Question

1. Explain four of the basic principles of lending.

2. List twelve elements that should be included in a banks credit policy.

Answer 1

01 Following are the four basic principle of lending:

1. The principle of diversification of risks
2. The principle of Safety & Source of repayment
3. The principle of Liquidity
4. The principle of Profitability.

02. Following are the Twelve Elements should be included in Banks Credit Policy:

1. Cash Discount: attracts new customers.
2. Credit Period: terms of credit period Might be the longer or shorter, shorter period helps to reduce the DSO
3. Collection Policy: it should be strong enough so that minimum bad debts should be arise.
4. Credit standard: Tight standard may help to reduce the bad debt expenses.
5. Credit Limit authority: How much credit should be allowed & should be depends on the level of income which will help to reduce the bad debts as well.
6. Credit Terms: Attractive credit terms may attracts new customers.
7. Clear Documentation: There should be proper set of requirement which should be standard to maintain the uniformity for all the customers.
8. Debtor review meetings: This is a cross-functional mechanism for reviewing accounts that are difficult to collect and should include sales and operations as well as finance
9. Account collection procedures: It should be followed by the credit team and the escalation process for accounts that are not collected according to term.
10. Customer information: This section should outline what you want to know about a customer before making a credit decision.
11. Reduction of the risk of bad debt: Bad Debt Level analysis, Method of reserve & provision should be followed.
12. Communication of Legal actions: Should be in a proper manner to avoid bad debts.