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Evaluation of Bank Lending Practices Credit Management in India

Banks collect money people save and lend these funds to creditworthy borrowers so they can buy homes or grow businesses. Carefully assessing who can repay loans on time helps banks lend responsibly so more people benefit while their savings stay protected from unpaid debts. Below, we’ll discuss about credit management in banks regulatory policy, technology adoption and prudent practices.

Importance of credit management in banks

If you don’t know what are the lending practices of banks, look at how these efficient credit management in banks helps in the following ways:

  • Appropriate risk profiling of borrowers
  • Pricing loans as per credit risk
  • Preventing defaults and write-offs 
  • Maintaining asset quality and capital adequacy 
  • Enhancing profitability through risk-adjusted loan pricing
  • Achieving balanced portfolio growth across sectors

Thus, credit management ensures banks’ long-term viability and competitiveness by balancing risk-return trade-offs. This makes it all the more critical for banks in India to evolve their credit management frameworks.

Understanding bank Lending Practices in India

Banks in India provide a range of loans for personal, agriculture, MSME, corporate, infrastructure, etc. Products offered include:

Banks rely on parameters like income, credit score, collateral, financial statements, etc., to evaluate loan applications. RBI regulates bank lending in India through measures like:

  • Capping sectoral exposure  
  • Mandating priority sector lending
  • Setting norms for risk weights and provisioning 
  • Defining norms for restructuring and settlements

Types of loans offered by Indian banks

  1. Personal Loans: Unsecured loans for personal needs like family functions, travel, medical treatment, etc.
  1. Home Loans: Long-term secured loans for the purchase/construction of homes. Have sizeable tax benefits. 
  1. Education Loans: Fund higher studies in India and abroad. Collateral-free but need co-applicant.
  1. Credit Cards: Give customers much spending flexibility through a preset borrowing limit.
  1. Auto Loans: Auto loans make owning cars, bikes, or even commercial vehicles possible by funding most of the price. 
  1. Gold Loans: Banks quickly loan money against gold jewellery and decorations one may own if temporary funds are required.

In addition to gold, banks permit loan sanctions against pledging assets like shares, bonds, insurance policies, etc.

The role of credit scoring in lending decisions

A credit score is a key metric in the credit decisions of banks. Higher scores signify a lower risk profile for borrowers.

Scores are based on the applicant’s repayment history, income, leverage, credit mix, etc., derived from credit bureau reports. 

Banks define internal score cut-offs for sanctioning loans. Higher-value loans require better scores. Scores enable customised loan pricing.

RBI has introduced standardised benchmark scores. This will bring objectivity and transparency.

Key components of effective credit management in banks

Key aspects include:

  • Credit Policy: Lays down loan products, target sectors, risk appetite, exposure limits, rates and collateral policy.
  • Credit Analysis: Evaluates business model, management, financials, leverage, operating cycle, industry scenario, etc., to measure risk profile and repayment ability. 
  • Credit Risk Management: Entails risk mitigation through credit caps, portfolio analysis, credit audit, risk-based pricing and bad loan recovery.

An aligned credit policy, rigorous appraisal and proactive risk management are vital.

Role of the Reserve Bank of India (RBI) in credit regulation

Reserve Bank keeps close watch so banks lend carefully. Their guidelines encourage prudent borrowing and responsible lending across industries. Key measures include:

  • Sectoral caps on real estate, infrastructure and capital markets
  • Mandating loans to agriculture and weaker sections
  • Priority sector lending requirements 
  • Defining sustainable debt levels and restructuring norms
  • Capping share of low-rated bonds and commercial papers
  • Norms for NPL identification, resolution, provisioning and write-offs

Adjusting caps, risk weights, and provisioning helps RBI manage credit growth and risks.

Impact of non-performing assets on credit management

NPAs reflect poor credit management in banks – inadequate appraisal and post-disbursal monitoring. Failure to repay principal or interest for 90 days leads to NPA classification. High NPAs indicate worsening credit quality and pressure banks’ profitability due to higher provisions, write-offs and lack of income accruals.

As NPAs rise, risk management becomes even more critical. Banks need to refine credit policies, systems and processes. Trends in vulnerable sectors require closer tracking to limit slippages. Centralised loan review teams help spot early warning signals. Swifter restructuring also helps.

While NPAs may be inevitable due to business cycles, disciplined credit management is key to limiting their fallouts.

Technological advancements in credit management in banks

Innovative technologies are transforming credit management in banks:

  • AI & ML help analyse millions of data points to detect patterns and insights for improved decisions. Chatbots handle customer queries.
  • Blockchain enables secure information sharing between banks for comprehensive borrower profiling. Smart Contracts automate processes.
  • Big Data, advanced analytics and predictive modelling strengthen risk assessment, loan pricing and management.
  • Robotic Process Automation accelerates processes. Data Digitisation minimises errors. Drones assess collateral.
  • While technology is an enabler, sound credit principles remain paramount. Human oversight on model building and recommendations also needs emphasis.

Best practices and innovations in credit management in banks

Banks are deploying improved practices:

  1. Digital Credit Management Tools: Platforms integrating data from credit bureaus, banking/tax/commerce transactions, GST, exports, etc., for insights.
  1. Data-Driven Decision Making: Statistical models are used to select potential defaulters and optimal time recovery steps. 
  1. Enhanced Customer Segmentation: Granular risk profiling based on demographics, psychographics, and behaviour can be used to customise engagement.
  1. Integrated Credit Management Framework: Systems connecting policy formulation, underwriting, portfolio analysis and collections in real-time.
  1. Regulatory Compliance and Reporting: Leveraging automation for stringent norms adherence.
  1. Credit Insurance: Sharing risks of defaults with global insurers.
  1. ESG Considerations in Credit Risk: Assessing environment, social and governance aspects for comprehensive profiling.
  1. Blockchain for Transparency and Efficiency: Distributed ledger for reliable information sharing between financial entities. 
  1. Customer Education Programs: Improving borrowing discipline through financial literacy.  
  1. Flexible Credit Solutions: Innovative lending options like invoice financing, cash flow-based loans, etc. For MSMEs.

The role of government and regulatory bodies in enhancing credit management

Regulators foster improved credit risk management and stability by mandating reforms, governance standards, and prudent norms.

For instance, RBI’s revised framework for resolving stressed assets has put a greater onus on banks to promptly identify and address emerging defaults through increased provisioning and haircuts. RBI’s analytics-based early warning signals framework also helps with faster stress detection.

Likewise, the mandate from RBI aims to curb NPAs in credit cards and enhance monitoring. Other measures, like linking lending rates to external benchmarks, boost transparency.

Government schemes for credit guarantee and interest subvention target priority sectors like MSMEs. Thus, combined focus by government and regulators on supervision, transparency and risk management disciplines banks’ lending approach.


As key intermediates in an economy, banks have to strike a fine balance between business growth and stability in credit creation. While new sectors and products will keep emerging, the foundations of sound credit management remain unchanged. The regulatory emphasis on governance, compliance and tech-enabled risk mitigation is rightly nudging banks to undertake the necessary transformations in their credit approach by realigning structures, systems, policies and processes without losing sight of fundamental diligence aspects. 

Ultimately, reforming credit management is key to India’s aim for sustainable and inclusive economic development supported by a resilient banking sector. Better discipline will only lead to win-win outcomes for all stakeholders over the long run.


What are the key principles of credit management for banks?

The key principles are – appropriate customer selection based on risk profiling, prudent credit approval processes, structured credit pricing in line with risks, vigilant portfolio monitoring and recovery practices, and steadfast adherence to internal policies and regulatory requirements.

How does technology help in improving credit management effectiveness?

Technology enables real-time data capture, advanced analytics for deeper insights, automated decisions through machine learning, blockchains for reliable information sharing between lenders and central agencies, quick processing through robotic process automation and paperless workflows, remote monitoring including geospatial assessments, etc., to significantly augment risk management outcomes.

What risks can poor credit management cause for banks?

Poor standards can lead to issues like high NPAs, hidden concentration risks in portfolios, inadequate buffer for external shocks, plummeting profits due to high provisioning costs, erosion of net worth due to large write-offs, reputational risks for the bank and inadequate controls against frauds – all of which compromise the sustainability of the lending institution.

How does RBI regulate priority sector lending in India?

RBI has stipulated target lending percentages to priority sectors like agriculture and micro and small enterprises. Domestic banks have targets like 18% for small enterprises, 10% for weaker sections, etc. RBI also drives initiatives for the financial inclusion of marginalised segments.

What metrics help assess the effectiveness of credit management in banks?

Key Ratios are – Gross and Net NPAs to gauge portfolio risks, Provision Coverage Ratio for a cushion against NPAs, Sectoral NPAs for emerging vulnerabilities, Credit Costs analysing provisions made, Risk-Weighted Assets for adherence to capital adequacy norms, etc.

What compliance aspects need to be covered in credit policies?

Aspects like norms about assessing borrower repayment capacity, collateral requirements, rating standards, caps on unsecured lending, end-use stipulations on loans, credit audit periodicity, reporting frameworks to board/regulators, and provisions for combating money laundering need specific coverage for adherence.

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