
banking institution in the form of loans. Bank credit, therefore, is the total amount of money a
person or business can borrow from a bank or other financial institution. A borrower's bank credit
depends on their ability to repay any loans and the total amount of credit available to lend by
the banking institution. Types of bank credit include car loans, personal loans, and mortgages.

Bank credit consists of the total amount of combined funds that financial institutions advance to
individuals or businesses. It is an agreement between banks and borrowers where banks make
loans to borrowers. By extending credit, a bank essentially trusts borrowers to repay
the principal balance as well as interest at a later date. Whether someone is approved for credit
and how much they receive is based on the assessment of their creditworthiness.

Approval is determined by a borrower’s credit rating and income or other considerations. This
includes collateral, assets, or how much debt they already have.

Banks offer mortgage and auto loans to borrowers. These are secured forms of credit that use
the asset—the home or the vehicle—as collateral. Borrowers are required to make fixed
payments at regular intervals, usually monthly, bi-weekly, or monthly, using a fixed or variable
interest rate.

One example of business credit is a business line of credit (LOC). These credit facilities are
revolving loans granted to a company. They may be either secured or unsecured and give
corporations access to short-term capital. Credit limits are normally higher than those granted to
individual consumers because of the needs of businesses, their creditworthiness, and their ability
to repay. Business LOCs are normally subject to annual reviews.

Credit is the trust between two parties in which one party provides money or resources (called
lender) to another party, where second party (called borrower) has to pay it in future possibly
adding some amount called interest. The resources provided may be financial (e.g. granting
a loan), or they may consist of goods or services (e.g. consumer credit).

Depository institutions such as cooperatives or banks create the credit. They can create credit by
opening a deposit, every time they advance a loan. This is because every time a loan is
sanctioned, payment is made through cheques by the customers. All such payments are adjusted
through the clearing house or borrower indorses cheque to next that will again return money
throughout the banking system of an economy. In average as a loan is due, a deposit of that
amount remains outstanding in the books of the depositary institution. Thus every loan creates
a deposit.

Depositary institutions have the ability to expand their deposits as a multiple of their cash
reserves. Deposits of the depositary institutions serve as the medium of exchange; through this
the depositary institutions manage the payments system of the country. Multiple expansions of
deposits are called credit creation and the ability of the depositary institutions to expand the
deposits makes them unique, and distinguishes them from other non-depositary institution
financial institutions.

The whole structure of banking is based on credit. Credit means getting the purchasing
power (i.e., money) now by a promise to pay at some time in future. Credit is right to receive
payment or the obligation to make payment on demand or at some future tune on account of an
immediate transfer; credit or loan is the liability of the debtor and the asset of the depositary
institutions. Credit means depository institution loans and advances.

A depositary institution keeps a certain proportion of its deposits as minimum reserve for
meeting the demand of the depositors and lends out the remaining excess reserve to earn
income. Every depositary institution loan creates an equivalent deposit in the depositary
institution. Thus, credit creation means multiple expansions of depositary institution deposits.
Credit creation refers to the ability of the depositary institution to expand deposits as a multiple
of its reserves. Credit creation refers to the unique power of the depositary institutions to
multiply loans and advances, and hence deposits.
Bank credit is usually referred to as a loan given for business requirements or personal needs to
its customers, with or without a guarantee or collateral, with an expectation of earning periodic
interest on the loan amount. The principal amount is refunded at the end of loan tenure, which
is duly agreed and mentioned in the loan covenant.

Bank credit is given to borrowers on the fulfillment of the necessary documentation required by
the bank. Interest rates, terms of repayment are duly mentioned in the loan covenant.
Documentation to bank includes financial statements, income tax returns, projected financial
statements for three to five years, and changes based on the type of loan and from person to
person.

Characteristics of Bank Credit

 Borrower: Person who borrows money.

 Lender: The person who lends money is usually the bank.
 Rate of Interest: Rate of interest can be fixed or floating rate of interest. The floating rate
of interest is based on benchmark rates like LIBOR or MIBOR.
 Terms of Repayment: These are mentioned in the loan covenant and strictly adhered to
avoid the prepayment penalty.
 Mode of Loan: Normally given in cash but sometimes will be given in the form of raw
material, fixed assets.
4.2 Types of credit
A. Term loan

A term loan is a loan from financial institutions having an initial maturity of more than one year.
Term loan is a contract under which a borrower agrees to make a series of interest and principal
payments in an interval of specific period. Funds raised from term loan is typically used to finance
permanent working capital, to pay for fixed assets, or to discharge other loans.

A formal term loan agreement (contract) is signed between borrower and lender for the term
loan. The contract specifies terms and conditions such as the maturity period, payment date (or
repayment schedule), interest rate, restrictive provisions, collateral (if any) etc. Term loans have
some specific advantages over public offerings. It can be raised in relatively short period, because
term loans are negotiated directly between the lender and the borrower, and the documentation
is kept minimum.

In contrast, public offering of long-term securities involves lengthy process. Another advantage
of term loan is flexibility. Terms and conditions of term loan can be revised on by mutual
agreement between the lender and borrower. Moreover, term loan may have lower processing
costs. Firms can avoid flotation costs such as underwriting fee, commission, printing charges of
certificate, advertisement cost etc.

Characteristics of Term Loans

Term loan is one of the most popular long-term debt instruments. The term loan agreement
specifies the conditions and actions required by the borrower and lender. Important
specifications are principal amount, loan maturity, interest rate, repayment schedule, collateral
and covenants.

PRINCIPAL AMOUNT. Term loans have generally a fixed amount of principal at the time of signing
contract. However, amount of loan decreases gradually after payment of periodic installment
payment.

FIXED MATURITY. Term loans have a fixed maturity within which the entire loan must be repaid
along with the interest. It is their maturity that distinguishes long term loans from intermediate
and short-term loans.

INTEREST RATE. Interest rate is stated in term-loan contract. But lender may have right to adjust
the stated interest rate when market interest rate change.

DIRECT NEGOTIATION BETWEEN THE LENDER AND BORROWER. Term loans require direct
negotiation with the lender. Hence, financial intermediary is not required to obtain term loan.

TIE UP WITH COLLATERAL. Term loans require that the borrower provide collateral, which may
either be in form of current assets or fixed assets. The amount of the loan is normally lower than
the value of the collateral. This is because the lender maintains a margin of safety.
FIXED REPAYMENT SCHEDULE. Term loans have a fixed repayment schedule. The installments
payment may be monthly, quarterly, semiannually or even annually. The installment includes
both principal and interest.

RESTRICTIVE COVENANTS: The lender often adds restrictive covenants to the loan agreement in
order to make lending safer. These restrictive covenants are designed to prohibit the borrower
from engaging in any activities that would increase the likelihood of loss on the loan.

CLASSIFICATION OR TYPES OF TERM LOAN

There are three main classification found in Term Loans: short-term term loan, intermediate
term loan, and long-term term loan. Classification focusing its length of time for which money is
lent.

SHORT-TERM TERM LOAN

It is a single purpose loan, matures within one year mainly to cover unexpected cash shortages.
It helps to either protect a loss hence boost the cash flow or to make some good profit from the
utilization deal. In some occasions, it works as working capital in the production industry for
inventory purchase.

INTERMEDIATE TERM LOAN

A planned requirement with repayment period of 1 to 5 years becomes intermediate Term Loan.
Repayment can be either from profit generated from the loan amount or from different sources.
Purchasing a car may not bring direct profit but boost facility of business.

LONG-TERM TERM LOAN

Mortgage loans investing real estate and same sort of assets considered to be Long-term Term
Loan. The loan amount may or may not generate profit and repayment period will be over 5
years. Banks have less risk, secure loan disbursement due to its mortgage collateral.

SPECIAL COMMITMENT TERM LOAN

It gives a short period single use loan having less than one year repayment scheme. It is
considered to be an interim finance support from bank side to purchase or protect or recover
from an immediate crisis or needs. This loan purely depends on the relationship between
customer and banks and may not be available for every aspects.

Loan Repayment of Term Loan

Loan Amortization

When term loan is scheduled to be repaid in periodic installments, it is known as loan

amortization. These payments are scheduled based on the negotiation between the client and
the bank. Loan may require initial down payment. The client may ask to repay in equal periodic
installment, yearly equal principal repayment with monthly interest payment, only interest
payment with bullet principal repayment at the end of the loan period, or small periodic payment
and balloon payment at the end of the loan period. Some calculations can be done as follows

1. If loan is repaid in equal installment (PMT),

Loan amount (PV) = PMT (PVIFA k% n period)

𝑃𝑉 𝐿𝑜𝑎𝑛 𝐴𝑚𝑜𝑢𝑛𝑡 𝐿𝑜𝑎𝑛 𝐴𝑚𝑜𝑢𝑛𝑡

Or, PMT = = = 1
𝑃𝑉𝐼𝐹𝐴𝐾%𝑛𝑃𝑒𝑟𝑖𝑜𝑑 𝑃𝑉𝐼𝐹𝐴𝐾%𝑛𝑃𝑒𝑟𝑖𝑜𝑑 1−
(1+𝑘)𝑛
( )
𝑘

If loan is to be paid in advance:

𝑃𝑉
PMT = 1+𝑃𝑉𝐼𝐹𝐴𝐾%𝑛−1𝑃𝑒𝑟𝑖𝑜𝑑

2. If loan is repaid in small periodic payment and balloon payment at the end of the loan
period,

Loan amount (PV) = PMT *PVIFAk%n-1 period + B * PVIFk%n period

Where, B= Balloon Payment at the end of the loan period.

PMT= Installment Amount or Periodic Payment

PV= Present Value or Loan Amount

 k = Interest Rate; n = no of installment or maturity year

3. Simple Interest Calculation:

Interest Amount (I) = Loan Amount * Rate * Time
Total Interest Paid = PMT*n – Loan amount
B. Revolving loan

Revolving credit is a type of credit that does not have a fixed number of payments, in contrast
to installment credit. Credit cards are an example of revolving credit used by consumers.
Corporate revolving credit facilities are typically used to provide liquidity for a company's day-to-
day operations. It is an arrangement which allows for the loan amount to be withdrawn, repaid,
and redrawn again in any manner and any number of times, until the arrangement expires. Credit
card loans, overdrafts and the line of credit are revolving loans, also called evergreen loan.

A revolving loan facility is typically a variable line of credit used by public and private businesses.
The line is variable because the interest rate on the credit line can fluctuate. In other words, if
interest rates rise in the credit markets, a bank might increase the rate on a variable-rate loan.
The rate is often higher than rates charged on other loans and changes with the prime rate1 or
another market indicator. The financial institution typically charges a fee for extending the loan.

Criteria for approval of the loan depends on the stage, size, and industry in which the business
operates. The financial institution typically examines the company’s financial statements,
including the income statement, statement of cash flows, and balance sheet when deciding
whether the business can repay a debt. The odds of the loan getting approved increases if a
company can demonstrate steady income, strong cash reserves, and a good credit score. The
balance on a revolving loan facility may move between zero and the maximum approved value.

A revolving loan or line facility allows a business to borrow money as needed for funding working
capital needs and continuing operations. A revolving line is especially helpful during times of

1
The prime rate (prime) is the interest rate that commercial banks charge their most creditworthy customers,
generally large corporations. The prime interest rate, or prime lending rate, is largely determined by the interbank
overnight rate that banks use to lend to one another.
revenue fluctuations since bills and unexpected expenses can be paid by drawing from the loan.
Drawing against the loan brings down the available balance, whereas making payments on the
debt brings up the available balance.

The financial institution may review the revolving loan facility annually. If a company’s revenue
shrinks, the institution may decide to lower the maximum amount of the loan. Therefore, it is
important for the business owner to discuss the company’s circumstances with the financial
institution to avoid a reduction in or termination of the loan.

Features of a Revolving Credit Facility

Cash Sweep

The revolver is often structured with a cash sweep (or debt sweep) provision. It means that any
excess free cash flow generated by a company will be used by the bank to pay down the
outstanding debt of the revolver ahead of schedule.

Doing so forces the company to make repayment at a faster rate instead of distributing the cash
to its shareholders or investors. In addition, it minimizes the credit risk and liability that comes
from a company burning through its cash reserves for other purposes, such as making large,
excessive purchases.

Interest Expense

The borrower is charged interest based only on the withdrawal amount and not on the entire
credit line. The remaining portion of the revolver is always ready for use. This feature of built-in
flexibility and convenience is what gives the revolver its main advantage. As for its outstanding
balance, a business can have the option to pay the entire amount at once or simply make
minimum monthly payments.

The interest rate is usually close to the rate found on the company’s senior term debt. However,
it may be variable and is based on the bank’s prime rate plus a premium, with an additional
premium determined based on the company’s creditworthiness.

Maximum Amount
When a company experiences a shortfall in cash flows to meet financial obligations, it can be
corrected promptly by borrowing from a revolver. There is a maximum borrowing amount set by
the bank. However, the bank may review the revolver annually. If revenues of a business
drastically fall, the bank may lower the maximum amount of the revolver to protect it from
default risk.

Conversely, if a company has a good credit score, strong cash reserves, a steady and rising bottom
line, and is making regular, consistent payments on a revolver, the bank may agree to increase
the maximum limit.

Commitment Fee

To commence the revolving credit facility, a bank may charge a commitment fee. It compensates
the lender for keeping open access to a potential loan, where interest payments are only
activated when the revolver is drawn on. The actual fee can either be a flat fee or a fixed
percentage.

Reusability

This type of loan is named a revolver because once the outstanding amount is paid off, the
borrower can use it over and over again. It’s a revolving cycle of withdrawing, spending, and
repaying any number of times until the arrangement expires – the term of the revolver ends.

A revolving credit facility is different from an installment loan, where there are monthly fixed
payments over a set period. Once an installment loan is fully paid, you can’t use it again like the
revolver. The borrower must apply for a new installment loan.

Types of Revolving Credit

Line of Credit

A line of credit (LOC) is a preset borrowing limit that can be tapped into at any time. The borrower
can take money out as needed until the limit is reached, and as money is repaid, it can be
borrowed again in the case of an open line of credit.
A LOC is an arrangement between a bank and a client that establishes the maximum loan amount
the customer can borrow. The borrower can access funds from the line of credit at any time as
long as they do not exceed the maximum amount (or credit limit) set in the agreement.

 Personal line of credit: This provides access to funds that can be borrowed, repaid, and
borrowed again. Opening a personal line of credit requires a good credit history of no
defaults, and reliable income. Personal LOCs are used for emergencies, weddings and
other events, overdraft protection, travel and entertainment, and to help smooth out
bumps for those with irregular income.
 Home equity line of credit: HELOCs are the most common type of secured LOC. A HELOC
is secured by the market value of the home minus the amount owed, which becomes the
basis for determining the size of the line of credit. Typically, the credit limit is equal to
75% or 80% of the market value of the home, minus the balance owed on the mortgage.
 Demand line of credit: This type can be either secured or unsecured but is rarely used.
With a demand LOC, the lender can call the amount borrowed due at any time. Payback
(until the loan is called) can be interest-only or interest plus principal, depending on the
terms of the LOC. The borrower can spend up to the credit limit at any time.
 Securities-backed line of credit: This is a special secured-demand LOC, in which collateral
is provided by the borrower’s securities. Typically, this loan lets the investor borrow
anywhere from 50% to 95% of the value of assets in their account.
 Business line of credit: Businesses use these to borrow on an as-needed basis instead of
taking out a fixed loan. The financial institution extending the LOC evaluates the market
value, profitability, and risk taken on by the business and extends a line of credit based
on that evaluation. The LOC may be unsecured or secured, depending on the size of the
line of credit requested and the evaluation results. As with almost all LOCs, the interest
rate is variable.

Credit Card Loan

Credit card debt is a type of unsecured liability that is incurred through revolving credit card
loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts
with varying terms and credit limits. The majority of outstanding debt on a borrower’s credit
report is typically credit card debt, since these accounts are revolving and remain open
indefinitely.

Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments
are typically much lower than a standard non-revolving loan. Users also have the option to pay
off balances to avoid high-interest costs. Additionally, most credit cards come with reward
incentives such as cash back or points that can be used toward future purchases or even to pay
down outstanding balances.

Overdraft

An overdraft is an extension of credit from a lending institution that is granted when an account
reaches zero. The overdraft allows the account holder to continue withdrawing money even
when the account has no funds in it or has insufficient funds to cover the amount of the
withdrawal.

Basically, an overdraft means that the bank allows customers to borrow a set amount of money.
There is interest on the loan, and there is typically a fee per overdraft. With an overdraft account,
a bank is covering payments a customer has made that would otherwise be rejected, or in the
case of actual checks, would bounce and be returned without payment.

Overdraft involve providing temporary emergency funds when an account unexpectedly has
insufficient funds, it's important to weigh the costs. Overdraft protection often comes with a
significant fee and interest that if not paid off in a timely manner, can add an additional burden
to the account holder.

Charges of Line of Credit:

Interest Charge = Loan amount*Interest Rate*Used Ratio

Commitment Fee Charge = Loan amount*Commitment Fee Rate*Unused Ratio

𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝐹𝑒𝑒+𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐶ℎ𝑎𝑟𝑔𝑒

Effective Annual Rate = 𝑈𝑠𝑒𝑑 𝐹𝑢𝑛𝑑
 C. Corporate loan

Business loans are loans given to companies and other such entities to meet their day-to-day
expenses, fund their working capital requirements and expansion, etc. They are also called as
corporate loans. A couple of examples could include infrastructure finance, working capital
finance, term loans, letter of credit etc.

These loans are an excellent way for businesses to focus on their growth and generate more
revenue. Over the years, such loans have become popular in Nepal amongst business owners and
proprietorships as it helps them overcome short-term and long-term financial hurdles.

Corporate loans could be unsecured or secured in nature. Some businesses might require the
unsecured loan that is based solely on the creditworthiness of the business. Some businesses,
who have the requisite collateral to offer, might go for secured loans since the loan amount is
larger than an unsecured corporate loan.

Commercial loans are granted to a variety of business entities, usually to assist with short-term
funding needs for operational costs or for the purchase of equipment to facilitate the operating
process. In some instances, the loan may be extended to help the business meet more basic
operational needs, such as funding for payroll or to purchase supplies used in the production and
manufacturing process.

When the existing businesses or industrial houses need to generate funds or working capital,
they apply for a corporate loan. The fund made available through this loan is used for smooth
functioning and takes care of short-term as well as long-term expenses. For instance, it could be
used to meet the daily expenses, fund working capital, upgrade machinery and for any other
expansion related activities.

Corporate loans can either be secured or unsecured. Secured loans demand a business asset as
collateral as a part of security. In case of non-payment of loan, the lender can seize the asset to
claim the unpaid amount. If businesses apply for secured loans, they can benefit from a lower
rate of interest, higher borrowing limits and longer repayment terms compared to unsecured
loans.
Unsecured loans are generally given for immediate fund requirements by businesses. No form of
collateral or security is required by financial institutions. However, to avail unsecured loans,
business need to have high credit ratings.

Usage of a Corporate Loan

As mentioned earlier, corporate loans are offered to business entities & corporates. Some of the
reasons to avail a corporate loan are

To start a new venture: When the clients have an enterprising idea and would like to put it to
action, they require the capital to start it. One can approach a bank or an non-banking finance
company to apply for a Venture loan to start a new business enterprise.

Daily business needs: A firm or a business entity may need funds to meet the daily expensed of
their business. These funds might be required for smaller expenses like rent, utilities, salaries,
petty cash, etc.

Purchase of assets: When the business requires to purchase and install assets like building,
machinery and other equipment, they can apply for a corporate loan.

Procurement of raw materials: The business needs constant flow of capital to invest in new
opportunities. They will require to buy raw materials to start a fresh batch of production.
Corporate loans help you to avail quick cash while you are waiting for future payments or pending
invoices.

Types of Corporate Loans

These corporate loans are offered in various forms. Cash is not the only form in which loans are
offered. Let us have a look at the various forms of credit offered under corporate loans:

Term Loan: The funds obtained by term loan can be used for capital infusion, purchasing or
renovating the property, and buying new machinery or upgrading the technology. Term loan
interest rates may be fixed or floating and has a fixed repayment schedule.

Loan against Securities: If business houses have invested in financial securities like mutual funds,
insurance policies, bonds, demat shares, fixed maturity plans, and/or exchange-traded funds,
they can raise funds for their business by pledging securities. Tenure of loan against securities is
for lower period such as maximum of 12 months.

Letter of Credit Facility and Bank Guarantee: It is a type of credit facility, wherein the bank will
provide a letter to the seller guaranteeing that the business will be making the payment on time
for the expected amount. However, if the business are unable to pay for the purchase made, the
bank will cover the outstanding payment on certain conditions.

Cash Credit Facility: You can avail cash credit facility by pledging your business assets such as
receivables or inventory. The limit on cash credit withdrawal is usually 70% to 80% of the value
of pledged asset. This is the kind of revolving loan

Overdraft Facility: The facility of bank overdraft allows the business to debit your current account
below zero, up to a specified limit. The overdraft limit is predefined according to the securities
or collateral pledged. The interest is charged only on the amount utilized. However, the bank
reserves the right to ask to repay the amount at short notice.

Working Capital loans: This is the most basic form of corporate loan. This loan is availed to meet
the daily business needs. This loan can be availed either as a Cash Credit, Line of Credit or
Overdraft facility. This could be a Demand loan, or a Term loan based on the needs of the
borrower.

Line of Credit: This is a facility extended to creditworthy customers of the bank. A Line of Credit
establishes the maximum loan amount that can be used by the borrower. The borrower can then
draw on the line of credit at any time, making sure that they do not exceed the maximum limit
set. The borrower is charged interest only for the amount that he/she used.

Real Estate loans: This loan provides for acquiring or creation of real estate such as office
buildings, industrial or factory space, warehouses & cold storage units, retail spaces, hotels,
multiplexes, gymnasiums, amusement parks, etc.

Asset backed loans: This loan can be availed for creation of assets for business needs. The assets
can be for capacity expansion, modernization, adoption of latest technological processes, short
term working capital, etc.
Export financing: This is a pre-shipping financing extended to export companies. The loan amount
can be used for purchase of raw materials, packing, transportation and warehousing of goods
meant for export. This loan can be availed by submitting proof of the export order or a letter of
credit by the importer.

Equipment financing: This loan can be availed to procure necessary equipment to run the
business. It can used for procuring medical equipment like scanning machines, x-ray machines
etc; sewing machines for a textile factory, meat processing machines, grinding machines, and
other similar equipment.

Loan against future lease rentals: This loan is mainly sought out by property owners, who have a
substantial rental/lease income. They can avail loan against their forecasted rental/lease
receivables. However, the lessor should be reputed corporates or government entities.

Short-term loans: Business entities can avail various short-term loans to finance their immediate
business needs, while waiting for a much larger and permanent source of funding. These loans
are usually for smaller amounts and smaller periods of time. These loans have higher interest
rates compared to other corporate loans due to the high risk involved.

Subsidized Loan: The Nepal government provides an interest subsidies of 5% on the interest rate
determined by the banking and financial institutions by adding 2% on their base rates. Mostly in
preferential sectors such as agriculture, women and deprived community micro-enterprising
support, etc.

The list of corporate loans offered by banks and non-banking financial corporation is quite long.
Each institution has a customized set of loan products to suit individual needs. Above, we
discussed a few well-known corporate loan products by a few leading banks.

Corporate Loan Features

Secured vs. Unsecured Loans: One loan feature looks at how secure the loan is. In secured loans,
the borrower pledges their own assets (called collateral). If the borrower defaults on their loan,
indicating that they’re unable to pay their financial obligations, the lender can then use the
collateral as a payment for the borrower being unable to repay the loan. Secured loans usually
have a lower interest rate since they’re considered to be safer than unsecured loans since
collateral can offset the risk of default.

An unsecured loan is given to a borrower who is deemed to be creditworthy and does not require
the borrower to pledge assets for collateral. The interest rate offered is typically higher since the
risk is usually higher for the lender (if the borrower defaults, there are no assets being pledged
which can repay the lender).

Amortizing vs. Non-Amortizing: Another loan feature considers the payment structure of the
loan.

Amortizing: An amortizing loans, the principal payments are spread out over several periods,
which means the principal amount on the loan will decrease with time. The payments can be
equal to each period, which would be referred to as equal-amortizing, or they can differ in value.
The payment schedule is developed with the intention to have the loan paid off by a certain time.

An amortizing loan decreases the interest expense over the life of the loan since the principal
balance is decreasing, resulting in paying interest on a smaller loan amount.

Non-Amortizing: Non-amortizing loans require regular payments, but the payments do not
include the principal balance. The principal is paid in full at the end of the loan period. A non-
amortizing loan requires lower monthly payments since the principal is not included in the regular
payments. It results in the final payment being much larger since the principal hasn’t been paid
off.

Fixed-Rate vs. Variable-Rate (Floating): The type of interest rate applied to the loan is also
considered a loan feature. For fixed-rate loans, the interest rate stays the same and does not
fluctuate over the lifetime of the loan. In contrast, a variable-rate loan, also called a floating-rate
loan, follows a reference rate that fluctuates over time.

Fixed-Rate - Fixed-rate loans protect the borrower from rising interest rates since they won’t
adjust upward if the reference rate were to increase. In addition, fixed-rate loans are worse for
the borrower if the interest rate falls. For example, if the rate is 5% and the reference rate falls,
the borrower must continue to pay the 5% instead of the lower rate.
Variable-Rate (Floating) - A variable-rate loan protects the borrower from falling interest rates
because the loan rate will adjust downward with the reference rate. In contrast, this type of loan
is worse for the borrower if the interest rate rises since their loan payments will increase in value
(due to the reference rate increasing, resulting in a higher interest rate being paid).

Closed-end loan vs. open loan:

Open loans don't have any prepayment penalties while closed-end loans do. In other words, if
businesses try to make a payment other than the exact monthly payment, they'll be charged a
fee if it is a closed-end loan but not if it is an open loan. If loan is open loan the client may choose
to pay the loan off in one lump sum or even adjust their payment schedule, allowing flexibility
and freedom in repayment plan.

D. Consumer loan

Loans given to individual consumers are called consumer or retail loans. A consumer loan is a
loan given to consumers to finance specific types of expenditures. In other words, a consumer
loan is any type of loan made to a consumer by a creditor. The loan can be secured (backed by
the assets of the borrower) or unsecured (not backed by the assets of the borrower). Personal
loan, home loan, auto loan, student loan, gold loan, credit cards, loan against property etc., fall
under the category of consumer loans.

Consumer credit is personal debt taken on to purchase goods and services. A credit card is one
form of consumer credit. Although any type of personal loan could be labeled consumer credit,
the term is more often used to describe unsecured debt that is taken on to buy everyday goods
and services. However, consumer debt can also include collateralized consumer loans like
mortgage and car loans.

Consumer loans and credit are a form of financing that make it possible to purchase high-priced
items that the consumers can’t pay cash for today. Banks, credit unions and cooperatives are the
source for most consumer loans and credit. The loans and credit come in many forms, ranging
from something as simple as a credit card to more complex lending like mortgages, auto and
student loans.
Features of a Consumer Loan

Some key features of a consumer durable loan are as follows:

 May be secured or unsecured: Some consumer durable loans may require borrowers to
provide a collateral/security to avail a loan, whereas, others may be unsecured (not
backed up by any collateral/security). Secured consumer loans usually offer higher loan
amounts, longer repayment tenures and lower interest rates as compared to unsecured
consumer loans.
 Flexible loan amount: A consumer loan is available ranging from Rs 50,000 credit card
loan to up to Rs. 50 million home mortgage loan. However, the amount that a client is
eligible to avail depends upon the item being purchased, credibility, income level and
other factors deemed appropriate by the lender.
 Flexible tenure: Consumer loans generally have flexible repayment tenure from short run
less than one year to 25 years home mortgage loan.
 Minimal documentation: Usually minimal documentation is required to avail a consumer
loan. Some key documents that lenders generally require include photo identity proof
(such as Citizenship, PAN, etc.) income proof (such as Salary slip, tax filling, etc.) and
address proof.
 Quick disbursal: Consumer durable loans are disbursed almost instantly, once the loan
application is approved.

Types of Consumer Credit & Loans

Consumers can get a loan for just about anything they want to purchase, which tells them
approximately how many loan types there are available. Loan types vary because of interest rate
or repayment period. Here are some types of consumer loan illustrated below:

Secured Consumer Loan: Secured loans mean the borrower has put up collateral to back the
promise that the loan will be repaid. The borrower risks losing that collateral if he/she defaults
on the loan. Lenders offer lower interest rates on secured loans because they have the collateral
to fall back on. Homes, cars, boats and property are good examples of secured loans.
Unsecured Consumer Loans: Lenders offer unsecured consumer loans based on the amount of
risk both parties are willing to take. Unsecured loans have no collateral backing them. This means
there is nothing to repossess and sell if the borrower defaults. That puts more risk on the lender,
who seeks protection by charging a higher interest rate. Credit cards and personal loans are
examples of unsecured loans.

Debt Consolidation Loans: A consolidation loan is meant to simplify borrower finances by

combining multiple bills for credit cards, into a single debt, repaid with one monthly payment.
This means fewer payments each month and lower interest rates.

Personal Loans: The best thing about personal loans is they can be used for any reason. Secured
and unsecured personal loans are an attractive option for people with credit card debt, who want
to reduce their interest rates by transferring balances. Like other loans, the interest rate and
terms depend on clients’ credit history. The common personal loan term is around for 12-60
months that Collateral is required for secured loan and not required for unsecured loan.

Auto Loans: Auto loans are secured loans tied to the property. The loan can help consumer to
afford a vehicle, but they risk losing the car if they miss payments. This type of loan may be
distributed by a bank, credit union, cooperatives or by the car dealership firm. The clients should
understand that while loans from the dealership may be more convenient since, they often carry
higher interest rates than commercial banks.

Student Loans: Student loans are offered to college students and their families to help cover the
cost of higher education. There are two types of student loans: government student loans and
private student loans. Government funded loans are better, as they typically come with lower
interest rates and more borrower-friendly repayment terms.

Mortgage Loan: Mortgages are loans distributed by banks, credit unions and cooperative to allow
consumers to buy a home. A mortgage is tied to client’s home, meaning the clients risk
foreclosure if they fall behind on monthly payments. Mortgages have among the lowest interest
rates of all loans because they are considered secured loans. Though must of the loan are variable
rate loans, most home buyers prefer fixed-rate mortgages. Generally mortgage loan matures
from 15 and 30 years and with interest rate from 8 to 14% in Nepal.
Home Equity Loans: If clients have equity in their home – the house is worth more than they owe
on it – they can borrow against that equity to help pay for big projects. Home equity loans are
good for renovating the house, consolidating credit card debt, major medical bills, paying off
student loans and many other worthwhile projects.

HELOCs: Home equity lines of credit (HELOCs) use the borrower’s home as collateral, so interest
rates are considerably lower than what you pay on credit cards. The major difference between
home equity and HELOCs is that a home equity loan is a lump-sum payout; has a fixed interest
rate and regular monthly payments are expected. A HELOC is a line of credit for 15-30 years. It
has variable rates and offers a flexible payment schedule.

Balloon Mortgage Loans: A balloon mortgage loan is one in which the borrower has very low, or
no monthly payments for a short-time period, but then is required to pay off the balance in a
lump sum. This is an extremely high-risk loan. It could be structured so that the borrower pays
no interest or makes no payments for a short time period, but at the end of that time period,
must make a “balloon payment” that covers the accumulated amount of principal and interest.
The only reason to consider this would be if the clients intend to own a home for a very short
time period and expect to sell it quickly, or they hope to refinance the loan before the balloon
period expires.

Cash Advances: A cash advance is a short-term loan against your credit card. Instead of using the
credit card to make a purchase or pay for a service, you bring it to a bank or ATM and receive
cash to be used for whatever purpose you need. Cash advances also are available by writing a
check to payday lenders.

Against Gold Loans: This is a low interest loan similar to secured loans, but with far less risk. The
borrower offers some sort of property (jewelry, coin collection, gold collection, etc.) as collateral
for a loan. The bank provides the loan and sets the terms for repayment. If the borrower repays
the loan on time, the property is returned. If the loan is not repaid on time, the bank can sell the
item to recover the unpaid amount.

Borrowing from securities, retirement fund & life insurance: Those with retirement funds,
financial securities or life insurance plans may be eligible to borrow against their accounts. This
option has the benefit that the clients are borrowing from their own investment, making
repayment much easier and less stressful. However, in some cases, failing to repay such a loan
can result in severe tax consequences.

Line of Credit: Line of credit is also something that most people are familiar with because they
use credit cards. A line of credit is essentially a revolving debt, meaning clients can keep
borrowing money providing that they make payments.

4.3 Credit Cycle

4.3.1 Credit process

Banks deal with other people’s money. They lend the money which they borrow from the
depositors. Unless these deposits are prudently utilized banks are destined to incur losses. Banks
cannot effort to either keep the deposits idle in the vaults or lend the deposits and not recollect.
Hence, a proper lending policy must be in place. Here are 6 steps imply a depository institution
generally takes to complete its credit process cycle.

Step 1: Finding prospective loan customers

Most loans to individuals arise from a direct request from a customer who approaches a member
of the lender’s staff and asks to fill out a loan application. On the other hand, the business loan
request, often arise from contacts the loan officers and sales representatives make as they solicit
new accounts form firms operating in the lender’s market area.

Step 2: Evaluating a prospective customer’s character and sincerity of purpose

Once a customer decides to request a loan, an interview with a loan officer usually follows,
allowing the customer to explain his/her credit needs. That interview is particularly important
because it provides an opportunity for the loan officer to assess the customer’s character and
sincerity of purpose. If the customer appears to lack sincerity in acknowledging the need to
adhere to the terms of a loan, this must be recorded as a strong factor weighing against approval
to the loan request.

7C of Creditworthiness- A Prospective Borrower for a Depository Institution:

Creditworthiness is a measure of how deserving a loan applicant is to get a loan sanctioned in
her favor. In other words, it is an assessment of the likelihood that a borrower will default on
their debt obligations.

It is based upon factors, such as for their history of repayment and their credit score. Lending
Institutions also consider the availability of assets and extent of liabilities to determine the
probability of default.

C1 – Character: Responsibility, truthfulness, serious purpose, and serious intention to repay all
monies owed make-up what is called character. The loan officer must be convinced that the
customer has a well-defined purpose for requesting credit and a serious intention to repay. The
loan officer must determine if the purpose is consistent with the bank’s loan policy.

Even with a good purpose, however; the loan officer must determine that the borrower has a
responsible attitude toward using borrowed funds, is truthful in answering questions, and will
make every effort to repay what is owed.

C2 – Capacity: The loan officer must be sure that the customer has the authority to request a
loan and the legal standing to sign a binding loan agreement, this customer characteristic is
known as the capacity to borrow money. For example, in most areas a minor cannot legally be
held responsible for a credit agreement; thus, the lender would have great difficulty collecting
on such a loan. Similarly, the loan officer must be sure that the representative from a corporation
asking for credit has proper authority from the company’s board of directors to negotiate a loan
and sign a credit agreement binding the company.

C3 – Cash: Does the borrower have the ability to generate enough cash – in the form of flow – to
repay the loan? In an accounting sense, cash flow is defined as:

Cash flow = Net profits + Noncash expenses.

This is often called traditional cash flow and can be further broken down into Cash flow = Sales
revenues – Cost of goods sold – Selling, general, and administrative expenses- Taxes paid in cash
+ Noncash expenses.
The lender must determine if this volume of annual cash flow will be sufficient to comfortably
cover repayment of the loan as well as deal with any unexpected expenses. Loan officers should
look at the trend of growth, decline, constant, or variances in following five areas carefully when
lending money to business firms or other institutions.

 The level of and recent trends in sales revenue.

 The level of and recent changes in the cost of goods sold.
 The level of and recent trends in selling, general, and administrative expenses.
 Any tax payments made in cash.
 The level of and recent trends in noncash expenses.

4C – Capital: Capital represents the general financial position of the potential borrower’s firm
with special emphasis on tangible net worth and profitability, which indicates the ability to
generate funds continuously over time. The net worth figure in the business enterprise is the key
factor that governs the amount of credit that would be made available to the borrower.

5C – Collateral: In assessing the collateral aspect of a loan request, the loan officer must ask, does
the borrower possess adequate net worth or own enough quality assets to provide adequate
support for the loan. The loan officer is particularly sensitive to such features as the age,
condition, and degree of specialization of the borrower’s assets.

6C – Conditions: The loan officer and credit analyst must be aware of recent trends in the
borrower’s line of work or industry’ and how changing economic conditions might affect the loan.
A loan look very good on paper, only to have its value eroded by declining sales or income in a
recession or by high-interest rates occasioned by inflation.

7C – Control: The last factor in assessing a borrower’s creditworthiness status is control. This
factor centers on such questions as to whether changes in law and regulation could adversely
affect the borrower and whether the loan request meets the lender’s and the regulatory
authorities’ standards for loan quality.
Step-3: Making site visits and evaluating a prospective customer’s credit record

A loan officer often makes a site visit to assess the customer’s location and the condition of the
property and to ask clarifying questions. The loan officer” may contact other creditors who have
previously loaned money to this customer to see what their experience has been. The credit
information center provides the all relevant information of the loan applicants that if the
prospective client has any issue in previous loan outstanding from other financial institution. A
previous payment record often reveals much about the customer’s character, the sincerity of
purpose, and a sense of responsibility in making use of credit extended by a lending institution.

Step – 4: Evaluating a prospective customer’s financial condition

If all is favorable to this point, the customer is asked to submit several crucial documents the
lender needs to fully evaluate the loan request, including complete financial statements and, in
the case of a corporation, board of directors’ resolutions authorizing the negotiation of a loan
with the lender. Once all documents are on file, the lender’s credit analysis division conducts a
thorough financial analysis of the applicant, aimed at determining whether the customer has
sufficient cash flow and backup assets to repay the loan.

The credit analysis division then prepares a summary and recommendation, which goes to the
appropriate loan committee for approval. On large loans, members of the credit analysis division
may give an oral presentation and discussion will ensue between staff analysts and the loan
committee over the strong and weak points of a loan request.

Step – 5: Assessing possible loan collateral and signing the loan agreement

If the loan committee approves the customer’s request, the loan officer or the credit committee
will usually check on the property or other assets to be pledged as collateral to ensure that the
lending institution has immediate access to the collateral or can acquire title to the property
involved if the loan agreement has defaulted.
Once the loan officer and the loan committee are satisfied that both the loan and the proposed
collateral are sound, the note and other documents that make up a loan agreement are prepared
and signed by all parties to the agreement.

6. Monitoring compliance with the loan agreement and other customer service needs

The new agreement must be monitored continuously to ensure that the terms of the loan are
being followed and that all required payments of principal and interest being made as promised,
for larger commercial credits, the loan officer will visit the customer’s business periodically to
check on the firm’s progress and see what other services the customer may need.

Usually, a loan officer or other staff members enter information about a new loan customer in a
computer file known as a customer profile. This file shows what services the customer is currently
using and contains other information required by management to monitor a customer’s progress
and financial service needs.

4.3.2 Credit analysis and approval

Credit analysis is the process of evaluating an applicant’s loan request or a corporation’s debt
issue to determine the likelihood that the borrower will live up to his/her obligations. In other
words, credit analysis is the method by which one calculates the creditworthiness of an individual
or organization.

Credit analysis involves a wide variety of financial analysis techniques, including ratio and trend
analysis as well as the creation of projections and a detailed analysis of cash flows. Credit analysis
also includes an examination of collateral and other sources of repayment as well as a credit
history and management ability.

Analysts attempt to predict the probability that a borrower will default on its debts, and also the
severity of losses in the event of default. The 3 steps credit analysis is carried out during the credit
approval done by an institutional lender.

Step I: Information collection

  Collecting information about the applicant: The first step in credit analysis is to collect
information of the applicant regarding his/her record of loan repayment, character,
individual and organizational reputation, financial solvency, ability to utilize the load (if
granted), etc. The bank may inquire into the transaction record of the applicant with the
bank and other banks. The repayment history of loans previously granted may also reveal
useful information in this regard.
 Collecting information about the business for which loan is required: The loan officer
should know the purpose of the loan, the amount of the loan and if it is possible to
implement the project by that amount. The banker should make sure the project is
feasible. The project must have good potential and the applicant has a good plan to
execute the project.
 Collecting information about the recovery process: The loan officer should collect
information about the sources from which the borrower would repay the loan.
Information for this purpose may include the profitability of the project, the payback
period, the sensitivity of the project cash flow to different economic factors, etc.
 Collecting information about the security: Banks, most often than not, lend money
against personal and non-personal securities. A bank would always prefer getting the loan
repaid by the borrower to realizing the loan from the sale proceeds of the security.
However, should the borrower default in repaying the loan the lender will have to fall
back on the security? Hence, it is always advisable to know information like price stability,
etc. about the security before advancing the loan.
 Collecting additional information if necessary: When the loan under consideration is for
a large amount a bank may find it necessary to gather additional information like the
overall business activities in the economy, the probably political and economic condition
of the country, efficiency, and candidness of the management team, likely effect of local
and international competition on the project, etc.

Step II: The information analysis

  Analyzing the accuracy of information: The information given in and along with the
application is analyzed to judge their accuracy. In this regard, the analyst would scrutinize
the national identity card, driver’s license, trade license, partnership deed, corporate
charters, resolutions, and other legal documents attached to the application.
 Analyzing the financial ability of the applicant: In this stage, the financial ability of the
applicant is taken into consideration. The financial solvency of the applicant and his skill
and capability are important factors in this regard. The analyst works out different
financial ratios from the past and proforma income statements, balance sheets, cash flow
statements, and other financial statements of the applicant and analyzes them to reach
about a conclusion about the applicant’s financial ability.
 Analyzing the effectiveness of the project: One aspect of credit analysis is the analysis of
quality, purpose, and prospect of the project for which loan has been applied. The banker
will be at ease to grant loans if the project is productive, expandable, and of course
profitable. On the other hand, if the project is in a declining stage, is up against the intense
competition, or is confronted by adverse conditions the bank is likely to be reluctant to
grant any loan.
 Analyzing the possibility of loan repayment: The analyst looks at what effect the
proposed loan will have on increasing the liquidity and income of the applicant. The net
cash flow is a good indicator of the ability of the applicant to repay the loan along with
interest and other expenses within due time. An analyst may also interested to see the-
interest burden and fixed charge burden of the applicant.

Step III: Decision-making for the approval

Depending on the analysis the analyst identifies and measures the credit risk associated with a
loan application and determines whether the level of risk inherent is acceptable or not.

If the loan analyst provides the positive comments and views in strength and prospect of credit
application, the loan committee may approve the customer’s loan request. After that, the loan
officer or the credit committee will usually check on the property or other assets to be pledged
as collateral to ensure that the lending institution has immediate access to the collateral or can
acquire title to the property involved if the loan agreement has defaulted. Once the loan officer
and the loan committee are satisfied that both the loan and the proposed collateral are sound,
the note and other documents that make up a loan agreement are prepared and signed by all
parties to the agreement.

Step IV Credit Disbursement

The actual amount of loan disbursed may differ from the amount sanctioned as per the
agreement. The sanction letter is only an intimation from the lender that the borrower are
eligible for a particular loan, subject to certain conditions. However, the disbursal is based on
additional formalities that has to be fulfiled once the loan is sanctioned. The amount disbursed
will depend of the following factors:

 Type of loan
 Processing fee
 Upfront payments (if any)
 Service tax

The bank will send the borrower a confirmation letter after disbursal of the loan amount either
as an email or as a paper copy along with a welcome kit. The bank will also provide them an EMI
calendar and an amortization table that will help them calculate the principal to interest ratio for
their loan payments.

4.3.3 Eligibility and documentation

Corporate Loan

Every bank and financial institution has their own eligibility criteria for each type and nature of
the corporate Loan. Some of the basic criteria are as:

 As a loan applicant, the business shall be established business for at least some years or
new business also can get project financing through the bank with appropriate project
proposal.
  Business or enterprise should be in profit for last some years or seems to be potentially
profitable.
 The company should have maintained good credit history, along with a record of
successful business
 In case, the business has applied for a loan in the past, the bank will check the records
and repayment status before sanctioning the loan
 Applicant with no previous defaults with any financial institution
 Citizens/founders with no past criminal record.

Documents Required for Loan Application

 Business plan
 Duly filled application form with passport-sized photographs
 Business and applicant’s PAN card
 Identity proof – Passport, PAN card, Voter’s ID, Driving license
 Address proof – Electricity bill, Water Bill, national identity card, trade license, etc.
 Statement of Accounts from the bank
 Business Address and proofs
 Records and balance sheets of past some years
 Income Tax Certificate and Sales Tax Returns
 Company establishment certificate
 Registrations and Licenses
 Any other document required by the lender
 Company chartered documents
 Board resolutions and authorization
 KYC of owners, proprietors, major shareholders, directors, and chief officers.
 Proofs (original and copy both) of assets such as land registration, vehicle registration,
building permits, invoice and bills of assets, certificate of securities, etc. for the mortgage
collateral.
 Independent property valuator’s report of property valuation.
Personal/Consumer Loan

Personal or consumer loan is granted to either salaried employees or self-employee

professionals/individuals. The following are the some eligibility criteria for personal or consumer
loan.

For salaried employees, individual must be employed in a formal or informal sector with constant
income generating conditions. For example employee from public and private limited companies,
government sector employees including public sector undertakings, central and local bodies, etc.
The minimum age is mostly 21 years and maximum age of 60 years. Fore self-employed
professionals or individuals, the same criteria as salaried employees with the proof of consistent
earnings form their self-employment undertakings.

When applying for a personal loan, borrower needs to submit the following documents:

 KYC documents such as driving license, National Identity Card, and voter ID card along
with Address proof – Electricity bill, Water Bill, national identity card, trade license, etc.
 At least last 3 months’ salary slips (for salaried) or income proof (for self-employed)
 Last 6 months’ bank account statements of borrower’s salary account (for salaried) or
current account (for self-employed)
 Proof of Residence:- Leave and License Agreement/ Utility Bill (not more than 3 months
old) / Passport (any one).
 Proofs (original and copy both) of assets such as land registration, vehicle registration,
building permits, invoice and bills of assets, certificate of securities, etc. for the mortgage
collateral.
 Independent property valuator’s report of property valuation.
 Further note that depending on individual profile and bank’s policy at the time of loan
application, additional documents may be requested.
4.3.4 Credit appraisal

Credit appraisal basically refers to assessing a particular loan application or proposal in a

thorough manner in order to gauge the repayment ability of the loan applicant. Whether one
applies individually or as a corporate entity, a lender always conducts a detailed and systematic
credit appraisal process. The credit appraisal process before giving a loan to entities is
comprehensive in nature as it appraises or evaluates management, market, technical, and
financial elements.

It is absolutely important for a bank to carry out a credit appraisal process in order to ensure that
the borrower has the capacity to repay the entire loan amount on time without missing any
payment deadlines. This is very crucial for a bank as this determines the interest income and the
capital of the bank. The repayment behavior of a borrower directly affects the performance of
the bank.

Each lender will have its own techniques for performing credit appraisal processes. A lender will
have certain norms, rules, and standards to assess the creditworthiness of a particular loan
applicant. If a borrower has a high creditworthiness, there is high probability that his or her loan
application will be accepted by the bank. A credit appraisal is done to avoid the risk of default on
loans.

Assessing the Creditworthiness of Borrower

In the context of loans and credit, creditworthiness broadly refers to the financial character of a
particular individual. When a person applies for a loan, the lender will check this financial
character to get an idea of how the applicant treats his or her debts.

The lender will check the borrower’s credit history. This will comprise checking his or her
repayment behaviour, time taken to pay different equated monthly installments (EMIs), how a
borrower has treated his or her different debt obligations, etc.

Credit Score: In order to compute the creditworthiness of a borrower, a credit analysis needs to
be performed. Apart from checking the credit history of a borrower, a lender will also evaluate his
or her credit score. A credit score refers to a particular score that is given to a borrower depending
on his or her credit history. This score is provided by credit bureaus who will evaluate one’s full
repayment behaviour and give them a score. It will be based on credit reports created by credit
bureaus. Hence, if one is interested in applying for a personal loan, a car loan or any other loan,
he or she should make sure that their credit score is good. In India, the credit score of any loan
applicant should ideally be 750 and above. In India, CIBIL is the leading credit bureau that takes
 care of observing your credit behaviour and preparing a credit report with details of your credit
score. You can check your CIBIL report to get an idea of your credit history.

Factors Evaluated During a Credit Appraisal Process

A lender’s credit appraisal process will typically check and evaluate the following important
factors:

 Income
 Age
 Repayment ability
 Work experience
 Present and former loans
 Nature of employment
 Other monthly expenses
 Future liabilities
 Previous loan records
 Tax history
 Financing pattern
 Assets owned

Evaluating a Borrower through Credit Appraisal

A lender typically compares borrower’s loan amount, income, EMIs, repayment capacity, and
overall borrowers’ expenses in order to determine if you are eligible or not to get a personal loan
or any other loan. Generally, banks and NBFCs take a look at certain ratios in order to check your
loan eligibility. These are some of the ratios that are used in the credit appraisal process:

 Fixed obligation to income ratio (FOIR): This ratio refers to how one deals with his or her debts
and how often they repay their debts. It refers to the ratio of the loan obligations and other
expenses to the income that they earn on a monthly basis. The bank will assess if a certain
portion of your income is sufficient to manage your EMIs for the loan that you have applied for
and for your other liabilities. If the ratio is higher than the benchmark fixed by the lender, then
the lender may not accept the application.
 Installment to income ratio (IIR): This ratio considers the equated monthly installments (EMIs)
of your loan to the income that you earn. It will indicate the amount you will be required to
take from your income to pay your personal loan EMI.
 Loan to cost ratio: This ratio indicates the maximum amount that a particular borrower is
eligible to take. This will depend on the cost of the car if you are taking a car loan and on the
cost of the house if you are taking a home loan. For a personal loan, it will depend on your
personal requirement. Usually, the ratio will range from 50 to 70% of the cost of the car or 60
to 80% of the cost of house.
Finding out the loan eligibility of a loan applicant will assist a lender in fixing the loan amount
that needs to be offered to the applicant.

Documents for Bankability

Bankability is a very important aspect that is a part of credit appraisal. Bankability refers to what
will be accepted by a particular bank. A lender will assess if a loan given to a particular person
will result in future cash flow and profitability.

When a prospective borrower apply for a personal loan or any other loan from a bank, they will
be required to mandatorily furnish certain government-approved documents, reports, and other
documents in order to prove your income, age, and other aspects. These norms will vary from
lender to lender. While applying for their loan, the lender will specify the norms and borrower
will be required to follow them so that they can decide if the loan can be approved or not. Let us
take a look at some of the common norms that are set by lenders for the credit appraisal process:

Proof of income

In order to prove the monthly income or cash flows, prospective borrower will be required to
submit certain documents and they include:

 Most recent bank statements for 3 to 6 months

 Most recent salary slips
 Most recent Income Tax Return (for self-employed individuals)
 Audited financials for the previous 2 years

Proof of address

To prove the residential address, borrower will have to furnish any of the following documents:

 Leave and license agreement

 Latest electricity bills or utility bills
 Citizenship Certificate
 Driving license
 Passport

Proof of identity

To prove your identity and date of birth, you will be required to submit any one of the following
documents:

 Citizenship Certificate
 PAN card
 Voter ID
 Driving license
 Passport-size photographs

Proof of employment

To prove employment information, borrower will be required to give certain documents

regarding their employer or their own company (if self-employed):

 Letter from employer

 Offer letter or appointment letter provided by the employer
 Office address proof
 Employment certificate from present employer
 Certificate of experience or relieving letter from previous employer(s) to show the overall
work experience

Proof of creditworthiness

To prove creditworthiness, borrower can show their credit scores to the lender. This can be done
by submitting your Credit Information Center’s report or any credit proving report.

Proof of investment

If borrower have made any investment, they will be required to provide proofs. This can be done
by giving documents of investments such as fixed deposits, shares, mutual funds, fixed assets,
gold, etc.
 When the lender takes a look at income proof, age proof, and employment proof, the lender gets
an idea about overall profile and the bank can determine if the prospective borrower will be able
to repay the loan promptly without any financial struggles.

Credit Appraisal for Project Financing for Organizations

If a lender is approached by a company for project financing or a loan, then the lender will need
to consider financial, technical, commercial, market, and managerial aspects of the organization.

 Under credit appraisal, to evaluate financial aspects, the bank will have to check the
organization’s costs, expenses, and estimated revenues in order to understand if the company
will be able to repay the loan without any trouble.
 To assess technical aspects of a company, the bank will have to evaluate the nature of the
business and the industry or sector of the borrower. The lender will have to observe the
company’s raw materials, capital, labour, transportation, selling plans, etc.
 To evaluate the market of the borrower, the bank will have to evaluate its demand and supply.
If the demand-supply gap is high, then it is great news for the lender. This is because it indicates
that the company will enjoy good sales and hence, can repay the loan efficiently.
 The bank also needs to assess the managerial aspects of an organisation before giving a loan
to them. The bank should understand the goals, plans, and commitment of the company to the
particular project. The organisation’s management style and ways of handling subordinates
should be observed by the lender.
Banks will assess both financial and non-financial aspects in order to determine the borrower’s
creditworthiness while conducting the credit appraisal process.

The intensity of the credit appraisal will depend on the loan quantum and the purpose of the
loan. According to these aspects, the appraisal process can be simple or complex for both
individuals and entities.

4.3.5 Credit monitoring and supervision

Proper monitoring of credit in banks has greater significance in the effective management of
lending. Monitoring of the credit portfolio and individual accounts is essential in order to
maintain the quality of the credit portfolio of the bank in a sound condition. With the financing
of the different business unit, the banks have a stake in the business of the borrower therefore,
the banker would like to ensure smooth running of the business of the borrower with reasonable
growth.

The focus of the monitoring process is always to ensure the safety of funds lent and see that the
account is conducted as per the terms and conditions of the sanction. The bank has its credit
monitoring department to undertake the credit monitoring and supervision activities. Monitoring
function in a bank should be done in all the three stages: pre- disbursement, during disbursement
and post-disbursement phases of granting credit.

Monitoring –Pre Disbursement Stage

The pre-disbursement stage covers obtaining satisfactory credit reports from credit analyst and
loan committee, post-sanction but pre-disbursement inspection report, verification of the
security documents, inspecting collateral security/mortgage as per terms of the sanction,
obtaining letters of guarantee from the guarantors, if any. The other formalities such as vetting
of documents by legal experts and ensuring disbursement, etc. are required as the responsibility
of the monitoring department.

Monitoring – Disbursement Stage

During the disbursement, monitoring work should ensure the end-use of the funds by disbursing
the amount in the right manner. All disbursements should be related to actual/acceptable levels
of performance of the business unit and in line with the basic objective of safety of the banks’
exposure in the credit assets. The disbursement should be corresponding with the progress of
the project/business activities.

Monitoring –Post Disbursement Stage

Post-disbursement monitoring forms a substantial part of the monitoring function in a bank.

Actual performance of the borrowers should be monitored by collecting operational and financial
information in periodic basis. The actual activities and performance by the borrower need to be
compared with the projected performance given to the bank before granting the loans. Periodical
inspections and stock audit by the appropriate officials should be ensured. Timely collection and
analysis of the audited financials and review of the account, at least once in a year, is the most
integral part of post disbursement monitoring. Timely identification of accounts showing
symptoms of problems, and putting them under Watch Category for constant monitoring is
absolutely necessary.

4.3.6 Credit recovery

When a borrower is unable to repay a loan, the lending institution initiates a loan recovery
process. It may be through different methods as:

Through a Loan rescheduling

One of the main criteria that determines a loan recovery process is the reason for loan default.
In a situation where a borrower is financially responsible with a good credit score. But due to
unexpected circumstances (for eg. the COVID-19 pandemic), he has lost his business or job and
is unable to repay the loan.

In this situation, the lending institution may offer the borrower to extension of repayment tenure
which reduces the EMI amount or rescheduling the repayment through the loan renewal.
When to Restructure and Reschedule?
 When a customer submits written action plan along with required documents
 Bank should assure about he/she can repay the loan
 Should be enough collateral

Loan Recovery through time framing

If a borrower failed to repay loan and there is way for him or her to repay loan through
rescheduling, the bank may ask the borrower to pay from elsewhere for example through sale of
their assets. In this regard, bank may allow some time for example 2 months, to repay loan
though loan is not performing at the movement.

Loan Recovery through sell of collateral

If borrower don’t have the money, the lender can sell any assets listed on the loan documents as
security. Secured assets can be real estate, goods, a car or other property offered to secure the
loan. If borrower default, the lender can take the property and sell it to recover the debt through
auctioning property after completing the legal process. For this bank should follow following
norms:

 Borrowers must be notified first regarding the details of the recovery process

 The auction agent must also carry the authorization letter and copy of the bank’s notice
when meeting the defaulter.

 The bank must also ensure that borrowers’ grievances regarding the recovery process are
addressed appropriately

 Every loan defaulter have right to fair value of their assets and right to claim on the
balance

4.4 Credit administration

Loan administration duties shall include, but are not limited to: approving or disapproving loan
applications from participants, loan origination and closing, providing proper disclosures to
borrowers under applicable country’s lending laws and bank’s internal policy, notifying
participant borrowers of default, and collecting current and past due payments on such loans.
Loan administration fees are charged directly to the account balance of the participant
requesting the loan.

Components of Loan Administration Systems

Loan administration is a critical element for the safety and soundness of an institution. While the
sophistication of a loan administration system will depend on the size of the institution and the
complexity of its portfolio, there are some functions that should be integrated in all:

1. Accessibility of data for loan officers, managers and potentially external loan review personnel.
An adequate loan administration system will provide an organization with access to the hundreds
of thousands of documents that some banks have on file. The time it takes to produce these
documents is also important to consider.

2. Consistent and on-time communication. Responsibility for client correspondence is often split
between loan officers or other parties in the bank, so letters or emails sent to borrowers may
vary greatly. A sound loan administration system will coordinate communication across the bank
so that it is more consistent and timely.

3. On-demand reporting for exception, covenant and document tracking. Many banks and credit
unions must pull loan-related information from their core processing system and either combine
it with data from paper files or manipulate it in order to monitor the health of the loan. A loan
administration system that easily provides automated reports or that standardizes risk
ratings helps bankers perform loan reviews quickly. It’s also important to track these exceptions
in aggregate across the portfolio, as they point out holes in underwriting standards or compliance
problems. Automated reports can get this information into the hands of management and
examiners more quickly and efficiently.

4. Workflow. It has great importance to record the dates of client communications. If credit
administration is conducted manually, through paper files and notations, accountability might be
more difficult to enforce and timeliness might be more difficult to demonstrate.

5. Workflow to accommodate the institution’s underwriting policies and covenants. This offers
bankers not only flexibility to change the loan administration process, but also control or
consistency between loans. If a change in underwriting policy is made, the relevant ticklers can
be updated bank-wide to ensure that various loan officers are enforcing the change within any
given loan relationship.

6. Data security. Given the confidential nature of many loan documents, data in credit files can
contain the most sensitive of bank information. Institutions relying on paper files assume the
risks associated with physical damage and other unsecured access.

A management information system or web-based loan administration solution could address

these essentials and provide some added benefits. For example, a solution that bridges the core
processing system and underwriting system(s) can allow an institution to conduct post-closing
reviews and periodic checks more easily by developing ticklers and generating client emails,
letters or phone lists automatically. This can result in significant time-savings for loan officers.

4.5 Credit Security

Before advancing loans and advances a bank should make sure that it will get the loan back in
time. Since borrowers may default in repaying loans, borrowers need to deposit assets or give a
guarantee as a testimony of the assurance of repayment. This asset or guarantee is called the
security of credit.

Security is something of value given to a lender by a borrower to support his or her intention to
repay. In the case of a mortgage, the security is the property that the loan is being used to
purchase.

Oxford Dictionary of Finance and Banking defines security as “an asset or assets to which a lender
can have recourse if the borrower defaults on any loan repayments”.

Hence security is what the borrower puts up to guarantee repayment of the loan. It may include
tangible, intangible assets or even a personal guarantee.

Types of Bank Securities

Personal Guarantee:

Personal security refers to the guarantee given by the borrower or by a third party in the lead of
pledging a tangible asset.

Since advancing loan against personal guarantee is very risky banks rarely grant a loan against
such security unless the borrower has a special and long relationship with the bank.

The character, integrity, financial solvency, and social status are important factors that are looked
into before sanctioning of loan against personal security.

Features of Personal Guarantee:

Financial Ability: The banker must inquire into the financial condition of the guarantor. If the
guarantor does not have the financial solvency to repay the loan in case the principal debtor
defaults the existence of a guarantee will be futile.

Honesty: The ability of the guarantor to repay the loan is of use only if the guarantor also has the
willingness and integrity. So in addition to the financial solvency of the surety, his honesty is of
immense importance in case of personal guarantee.

Social status: The social status of the borrower and that of the guarantor must be ensured before
granting a loan. A person who holds esteemed kudos in the society is more likely to be conscious
about fulfilling his promises.

Non-personal Guarantee

Non-personal security refers to movable and immovable tangible properties against which loans
are granted. This type of security may include land, building, commodities etc.

Non-personal security is safer than personal security.

In case the borrower defaults a tangible property can be sold in the market to realize the unpaid
amount.

Non-personal security can be charged in the Conn of lien, pledge, mortgage, hypothecation, or
assignment.

Features of Non-personal Security

Acceptability: Asset accepted as security must be acceptable in the eyes of the law. Any asset
considered illegal to own or possess will put the bank in difficulty at the time of disposing of.

Marketability: The security must have a ready market. The bank has not taken the asset to keep
it in its possession for an indefinite period but rather to sell it in the market and realize the loan
amount. Hence, no matter how valuable the asset maybe it is of no use if it does not have a broad
market.

Liquidity: A security should be liquid which will enable the banker to sell the properly at a known
price as soon as the default occurs.
Ownership: Before accepting a security the banker must ensure the ownership of the property.
An asset which is not owned by the lender may render difficulty in getting the loan repaid.

Adequacy: The value of the security must be adequate to cover the full amount of the loan.
Moreover, a reasonable margin over the loan is to be maintained.

Stability of Price: Bankers are generally reluctant to accept the commodities the prices of which
are uncertain and fluctuate too widely and frequently.

Documentation: The banker should see that proper documents such as a mortgage deed or the
pledge agreement containing all terms and conditions of the mortgage or pledge are executed.
This should be done in order to avoid all future disputes.

Non-encumbrance: A property or asset which has already been charged against a prior loan from
some other lender should be avoided as a security. Because in that case, the banker will have a
secondary claim on that particular security.

Quality: If a commodity has been used as a security it should be of good quality. A commodity
which is perishable and may deteriorate in quality or quantity with the passage of time should
not be accepted as security.

Free from disabilities: A banker should disqualify securities crippled with certain disabilities like
partly paid up shares, life insurance policy without surrender value and so on. It should be seen
before accepting that the security is free from such disabilities.

Meld generating security: An asset which generates earnings during the period in which the loan
is outstanding is a better security than those which do not and are preferred by the bankers.’

Easy store ability and low maintenance cost: A security should not create a headache or be a
burden for the banker. It must be easy to store with low maintenance cost.

Security Valuation

A loan security valuation is a detailed report which allows banks (and other money lenders) to
make a better informed decision about whether a loan should be issued and how much they
could lend you safely.
It assesses the risks involved and whether the lender could realistically recoup the amount should
you default or be unable to repay the loan.

Set out clearly and concisely, each valuation includes the following information:

· Property location and inspection assessment

· SWOT analysis of property
· Condition and quality
· National and local market commentary
· Sector-specific market commentary for conditions in that area
· Supply/demand for your specific property type in that area
· Amount of income derived from property
· Whether tenants are reliable
· Whether property is sustainable over loan period
· Environmental matters - contamination, asbestos etc.
· Planning permissions in place which may affect future value
· Potential for alternative use
· Energy efficiency levels
· Value on the applicable valuation date
· Methodical reasoning in relation to valuation approach

4.6 Credit Valuation

Credit Valuation is the methodology and process of determination of an

appropriate asking interest rate for a loan product at the time of origination, execution and closer
by financial institution such as bank. The ask rate is considered to be the rate that gives the value
of the contract loan balance while discounting the expected cash flows generating in future by
the loan contract. Therefore, the bank should revise the loan rate and other applicable fees as
per the shift in the risk level of the particular loan.

A bank acquires funds through deposits, borrowings, antiquity recognizing the costs of each
source and the resulting average cost of funds to the bank. The funds are allocated to assets,
creating an asset mix of earning assets such as loans and non-earning assets such as banks
premises. The price that customers are charged for the use of an earning asset represents the
sum of the costs of the banks ’funds the administrative costs e.g salaries, compensation for non-
earning assets and other costs. The price/interest rate of a loan is determined by the true cost of
the loan to the bank base rate plus profit and risk premium for the bank’s services and acceptance
of risk.

The components of true cost of a loan are:

 Interest expense,
 Administrative cost, and
 Cost of capital

These three components add-up to the banks base-rate.

The primary risk of making a loan is repayment risk, which is the measurable possibility that a
borrower will not repay the obligation as an agreed.

A good lending decision is one that minimizes repayment risk. The prices a borrower must pay to
the bank for assessing and accepting this risk is called the risk premium.

Since past performance of a sector, industry or company is the strong indicator of future
performance, risk premiums are generally based on the historical quantifiable amount of losses
in that category.

Price of the loan (Interest Rate Charge) = Base Rate + Risk Premium

Loan pricing is not an exact science- get adjusted by various qualitative as well as qualitative
variables affecting demand for and supply of funds. These are several methods of calculating loan
prices.
A. Interest-Based Loans by traditional banks

Pricing method Characteristics

Fixed rate The loan is written at a fixed interest rate which is negotiated at an
origination. The rate remains fixed until maturity.

Variable rate The rate of interest changes basing on the minimum rate from time
to time depending on the demand for and supply of fund.

Prime rate Usually, relatively low rate offered to the highly honored clients for a
track record.

The rate for general This rate is applied for general borrowers’. This rate is usually higher
customer than the prime rate.

Caps and Floors For loans extended at variable rates, limits are placed on the extent
to which the rate may vary. A cap is an upper limit and a floor is the
lower limit.

Prime times This special rate is a number of times greater than the prime rate. If
the maturity of the loan is increased or decreased, this rate will also
be increased or decreased in a multiple.

Rates on another basis The interest rate can also be determined on the basis of the current
interest rate of debt instruments or the regional index of change of
interest/price.

This rate is similar to prime rate except that the base is different a
rate can be a bit lower or higher than the prime rate. Examples
include the regional index or other market interest rate such as the
CD rate.
B. Determining loan price without interest

Pricing method Characteristics

Compensating balances Deposit balances that a lender may require to be maintained

throughout the period of the loan. Balances are typically required
to be maintained on average rather than at a strict minimum.

Fees, charges etc. After sanctioning credit but before disbursing the amount to the
borrower, a charge is taken for this interim period. This charge
helps to prevent the loan taker from making unnecessary delay in
taking a loan.

4.7 Loan classification and provisioning

The bank loan can be classified into two types according to the overdue of the credit period. They
are –Performing Loan and Non-performing loan:

Performing Loan

1. Pass Loan

Condition of Pass Loan

 No overdue/overdue up to 1 month
 Loan against the fixed deposit (FD)
 Loan against government securities and Nepal Rastra Bank securities
 Loan against gold and silver up to 10 lakhs
2. Watch-list

Condition for watch list

 Overdue up to 3 months
 Extending the loan period without renewing the loan
 If the borrower has been listed in Non-performing loan in other B&FIs
  If the borrower paying interest and fee but his project is continuously bearing negative
cash flow for the last 2 years.
 If a single bank advances the loan of the amount of 1 Arab (100 Crore).
 If NRB list the borrower in watch list because his/her project does not fulfil the NRB
standard
Non- Performing Loan
A non-performing loan is a debt on which the borrower is late on making payments or is in danger
of missing payments. Loans where the borrower is 90 days late on payments are considered non-
performing, but any loan in default or near default may also be called non-performing.

1. Sub-standard
Non-performing loans not serviced for three to six months will have to be classified as 'Sub-
standard' loans.

2. Doubtful
Similarly, loans not service for six months to one year will have to be classified as 'Doubtful'
loan.
3. Loss
The 'Loss' loans are those whose interest and/or installment of principal has not been paid for
more than one year. Condition of Loss Loan:
 The market price of the collateral cannot secure the loans
 The debtor is bankrupt or has been declared to be bankrupt
 The debtor disappears or is not identified
 The loan is misused (used for a different purpose)
 A debtor who has been black-listed by the Credit Information Bureau (CIB).
 The project/business is not in a condition to be operated or project/business is not in
operation
  If the debtor submits a double financial statement2 of the specific period of time.
 The credit card loan is not written off within 90 days from the date of expiry of the
deadline.
Loan Loss Provision

Loan Classification Meaning Provision

Pass Loan Not overdue/Overdue up to 1 month 1%

Watchlist Overdue up to 3 month 5%

i.e 1-3 months

Sub-standard Overdue up to 6 months 25%

i.e 3-6 months

Doubtful Overdue up to 1 year 50%

i.e 6-12 months

Loss Overdue for more than 1 year 100%

Restructuring and Changes made in loan timing (credit period) 12.5 % for Pass Loan; 25% for
Rescheduling and terms and condition (other structure) substandard; 50% for doubtful
in between loan period 100% for loss

4.8 Credit risk and its management.

Credit Risk

Credit risk is the risk that a loan which has been granted by a bank will not be either partially or
fully repaid on time. The indicators of credit risk include the level of bad loans (Non- performing

2
Double Financial Statement – multiple financial statements of a single business. For example,
the financial statement presented to the Tax office is different from what it is submitted to the
bank.
loans), problem loans, or provision for loan losses. Credit risk exists in all activities where the
bank invests or loans funds with the expectation of repayment.

Credit risk affects the health of the bank’s loan portfolio, which may affect depositary institution
liquidity performance. The more the commercial bank are exposed to high-risk loans, the higher
the accumulation of unpaid loans and the lower the liquidity will be resulted. It will also impact
on the profitability, long term capital bases, and so many other aspects of the bank management.

According to Basel Committee on Banking Supervision, credit risk is defined as the potential that
a bank borrower or counterparty is failed to meet its obligations in accordance with agreed terms.
Effective management of credit risk is a critical component of a comprehensive approach to risk
management and essential to the long-term success of any depositary organization.

Credit Risk Management

Credit risk has always been a primary concern for financial services institutions. The goal of credit
risk management is to maximize a depositary institution’s risk-adjusted rate of return by
maintaining credit risk exposure within acceptable parameters. Sound credit risk management
entails critical assessment of credit risk and control, structural credit delivery process, effective
monitoring / supervision system, and oversight mechanism in respect of credit limits,
classification and provisioning of credits. Some of the credit risk management ingredients can be
illustrated as:

Institutional Framework: Credit risk management in a bank starts with the establishment of
sound lending principles, and an efficient framework for managing the risk. Policies, industry
specific standards, and guidelines, together with risk concentration limits are designed under the
supervision of risk management committee. Sound credit risk management involves prudently
managing the risk/reward relationship and controlling and minimizing credit risks across a variety
of dimensions, such as quality, concentration, currency, maturity, security and type of credit
facility. Credit risk management is the establishment of a framework that defines corporate
priorities, loan approval process, and credit risk rating system; risk adjusted pricing system, loan-
review mechanism and comprehensive reporting system.
Credit Rating: Credit ratings provide an estimate of the creditworthiness of a borrower, and are
generally a reflection on a borrower’s ability to repay loans and interests. In addition to the
standard ratings provided by credit-rating agencies, depositary institutions often also make use
of internal ratings that they calculate themselves. Each depositary institution should have its own
unique methodology for calculating internal ratings of credit accounts, borrowers and complex
loan products.

Credit Insurance: Credit insurance coverage protects bank from non-payment of commercial
credit. It makes sure that outstanding debts will be paid and allows banks to reliably manage the
commercial risks especially for the sectorial loan provided to the preferential area as per the NRB
guidelines.

Credit Risk Transfer: The credit risk transfer instruments became a vital way to transfer credit
risk for large organizations and improve the diversification of risk in the financial markets. The
use of credit transfer activities such as credit derivatives and securitization have increased for the
purpose of credit risk transfer to the market which is called hedging.

Credit portfolio model: Credit portfolio models differentiate credit risk based on different
parameters such as industry, geography, credit grade, etc. A numerical simulation is run to
generate a large number of scenarios, simulating various states of the economy and the resulting
impact of each on the credit portfolio value.

Exposure limit: Every firm monitors their exposure to a number of entities and categories such
as counterparties, bond issuers, issuer type, product type, etc. This is done to ensure risk
diversification so that the firm is not overexposed to any one entity, and in the case of a negative
market event, has only limited losses. In some markets these limits are regulatory requirements
for certain types of financial firms and their exposures must be reported.

Stress testing: Stress testing is done to overcome some of the drawbacks of risk mitigating
models that are overly dependent on historical data, and to test the specific risk parameters
Stress testing is now a regulatory requirement in certain countries since it helps ensure that
companies maintain adequate capital levels. A bank stress test is an analysis conducted under
hypothetical scenarios designed to determine whether a bank has enough capital to withstand a
negative economic shock. These scenarios include unfavorable situations, such as a deep
recession or a financial market crash.

4.9 Credit marketing

Marketing scope in a bank is considered under the framework of service marketing. Bank
marketing does not only include service selling of the bank but also is the function which
gets personality and image for bank on its customers’ mind. Credit marketing is the process of
designing and executing the strategies that creates wholesale and retail credit supply to the
prospective clients. It may be develop and oversee marketing campaigns to promote products
and services this may oversee many aspects of a campaign throughout the entire lifespan of a
product, service or idea. For credit marketing following 6Ps analysis and execution shall be done
by a perspective depository institution:

P1-Product

‘Product' satisfies the needs and wants of customers. Banks offers variety of the credit product
targeting different market niche and increasing costumer aspirations such as home loan, credit
card loan, auto loan, education loan, hire purchase loan, commercial loan, agriculture loan, small
and medium business loan, micro credit facilities, line of credit, revolving funds, overdraft
facilities, etc. Bank also designs the credit products targeting different market segments such as
employee, retired population, women and housewife, children, corporate houses, trust
organization, small and medium enterprises, etc.

P2-Price

The ‘price' of the credit product is fixed in the form of interest, service charges and other fees to
cover transaction costs, overheads, risk premium and to generate a reasonable surplus for the
bank. Moreover, other relevant charges such as compensating balance requirement, fixed rate,
variable rate, prime rate, caps and floors, fees, charges etc. These charges should be competitive
and reliable as per the market trends and costumers aspirations.

P3-Promotion
Promotion includes all publicity vehicles that aim at customer information, education and image
building. Moreover, it also implies the distribution channel to reach the customer's place:
Implementing the most effective strategy in order to get the most out of any marketing
campaign. What segment of the population should we address? Which instrument should we use
to get our message out? For ex: telephones, radio, TV, social media, digital media, etc. The
promotion includes advertising - television, radio, movies, theatres, etc.; print media- hoardings,
newspaper, magazines; publicity- stalls in commercial area, road shows, corporate houses visits,
sponsorship; sales promotion- gifts, discount and commission, incentives, etc.; personal selling-
cross-sale (selling at competitors place), personalized service, etc. targeting the appropriate
market niche. Marketing communications is therefore critical as an information and knowledge
dissemination tool.

P4-Place

The ‘place' of a bank branch play a significant impact for disbursement of loan. Suitable location
and convenience determine the choice of a bank by a customer. A bulk of the banking business
for any branch comes from its immediate neighborhood. Therefore convenience branch location,
ATMs, service centers, etc. also have impact on choice of quality borrowers. Moreover, client will
also evaluate the service as per their comfort zone with the service during and after consumption.
The conditions such as lighting, temperature, noise and colour, etc. inside and outside of bank
office also create favorable perceptions among customers. Moreover, this will help in branding,
market positioning, etc. for the bank.

P5- People

One of the most important features of customer care is the “feel good factor”. For the ‘people'
factor in marketing a bank service, a team of motivated and dedicated staff with positive
attitudes in favor of business development and offering high service quality will make the bank
the most preferred one for the customers. This includes mostly the behaviors of the branch
manager, front line officers, and bank employees toward the visiting costumer in the bank.

P6-Process
The role of ‘processes' in providing banking services is very crucial therefore operational systems
and procedures are viewed as vehicles for the delivery of customer satisfaction. “Hence, banks
keep on refining or reinventing or re-engineering their systems and procedures to keep managing
customers' ever increasing expectations.

Relevant Websites for the Credit Management:

 Credit Information Bureau of Nepal: https://cibnepal.org.np/
 Deposit and Credit Guarantee Fund: http://dcgf.gov.np/
 Debt Recovery Tribunal: https://drtribunal.gov.np/