Credit management in banking simply refers to the process of monitoring and gathering payments from customers. A good credit management system decreases the amount of capital tied up with debtors and helps inefficient cash flow. Credit management practices help in executing a plan with sufficient management as these practices avoid the circumstances related to bad debts. To run a business for profit an entrepreneur needs to prepare and design new policies and procedures for credit management.
Principles of credit management-
Credit management plays a major role in banking. As well as bank is that source that lends capitals. So, the following are the principles, Banks follow for lending capital.
Banks lend money for a short period of time to avoid the chaos related to withdrawal by depositors as they can withdraw their funds anytime they want. Banks lend money to a borrower who produces enough security of assets that can be easily marketable and converted to cash in a short duration. To maintain liquidity, banks should always make investments in government securities and shares and debentures of reputed industrial houses.
Safety of the funds is another important function of lending. Safety here means that the loan seeker should be in a position to repay the loan and interest at regular durations of time without any fail. Unlike every other investment, bank investments are risk-prone. The intensity of risks differs as per the type of security that are securities of the central government, state, and other local bodies, securities of the industrial concern. The bank needs to check the reliability of the borrower.
While choosing an investment portfolio, a commercial bank should look for diversity. It should prefer investing in different types of securities. The principle of diversity is applicable to the progressing of loans to different types of firms, factories, industries, businesses. It should distribute its risks by lending loans to various trades and businesses in different parts of the country.
This is another essential principle of the investment policy of a bank. A bank should invest in those stocks and security which are highly stable in their costs. They should invest their funds in the shares of branded organizations where the probability of a decrease in their rate is less.
It should be the chief principle of investment. A bank should invest where it earns sufficient profits. It should invest in securities that have a fair and stable return on invested funds.
Banks help in creating money by lending it to borrowers and charging some interest on the amount. So, it is very important for the bank to follow the above-discussed principles. In the entire process, banks earn good profits. The above lending principle of banks also empowers the economy of the country and ultimately helps in raising the economic level of any country.