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Credit Control Part A — Transcript

by NPTEL-NOC IITM · 3,270 words · 497 segments · language en · Watch on YouTube

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0:21Welcome, welcome to banking and finance
0:24loss course. This is the fourth week.
0:27This week we are discussing Reserve Bank
0:29of India and other banks powers and
0:32functions.
0:33This is the 17th session. We will
0:36discuss about credit control in this
0:39session as part of Reso Bank of India's
0:42powers and functions and other banks
0:45powers and functions. We have already
0:47discussed about Reserve Bank of India's
0:50establishment and the note issue power
0:53in the previous class and in this class
0:56we will specifically discuss about
0:58credit control measures.
1:01Now what is meant by credit control? We
1:04can understand this is called selective
1:06credit control. In a way, credit control
1:09means who should get credit, who where
1:12the access should come from, how much
1:15money they should get, from which
1:17sources they should get, how much, what
1:20time, when, whom of credit access and
1:23credit facilities and credit
1:25institutions. the measures to all of
1:28this. This this is very crucial for
1:31national development because you should
1:33have a vision where the money should go
1:35to which direction to whom. Say for
1:38example the government policy says that
1:41we have demographic advantage and our
1:43students should have higher education
1:46opportunities. Then the higher education
1:49loans should be available in the market
1:51so that these people can reach there. So
1:54your national growth is aligned with
1:57your national policies and the credit
2:00measures accordingly. Suppose Indian
2:03government want to encourage sugar
2:06industry so that there are export
2:08opportunities. Then people who want to
2:10start sugar industry must get the access
2:13to the credit. So you should have
2:15certain percentage of credit going to
2:17those sectors. So the national
2:19government's plan of growth plans or
2:23five-year plans or national development
2:26plans and the credit access should
2:28match. This is one and secondly national
2:32development requires providing access to
2:34entrepreneurs to a students to all
2:38sectors maybe real estate maybe agro
2:42related products or maybe agro tech
2:44industries or anything whatever is the
2:47requirement we should channelize our
2:50credit to that sectors and also ensure
2:52that those sectors and nation develops
2:55in the trajectory of the vision that we
2:59have aligned or designed for ourselves.
3:02So for this we need certain measures and
3:05these measures should come from the
3:07central government or from the Reserve
3:09Bank of India or from other regulators
3:11wherever they are required. So we will
3:14learn about these credit control
3:16measures. These credit control measures
3:19can be broadly divided into quantitative
3:22measures and qualitative measures.
3:25Qualitative measures are the measures
3:27which ensure that the credit goes to the
3:30sectors they want. Credit is repaid to
3:33the people paid given to the people who
3:35are genuine. Credit is given to the not
3:39given to any kind of fraudulent
3:41activities. All these kind of things
3:43come under qualitative measures and
3:46quantitative measures are the quantum of
3:49money where to whom it should go how it
3:52should happen. These are called
3:54quantitative measures. So let us
3:56understand qualitative measures of
3:59credit control and the quantitative
4:01measures of credit control. Let us first
4:04look at what all are the qualitative
4:06measures. Priority sector lending
4:10know your customer norms which are
4:13called KYC norms. Non-performing assets
4:16and willful defaulters monitoring.
4:19Credit rating, central registry, credit
4:23score. These are some of the qualitative
4:26measures. Let us understand each one of
4:28them in detail. Now, what is a
4:31non-performing asset? So, the banks
4:34should know that who are the people who
4:36are not repaying the loans properly. So
4:39when the asset of the bank that is a
4:41loan given by a bank is its asset is not
4:44repaid as per the schedule by the
4:46borrower it is classified as a
4:48non-performing asset because that asset
4:50is not performing well to the banker.
4:53Now this non-performing asset
4:55classification will be done not just by
4:57the bank as as it likes. It has to be
5:01done in accordance with the directions
5:03or the guidelines given by the RBI from
5:06time to time. this like say for example
5:09if a loan remained unpaid for 90 days it
5:12could be an non-performing asset or if a
5:15loan remained unpaid for 180 days it
5:18could be a non-performing asset
5:19depending upon how the Reserve Bank of
5:22India categorizes it there are also
5:24further categories like substandard
5:26asset loss asset like that if it is like
5:30if the non-performing asset continues
5:32for over further period it can be
5:34further categorized as doubtful full
5:37substandard or loss asset like that. So
5:40in a way when the loans are not repaid
5:42properly they are called non-performing
5:44assets. Once an asset is classified as a
5:47non-performing asset only then only
5:50banks can file cases or enforce security
5:53interest to recover and banks have to
5:55carefully monitor this like who are the
5:58people who are not repaying properly.
6:00They should not be given loans again.
6:03Their loans should be recovered
6:04immediately. Immediately you should
6:06identify the defaulter and take
6:08measures. These are important to ensure
6:11that the credit is not freezed and gone
6:14into the hands of the people who are not
6:17repaying. So there could be legislative
6:19measures to recover and there could be
6:21other measures to the RBI directives
6:24like enforcement of security interest.
6:26These are the measures to address the
6:28non-performing assets.
6:31We will understand recovery law in
6:33greater depth in the next uh week. For
6:37the time being, let us understand that
6:39non-performing assets are a danger to
6:41the banking or the other financial
6:44institutions and they have to be
6:45recovered and measures have to be taken
6:47to recover and to ensure that the NPS
6:50are at the very lower level. Now know
6:53your customer norms. Now what is meant
6:57by know your customer? Know your
7:00customer norms means generally the RBI
7:04gives again guidelines, directives or
7:06notifications from time to time to help
7:09the banks to understand the risks they
7:12are going to face from their customers.
7:14Sometimes you don't know whom you are
7:16financing and the person may use it for
7:19terrorism or the money may be used for
7:21fraudulent activities or for drugs,
7:25illegal activities or money laundering.
7:27So there are multiple uses with the
7:30finances which are not wanted by the
7:33nation. So where the banking operations
7:36must be ensured that they are not
7:39helping these kind of illegal
7:41activities. So how do we prevent this
7:44kind of thing? So there is a qualitative
7:46measure that is required to ensure whom
7:49you are giving the loan to and to ensure
7:52where they are using this. For this you
7:54need to understand who is the customer
7:56with whom you are giving loan. So you
7:59have to try to take his Aadhaar number
8:02his PAN card and see how his
8:05transactions are and if you have any
8:07doubts verify with the income tax
8:09authorities how the this particular PAN
8:12account is using his uh money like that.
8:16Similarly, what is his address? Where
8:19does he stay? Like if you have any
8:21doubt, you can share this with the
8:23police or other enforcing agencies to
8:25verify the authenticity of that utility
8:28bills, take his photograph. So all these
8:31are the measures to ensure that your
8:34customer is a genuine customer and you
8:37are not giving that person the person
8:40who is not entitled to receive these
8:42loans. You should not give them. So
8:44these are some of the measures that
8:46should be taken to understand your
8:48customer and the nature of his
8:51transactions.
8:53Now central registry central registry is
8:57the registry which is established under
9:00the surface act 2002 securitization and
9:04reconstruction of financial assets and
9:07enforcement of security interest act. In
9:10short we will call it as surfacey act.
9:12Now this surface act provided for
9:15something known as central registry.
9:18Under central registry whenever a
9:20security interest is created by one bank
9:23it will get registered with the central
9:25registry. Similarly if a securitization
9:28transaction is done by a banker it will
9:31get registered. Similarly when any asset
9:34reconstruction measure is taken or when
9:36the loan is repaid also it gets
9:39registered with the central registry.
9:41That means creation of security interest
9:44and satisfaction of security interest,
9:46creation of securitization
9:48or asset reconstruction measures.
9:50Everything is registered with the
9:52central registry. Now what happens is
9:55when you register a transaction with the
9:58central registry, it creates a
10:00centralized database and the
10:02registration with central registry is
10:04deemed public notice. Now how does this
10:08help a banker? Now let me tell you one
10:11borrower came to me and asked for 10 cr
10:14loan and he is asking that he can repay
10:17that loan but he is showing me some
10:20property that he will give it to me. If
10:23I go to central registry I can verify
10:26whether this person already has other
10:28loans or whether this property is
10:31already mortgaged for some other loan.
10:34So I get the information immediately on
10:37payment of fees. Everybody can access
10:40the central registry's documents. So
10:42they are available for public to verify.
10:45So it is deemed public notice. So a
10:48banker when he is giving new loan has to
10:50verify whether this person whether this
10:53borrower or whether this property is
10:55already mortgage what are the other
10:58obligations of this borrower? whether
11:00this borrower can actually repay the
11:03loan what he has promised and it also
11:05creates a centralized database not only
11:08with one other bank he has loan if he
11:10has loans with other banks or other
11:13financial institutions all that will get
11:16known to the banker who is wanting to
11:19give loan even a prospective guaranter
11:21can go and verify with the central
11:23registry whether this is there and there
11:26is also an opportunity for the other
11:29registration ations also to get
11:31centralized with this registry. Suppose
11:34you register your property somewhere in
11:37Bopal or Hyderabad. Now that property
11:40registration if the state government so
11:42desires can also align with the central
11:44registry. So if it is aligned with that
11:47central registry, state government will
11:49notify. So a banker will know if a
11:51property is registered in this
11:53particular city whether that registry
11:56actually is there and that property is
11:59actually being registered and is that
12:01the same property given in Martage. So
12:04in a way there is a complete database.
12:08So the creditors are more assured that
12:11their property will be recovered and
12:14they get to know the borrowers's
12:16capacity to repay. they get to know
12:18whether the same property is already
12:20mortgage and if so with whom what is the
12:23value of that property. So everything is
12:26available with the central registry and
12:28it is for the bankers to use that
12:31particular registry facility to ensure
12:33that there is no fraudulently giving
12:36loans again and again or the same person
12:38trying to cheat the bankers or the
12:41financial institutions. So this is a
12:43very good facility available now. Now
12:47credit score is a score calculated by
12:50licensed credit bureaus. Some of them
12:53like very popular civil equifax India
12:56etc etc. There are many more. These can
12:59be used by the bankers or other
13:01financial institutions to determine the
13:04creditworthiness of a prospective
13:06borrower or borrowers. How does this
13:09creditworthiness depicted? There will be
13:11a score given to you. Say for example I
13:14am a borrower. Now what is my credit
13:17score? The civil will tell me say my
13:19credit score is 800. That means loan
13:22given to me is less risky because I have
13:25better score. Better score means better
13:27credit worthy. Suppose civil tells that
13:30my score is only 400. Then the banks
13:34will hesitate to give me loan. So in a
13:36way for banks it gives them some kind of
13:39assurance that the loan they are giving
13:41will be repaid and the person to whom
13:44they are giving loan is of some credit
13:46worthiness. Now how how is a credit
13:49score determined? Now can anybody say
13:53that I need higher score give me higher
13:55score. Can it be done like that? No. It
13:57is dependent on multiple factors like
14:01what are these factors which determine a
14:03credit score is like if I have taken
14:06loans. What is the loan repayment
14:09history that is whether I am promptly
14:12paying my loans? Whether the loan
14:14repayment is as per the schedule
14:16determined in the debt agreement whether
14:19I have defaulted in any payment
14:21schedules. All this will give some
14:23weightage. Then in how many number of
14:26years I have loan and what is the loan
14:29servicing years? Suppose I have a
14:3215-year 10ear loan. If the loan is being
14:35repaid for 12 years promptly then the
14:38number of years to which I am servicing
14:40my loan and this also gives a kind of
14:44how many years my money is already being
14:46obligated to. That means if I have taken
14:49loans two three loans which are of 10 10
14:52year duration and they all are were
14:55taken recently 2 years back 3 years back
14:57or one year back that means my loan
15:00obligations are very high and I can't
15:03get a future loan if I take it will be
15:06too much on my salary or on my cash
15:09flow. So in a way my credit repayment
15:12will be very difficult. So that also
15:15will have an impact on that. So the
15:17number of years I am servicing the loan
15:20and the number of years I have been into
15:22the loan market and my loan history also
15:25will determine and the number of years I
15:28am eligible to repay the loan. What is
15:30my retirement and all that also will
15:32determine my credit history. So in a way
15:35my age also will be a determining
15:37factor. Similarly, credit card usage
15:40history like how many credit cards I
15:42have, how do I use them, whether I
15:45promptly repay them, whether I was
15:47defaulted in my credit card repayment,
15:50all this will have a impact on my uh
15:53credit uh score. So, if I am promptly
15:57paying and I use it very you know
16:00genuinely and then at very proper malls
16:03and petrol buns are where it has to be
16:06used like that. So the credit card usage
16:09volume and the quality of its usage also
16:12will determine my score. Similarly, loan
16:16utilization. How much loans do I take?
16:19How do I utilize for what purposes do I
16:21utilize and what is the percentage of
16:24the loan debt versus equity kind of
16:26thing like how much is the upfront money
16:28I take and what percentage of purchase
16:31value of a home is through loan. All
16:33these kind of things will have an impact
16:36on the credit score. Usually individual
16:39borrowers do go for credit score. Big
16:42firms and companies generally go for
16:45credit rating. Now credit rating is
16:49different from credit score. It is also
16:52determining credit worthiness and it is
16:55usually done for corporates, financial
16:59institutions or even the credit rating
17:01of certain financial instruments,
17:04investors and something like that. In a
17:07way, it is a creditworthiness
17:09to determine a prospective debt
17:11repayments or an investment obligation.
17:14It could be any. It could be an investor
17:17service. Suppose I want to invest in a
17:19particular bond. I might take the
17:21service of the credit rating agency and
17:24ask them whether it is will be a
17:25worthwhile. Similarly, I am an investor
17:28who want to invest in a company's uh
17:31equity. Then I might ask them to find
17:34out about the creditworthiness of that
17:36market. I might be an investor who is
17:39investing in a securitization
17:41instrument, security receipt. I might
17:43ask a credit rating agency to do that
17:45service for me. Alternatively, an asset
17:48reconstruction company also may engage
17:51the service of a credit rating agency to
17:55market its security receipts. So in a
17:58way the credit rating service can be
18:00used either by investors or by the
18:04proponents or the persons seeking
18:06investment in a way that is it is a
18:09service. Basically the agency whoever is
18:12doing credit rating those agencies will
18:16give that opinion they give opinion.
18:19Credit rating is basically an opinion
18:22even the credit score is also an opinion
18:24in a way and you can't make them liable
18:28that you gave very good credit rating
18:31but they did not repay so you are liable
18:33like that we can't make the credit
18:36rating agencies liable. There are very
18:39big big standard and poor Moody's etc.
18:42very globally renowned credit rating
18:44agencies which rate and their ratings
18:47they get renowned name by their genuine
18:51and best practices they employ in
18:54rating.
18:56What are the parameters on which they
18:58rate the instruments? Is it the
19:01bankruptcy remoteness? Is it the profit
19:03and loss of that particular company?
19:06they have certain criteria. So those
19:08criterias will determine the
19:10creditworthiness of that particular
19:12company or of that particular instrument
19:14or that particular uh investment uh
19:17instrument or investment profile which
19:20you are looking at. So these ratings are
19:23generally exhibited on letter based
19:25scales. Triple A is considered the
19:29better than B BB RB C C D like that A
19:36like that. So these are exhibited on A
19:39to D kind of letters. Uh so triple A
19:43being the best and D being the last in
19:46the given uh scale that I am giving the
19:48examples. These are available A plus, BB
19:51B+ like that also B minus, C++ plus like
19:54that. These are letter based scales with
19:57plus or minus and their ratings are
20:00dependent on uh whatever whatever
20:04instruments with the if it is a company
20:06then what are the debt obligations they
20:08have? What are the payment obligations
20:10they have? What is the equity they have?
20:13What is the risks they are taking? What
20:15is the cash flow that company has? what
20:17are the products of that company? What
20:19is the market for those products in the
20:21company? These are some of the aspects
20:24which they will consider. So each credit
20:26rating uh of any particular uh company
20:30or a particular uh instrument will deter
20:33will depend on that particular kind of
20:36business and the kind of uh activities
20:39they take and credit rating cannot be
20:41done just because they are giving you
20:43the fee. You can't give them good
20:44rating. Obviously there are certain
20:47guidelines and certain agencies which
20:49are regulating them and in India the
20:52sebi the securities exchange board of
20:55India in short the sebi sebi credit
20:58rating agency regulations 1999 govern
21:01them any violations can be reported to
21:04sebi and sebi can take action on them
21:06sebi has dispute settlements also
21:10grievance redressal agent adjudicating
21:12authority powers also so Credit SEBI
21:15governs these credit rating agencies in
21:18India. So
21:21uh while uh the credit score is in a way
21:25the banks use for individual borrowers,
21:28credit rating are for more complex
21:30investments and complex instruments or
21:32complex trading uh platforms where
21:35credit rating agency services are being
21:37used. All these are the kind of
21:40qualitative measures meant to ensure
21:42that your investment your credit does
21:45not go in a wrong direction. So in con
21:49to conclude we are we have discussed a
21:51few of the uh qualitative credit control
21:55measures in this class. We will discuss
21:58further uh qualitative credit control
22:01measures as well as quantitative credit
22:04control measures in the next class.
22:06Collectively, qualitative and
22:08quantitative credit control measures
22:11collectively will ensure selective
22:14credit control and the credit control we
22:16will understand cumulatively when we
22:19study qualitative and quantitative
22:21measures. So we will continue our
22:24discussion on credit control to the next
22:27class. With this we will conclude our
22:30discussion for this class where we have
22:33studied few of the qualitative credit
22:35control measures. Thank you.

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