Credit Policy

Whenever you avail of a loan with any financial institution, you must thoroughly go through their credit policy. This financial document defines the nature of repayments and their penalties if any. Any business determines the credit policy on the invoices and the prepared agreements. This helps understand the organisation's cash inflow and determines penalties or legal action, if needed, that will be enforced in case of a delay in repayments.

For individuals who avail of a loan, the credit policy is an important document that helps you maintain a good credit history by adhering to the regulations defined by the financial institution. 

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Credit administration is an important division in any lending organization. They are responsible for overlooking the entire credit procedure and ensuring that loans are provided only to low-risk customers. It also helps the banks take necessary measures to retrieve the loan if it is overdue.

The credit policy is a document that determines all the guidelines which allow these lending companies to make these critical lending decisions. These guidelines are important for risk management and provide necessary guidelines to the staff to effectively manage clients' portfolio.

It also allows the customers to get a clear understanding of what is expected from them in order to avail credit. For example, it is a good idea to carry out a free CIBIL score check to ensure higher chances of approval on the application based on the bank's credit policy. 

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The RBI credit policy, also known as the monetary policy, is instrumental in determining the money supply, the economy's credit cost, and other national monetary matters. This credit policy is also important for distributing any credit among borrowers, lending rates and other key indicators.

The primary indicators of the RBI credit control policy are:

• Cash Reserve Ratio: This is a fixed amount of cash that the banks must set aside for the RBI. This amount cannot be used for lending or obtaining any interest. 
• Statutory Liquidity Ratio: These are liquid assets like RBI approved securities or gold that the bank must set aside. 
• Bank Rate: the rate at which funds are lent to banks by the RBI. 
• Repo Rate: The interest rate paid by the RBI to the banks upon any additional deposits. 
• Marginal Standing Facility Rate: This is the rate at which banks can borrow money from the Central Bank.

The monetary policy of the RBI is responsible for improving the transmission of loans, providing aid to banks during a financial deficit, creating the standards for lending and borrowing and improving financial inclusion by creating policies that eliminate any individual lenders.

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Banks use different types of credit policy when providing a loan or a credit card. The credit policy is an agreement between the bank and the customer. It communicates the following to the customer with complete clarity:

• The eligibility criteria for the individual to avail of the loan. 
• The margin and security required to avail a loan. 
• The repayment terms for the loan or credit card. 
• The penalties that the customer is liable to pay for delayed payments, prepayment, foreclosure etc. 
• The process of collection in case of any default. 
• Legal action may be taken if the loan is overdue beyond a given time.

For customers, this document helps ensure that the payments are made on time towards any credit availed. It also helps you understand if your application will be accepted when you submit it to a lender. These factors are necessary for your credit monitoring and monitoring your CIBIL score. 

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There are various types of credit policy lending institutions use based on the product being extended to the customer. This includes: 

• Automotive credit policies: This includes any vehicle loans availed by the customer. 
• Personal credit policies: This credit policy determines the minimum credit score for a personal loan, the quantum of finance, interest rate etc. 
• Business/ wholesale credit policy: This credit policy includes all products for business operations credit and capital loans for various industries. These policies depend upon the nature of the business and the scale of the business primarily. 
• Home loan credit policy: It includes the security terms, the margin to be paid, the minimum credit score for a home loan and other primary factors. 
• Academic credit policy: This refers to education loans provided for higher studies, including the holiday period for the loans, along with other factors. 
• Credit card policy: This credit policy is listed by institutions that offer credit cards to customers. 

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The credit policy of banks is an internal document that standardizes all the lending and collection procedures of a bank. Based on the credit control policy issued by the Reserve Bank of India, such as the bank rate, lending rate, cash reserves etc., banks create their own credit policies.

The credit policy of banks contains the following details:

• Credit terms: The credit policy of banks includes credit terms that help customers understand when they are expected to repay the loan instalment. It also includes the interest rate for the loan or credit provided to the customer. These terms also include details like the penalties for late payment or discounts for making early repayments. For anyone who is wondering how to increase my CIBIL score fast, adhering to these credit terms is a great beginning.
• Credit standards: Credit standards are listed in all types of credit policy. These standards determine the basis on which an individual will be given a loan. The lending institutions calculate your CIBIL score check the repayments made to other institutions, the debt to income ratio and other factors before extending a loan to any individual.
• Deposits: This section in the credit policy outlines any deposit or margin that is to be paid by the customer in order to avail of the loan. This amount may vary based on the minimum and maximum CIBIL score required to avail of the loan and other factors outlined in the credit standards.
• Credit limits: The credit limits determine the quantum of finance or the maximum credit that will be given to an individual. This is based on the minimum and maximum CIBIL score, nature of employment and the repayment history provided by credit rating agencies. Currently, there are four credit rating agencies in India, namely TransUnion CIBIL, Experian, CRIF High Mark and Equifax.
• Information requirement: In this section, the credit policy lists all the information that you are required to provide to the lending institution in order to complete your application and get approval on a loan. 
• Collection policy: Collection policies determine the measures that will be taken by the lending institutions in case there is any delay in the repayment. This section even gives you details of third party collection agencies that the bank may be partnering with in order to collect any pending loan amount from defaulting customers. 

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The credit-control policy is one of the most important tools used by the RBI to enforce its monetary policy. The objective of the credit-control policy is to meet the credit flow requirements in the economy. In order to control any credit policy of banks that offer commercial loans, the credit-control policy uses the following tools:

• Quantitative Measure of Credit Control: This includes the cash reserve ratio and the statutory liquid ratio. These parameters determine the volume of credit available in the economy. It also affects the cost of credit depending upon the assets of commercial banks that are available to the RBI.
• Open market operations: Any transactions made towards government securities by the Reserve Bank of India in the open market is determined by this tool. The credit volume increases when RBI invests in these securities and decreases when it sells the securities. 
• Policy Rates: This includes RBI rates of interest like the Bank Rate Policy, The Repo Rate and Marginal Standing Facility. The objective is to provide standards to the banks based on which they can create internal interest rate policies based on the CIBIL score range, lender profile and other factors. 
• Qualitative Measures of Credit Control: These tools determine how the credit is used and the direction of the credit flow. It includes credit rationing, which controls the credit available for various industrial sectors. It also includes moral suasion, which persuades commercial banks to create a credit policy that can improve the economy and boost the interest of the country’s economy. Lastly, it lists changing margin requirements that determine the securities that should be provided against any loan extended by a commercial bank. 

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