Credit policy and Procedure

What is Credit Policy?

Credit administration is the nucleus of the lending organization. They are used to know about the entire credit procedure and also make certain that the loans are given only to the minimal-risk customers. It also provides help to the banks in the case of a loan overdue to recover the amount with the necessary actions.

A credit policy is a document that lays down all the required guidelines that allow the lending institutes to make crucial lending decisions. This document also indulges in making guidelines with respect to risk management and also laid down the protocols for the staff to efficiently control the client’s portfolio.

Types of Credit Policies

Several credit policy lending institutions apply their policies based on the product the customer offers. Some of them are provided below: –

·         Automotive Credit Policies

Got your eye on a car? This policy covers vehicle loans. It decides how much you can borrow, the interest rate, and repayment terms. Basically, if you want a loan to buy a car, this policy sets the rules.

·         Personal Credit Policies

Need a personal loan? This one’s all about minimum credit scores, how much money you can get, and the interest rate you’ll pay. Everything from credit limits to eligibility is outlined here.

·         Business/Wholesale Credit Policies

Running a business and need funds? These policies cover loans for day-to-day operations or big capital investments. What you get depends on your industry, how big your business is, and how risky it looks to the lender.

·         Home Loan Credit Policies

Thinking of buying a house? This one covers the fine print of home loans—how much margin you need to pay, the collateral required, and your minimum credit score. If you’re securing a home loan, this policy is your rulebook.

·         Academic Credit Policies

Looking to fund your education? This policy is for education loans, including how long you can defer payments (a.k.a. the “holiday period”) and other terms for paying back the loan for your studies.

·         Credit Card Policies

Want a credit card? This policy spells out everything you need to qualify—credit limits, interest rates, minimum credit scores, and fees. It’s the rulebook for anyone applying for a credit card.

Key Parts of a Good Credit Policy

A strong credit policy isn’t just about who gets credit, but how much, how long they get to pay, and what happens when they’re late. Let’s break it down.

Check Customer Creditworthiness

Before you start handing out credit, you’ve got to know who you’re dealing with. That means checking a customer’s creditworthiness. In India, businesses often use credit rating agencies like CIBIL or CRISIL to figure out how risky a customer is. For smaller businesses or local clients, the process might be less formal, but you still need to know if they’re likely to pay you back on time.

Set Credit Limits

Once you know if a customer is worth the risk, the next step is deciding how much credit to give them. This is the maximum amount they can owe you at any given time. Be smart about this. In India, payment cycles can be unpredictable, so keep a close eye on these limits and adjust them based on how the customer behaves and what’s happening in the market.

Lay Down Payment Terms

Payment terms tell the customer how long they’ve got to pay their invoice. Common terms might be “Net 30” (payment due in 30 days), “Net 45,” or “Net 60.” In India, longer payment terms are often expected, especially in manufacturing and retail. But don’t let these drag your cash flow down. Make sure you balance offering flexible terms with keeping your own finances in check. Also, spell out penalties for late payments, interest charges, and discounts for paying early.

Tackle Collections

Even with the best credit policies, some customers will push the limits and pay late. That’s just reality. A solid credit policy should outline how you’ll handle this, whether it’s sending reminder emails, making phone calls, or even taking legal action if necessary. In India, you’ve got to walk a fine line between keeping relationships smooth and protecting your bottom line. Late payments are common, but that doesn’t mean you should just let them slide.

Review and Adjust

Customers aren’t static, and neither is their financial health. You need to regularly check how your customers are paying and adjust credit terms as needed. A customer who was rock-solid six months ago might be struggling now, and you don’t want to be left holding the bag. Keep reviewing accounts, adjust credit limits, and protect yourself.

The Real Struggles of Credit Management in India

Credit management in India isn’t as straightforward as it sounds. From cultural norms to cash flow delays, there are plenty of obstacles that make it tricky. Here’s what businesses have to deal with.

Cultural and Business Norms

In India, it’s normal for customers to expect long credit periods. This can really mess with your cash flow if you don’t manage it right. Plus, Indian business culture values relationships, which makes enforcing strict credit policies tough, especially when you’re dealing with long-term clients.

Payment Delays

Delayed payments? Yeah, that’s a huge issue, especially for SMEs. It can happen because of supply chain problems, shaky market conditions, or just bad cash flow management on the customer’s end. These delays create a domino effect, forcing businesses to extend more credit than they’re comfortable with.

Regulatory Mess

The introduction of Goods and Services Tax (GST) has made managing credit even more complicated. Businesses need to make sure they’re complying with GST rules, which affect everything from invoicing to credit periods and collections. Plus, they need to keep an eye on any regulatory changes that could impact credit management.

Best Practices to Nail Credit Management

You can’t just write a credit policy and leave it to gather dust. You’ve got to stay on top of things, know your customers inside out, and use tech to make your life easier. Here’s how you can do that.

Know Your Customer Inside Out

Don’t just take your customer at face value. Get to know their business operations, payment cycles, and financial health. Use both formal credit checks and informal methods to assess creditworthiness and make smart decisions.

Be Clear and Stick to It

Your credit policy should be simple and applied consistently. Customers need to know from day one what the payment terms are, what happens if they pay late, and what the collection process looks like. Don’t leave room for misunderstandings.

Keep an Eye on Things

A credit policy isn’t a one-and-done deal. Keep checking on customer behavior, market trends, and economic conditions. If things change, be ready to adjust your credit terms on the fly.

Use Tech to Your Advantage

Why do everything manually when you can use credit management software or ERP systems to handle invoicing, send payment reminders, and automate collections? This cuts down on human error and makes sure no late payments fall through the cracks.

Questions to understand your ability

Que.1 What’s the main purpose of a credit policy in a lending business?

A. To keep customers happy

B. To tell customers how to repay loans

C. To control risk and decide who gets credit based on their creditworthiness

D. To hand out interest-free loans for everyone

Que.2 Which of these has nothing to do with automotive credit policies?

A. How much you can borrow for a car loan

B. The interest rate and repayment terms for the loan

C. Car insurance policies

D. Rules on who qualifies for a vehicle loan

Que.3 In India, what’s a big problem when enforcing credit policies?

A. Interest rates being too high

B. Payment cycles being too short

C. Customers expecting long credit periods

D. Lack of demand for loans

Que.4 What’s the first move when setting up a credit policy for any customer?

A. Setting how much credit to give

B. Deciding payment terms

C. Checking if the customer is creditworthy

D. Laying out collection steps

Que.5 What’s a smart move for better credit management?

A. Give the same credit terms to everyone

B. Ignore credit history for long-time customers

C. Use credit management software to automate billing and collections

D. Increase credit limits without checking how customers pay

Conclusion

If you want to survive and thrive in the Indian market, strong credit policies and procedures are non-negotiable. By carefully assessing customer creditworthiness, setting clear terms, and staying on top of collections, you can reduce risk, keep cash flowing, and build solid customer relationships. Sure, managing credit in India comes with its challenges, but having a robust policy in place helps you handle them without losing sleep—or money.