Lending is one of the foremost business activities for any bank as it relies on the income earned on these loans to repay to its depositors and in the process earn some profit.
Credit Analysis also called credit appraisal along with due diligence is the most basic step involved in any lending decision. A Credit officer will consider a customers loan application and decide whether to sanction it or reject it as per the Credit policy of the bank. Every bank, NBFC or a financial institution involved in the business of lending will have a Credit Policy approved by its board of directors. This credit policy acts as a guiding document for the entire institution and its employees on the basis of which loans are sanctioned or rejected.
Banks will do proper due diligence and credit appraisal before deciding to lend money to any customer. Depending on the nature of loan, credit appraisal will vary. A Customer can approach the bank for a Personal loan, Home Loan, Vehicle loan, Education loan or a business loan.
In India as per IRAC norms (Income Recognition and Asset Classification) given by Reserve Bank of India if an EMI (Equated Monthly Installment) which includes principal and interest is not paid for consecutive 90 days then the account turns NPA (Non-performing asset). Once the account turns NPA bank can initiate recovery proceedings in the account as per the nature of account and securities available.
At times banks can offer settlement for the loan account, that means instead of borrower paying the entire loan amount including interest, the bank can willingly agree to take a lesser amount and close the account.
Most loans sanctioned by banks fall in two categories - secured and unsecured. In any loan which has any underlying security like a Home loan, Car Loan, Business loans falls under the category of Secured loans. Whereas Personal loans, clean overdrafts, Overdrafts against salary falls under the category of unsecured loans.
Comments