CREDIT ANALYSIS

Dr C SITHARAMAYYA

MEANING
It is an investigative frame work that permits the systematic and comprehensive assessment of an enterprises capacity and willingness to pay its financial obligations in a timely manner

CREDIT
It is a prime function of a bank/financial institution due to:
1. Regulatory prescriptions and 2. Need for profitable sustenance

NEED FOR CREDIT

1. On the demand side of the economy there are consumers of goods and services, who need credit
2. On the supply side of the economy, there are providers of such goods and services who also need credit

CLASSIFICATION OF CREDIT
1 Credit extended to the supply side of the economy can be termed as Commercial loan 2. Credit extended to the demand side of the economy can be termed as Individual loan

COMMERCIAL LOANS

1. To acquire fixed assets & 2. To run the business

INDIVIDUAL LOANS

1. Consumption and acquisition of durables 2. Housing finance

TYPES OF CREDIT
(FUND BASED)
1. TERM LOANS
2. CASH CREDIT 3. EXPORT CREDIT (for exports) 4. OVERDRAFT

TERM LOANS
ACQUISITION OF FIXED ASSETS (except land)

New enterprises Existing enterprises for expansion, modernization, diversification Sick and defunct enterprises for revival Joint ventures domestic and international

TERM LOANS contd

1.Term loans are referred to as Long term loans which are granted on the premise that the fixed assets acquired by such loan benefit the borrower over a long period
(exceeding at least one year)
2. They bear a prescribed interest rate, predetermined schedules for payment of interest and installments of principal

CASH CREDIT
The bank fixes a cash credit limit to a borrowers account permitting him/her to draw funds within that limit. This facility is mostly for the purposes of meeting the working capital requirements of an enterprise

EXPORT CREDIT
1. Pre shipment credit offered to an exporter by way of packing credit to enable him to finance purchase/import of raw materials, processing and packing of the goods meant for exports. 2. Post shipment credit offered to an exporter to finance export sales receivables after the date of shipment of goods till the date of realisation of export proceeds.

OVERDRAFT
Offered at the discretion of the bank against securities like shares, units of mutual funds, surrender value of LIC policies etc., and some times even on perceived worth of an individual

TYPES OF CREDIT
(NON FUND BASED)

1. Factoring: It is a financial service covering the financing and collection of accounts receivables in domestic as well as in international trade. It is an arrangement in which receivables on account of sale of goods or services are sold to the factor at a certain discount

TYPES OF CREDIT
(NON FUND BASED) contd..

2. Forfaiting: is a source of trade finance which enables exporters to get funds from the institution called forfaitee on transferring the right to recover the debts from the importer

TYPES OF CREDIT
(NON FUND BASED) contd..

3. Bill discounting: Seller of the goods draw a bill of exchange on the buyer (who accepts and returns the same to the drawer). Subsequently seller of the goods discounts the bill of exchange with bank or finance company and avail the finance accordingly.

TYPES OF CREDIT
(NON FUND BASED) contd..

4. Letter of Credit: It is a letter addressed by the buyers bank to the sellers bank stating that they would vouch for the buyer and that they would pay the seller in case the buyer defaults

TYPES OF CREDIT
(NON FUND BASED) contd..

Procedure in Letter of Credit: 1. The buyer and seller agree on terms & conditions of sale 2. The buyer approaches his bank for LC, to the extent of invoice price/delivered price 3. The buyers bank (Issuing bank) verifies and approves and sends LC to the sellers bank (Advising bank)

TYPES OF CREDIT
(NON FUND BASED) contd..

4. The advising bank accepts the LC and intimate the seller to that effect 5. The seller then dispatches the goods and hands over the invoice, transport documents etc., to the advising bank 6. The advising bank pays the seller and forward the documents to the issuing bank

TYPES OF CREDIT
(NON FUND BASED) contd..

7. The issuing bank debits the buyers account and releases the transport documents etc., to enable the buyer take delivery of the goods from the transporter
8.

The communication between the banks is through swift* code/e mail etc. *Society for Worldwide International Financial
Transactions

THANK YOU