Credit Policy

By Sanket Thakare

What is a Credit Policy?

a set of principles that a financial organization or business

uses in deciding who it will loan money to or give credit

What should Credit

Policy include?

Criteria
Criteria related to borrower
Criteria related to security
Criteria related to business
Criteria related to industry
Criteria related to diversification

Mandatory Requirements
Documents
Projections
Legal formalities
Credit Scores

It also includes
Terms and conditions
Authority hierarchy
Actions to be taken in case of default

Points to be considered
while formulation policy:
Economic Condition
Financial condition of lender
Industry trends
Other investment options
Competitors Strategy

Types of Credit Policy

Strict analysis of risk and strict collections
Strict analysis of risk and liberal collections
Liberal analysis of risk and vigorous collection effort
Liberal analysis of risk and liberal collections

Purpose of Policy

to define the objectives of credit extension in the context of corporate

strategy and organization structure

to define the authority and responsibilities for credit granting,

establishing and varying terms and the timing of collection actions

to provide documented procedures in relation to the above that can be

communicated to all staff

to specify training policy for credit staff

to specify performance targets and monitoring activities for credit staff

Advantages

Transparency in operations

Unbiased processing

Clear delegation of tasks and responsibilities

Faster processing

Thank You