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Credit Management & Issues of Bad Debts in India

The ever-evolving financial landscape of India presents significant challenges to banks and financial institutions. This is in terms of credit risk management and the issue of bad debt. Maintaining a healthy financial system, promoting economic growth, and ensuring banking sector stability all hinge on effective credit management practices. Conversely, the prevalence of non-performing assets or bad debts can trigger severe consequences for the economy by hindering credit flow and impeding overall growth. Keep reading to know what is credit management.

What is credit management?

You may ask what is credit risk management. Everything directly related to approving, monitoring and recovering customers’ payments falls under the purview of credit management. It includes onboarding, setting payment terms and policy, issuing trade credit or other business financing, and collections are all integral aspects.

Banks and businesses across all industries and markets actively engage in this core task. Managing best practices, risk levels, and days sales outstanding (DSO) is a measure that determines the health of business collection processes. It’s important to note how these factors vary within each industry or market.

Essentially, effective credit management safeguards the financial health of a company. It can determine whether a business survives, thrives or even goes bankrupt.

Banks primarily generate a significant portion of their income through the interest accrued from loans extended to borrowers. The ability to reimburse depositors and employees hinges on timely loan recoveries. Consequently, effective credit risk management becomes even more crucial in an environment where higher bad debts prevail, such as in India.

What is the meaning of bad debt?

The phrase ‘bad debt’ refers to loan amounts that cannot be recovered and are written off by the bank. Any type of loan, whether for personal or business purposes, can become bad debt if the borrower fails to repay the borrowed funds. Banks and financial institutions can use inadequate debt recovery measures to recover their loans, such as selling the borrower’s assets used as security.

The importance of credit management

Risk assessment and mitigation 

A range of processes and practices in credit management: these are aimed at minimising default risk while ensuring loans get repaid on time. Thorough due diligence, credit analysis, and risk assessment precede the granting of any credit facilities. It’s an intricate procedure with no room for oversight or error. Banks and financial institutions must employ three key strategies to ensure informed lending decisions. 

It includes robust credit scoring models, comprehensive financial statement analysis which provides insight into an applicant’s fiscal health and collateral evaluation is also crucial. Effective credit monitoring and early warning systems, in addition to identifying potential risks, are also needed. They enable proactive measures to mitigate losses.

Regulatory oversight and compliance 

Actively, the Reserve Bank of India (RBI) regulates and supervises banks’ pivotal credit management practices. It also fulfils this role with financial institutions. The RBI issues guidelines, circulars, and prudential norms. All are aimed at promoting sound lending practices, and their objectives are to ensure transparency and uphold financial stability. Maintaining public confidence necessitates compliance with these regulations. It is a crucial step in fostering a healthy credit ecosystem.

The Challenge of bad debts

Rising non-performing assets (NPAs) 

Non-performing assets (NPAs), often known as bad loans, have long plagued India’s banking system. NPAs are loans or advances in which the borrower has failed to meet repayment requirements over a lengthy period of time, usually 90 days or longer. High levels of non-performing assets (NPAs) can degrade banks’ profitability, strain capital sufficiency, and eventually threaten their capacity to lend credit to productive areas of the economy.

Causes and implications of bad debts 

Several causes contribute to issue of bad debt in India, including economic downturns, sector-specific issues, purposeful defaults, insufficient risk assessment, and poor credit monitoring. Bad debts have an influence on economic development, investor confidence, and the country’s overall financial stability, in addition to the banking industry.

Addressing the NPA Crisis

Resolution mechanisms and reforms 

To address the growing NPAs, the Indian government and regulatory agencies have introduced a variety of resolution processes and reforms. These include the Insolvency and Bankruptcy Code (IBC), which establishes a comprehensive framework for insolvency and debt recovery. The RBI has also implemented measures such as the Prompt Corrective Action (PCA) framework, asset reconstruction firms, and sustainable structure of stressed assets.

Strengthening credit management practices 

Addressing the issue of bad loans necessitates a multifaceted strategy, including improving credit management processes in banks and financial institutions. This includes increasing due diligence procedures, modelling credit risk, and cultivating a responsible lending culture. Furthermore, capacity building and training programmes for bank employees may give them the skills to make sound credit judgements and successfully monitor loan portfolios.

What are the benefits of credit management? 

One of the primary advantages of credit management is having a comprehensive picture of your company’s finances, allowing you to avoid undue credit risk while capitalising on possibilities. But that is not all. Credit risk management also has the following benefits: 

  • Ensuring inflows exceed outflows for timely bill and payroll payments.
  • Early detection of late payments to prevent bad debts, reducing default risks.
  • Enhancing business liquidity.
  • Expedited and thorough debt recovery processes.
  • Improving Days Sales Outstanding (DSO).
  • Unlocking working capital for strategic investments.
  • Facilitating performance analysis and financial budgeting.
  • Instilling confidence in potential lenders for business expansion funding.


Maintaining or growing a sustainable business necessitates essential credit management. Frequently, we associate this process with collections. Moreover, it often occurs within the same department – yet they are not synonymous tasks. Quick yet comprehensive assessments are what credit managers must undertake when onboarding new clients and extending credit. They must also strike a delicate balance between lowering the risk of extended credits and maintaining even augmenting, cash flow.

To clarify, extending longer payment terms potentially enlarges your customer base. However, it concurrently constrains cash flow and elevates risk. Business-to-business (B2B) credit management typically presents a more intricate scenario than its business-to-customer (B2C) counterpart due to factors such as high order volumes and extended payment periods.

You can evaluate your current credit management through several methods. Follow best practices for assessing customer credit history, invoicing, collections and employee allocation. Consider also outsourcing your credit management to a third party in strategic cases. This approach may enhance cash flow, which is a critical resource, and optimise internal resources more effectively.


What are Non-Performing Assets (NPAs)? 

Non-Performing Assets (NPAs) are loans or advances given by banks or financial institutions to borrowers who fail to pay on time or at all. In India, a loan is considered non-performing if the principle or interest is more than 90 days past due. NPAs constitute a significant problem for the banking sector because they reduce profitability, strain capital sufficiency, and limit loan flow to productive areas of the economy.

What are the major causes of bad debts in India? 

Bad debt accumulation in India can be linked to various issues, including economic downturns, sector-specific problems (such as stress in the infrastructure, steel, and power industries), borrowers’ purposeful defaults, insufficient risk assessment by lenders, and poor credit monitoring. External variables like policy changes, regulatory uncertainty, and global market circumstances can all contribute to increased NPAs.

What measures has the government taken to address the NPA crisis? 

The Indian government and regulatory authorities have implemented several measures to address the NPA crisis, including the Insolvency and Bankruptcy Code (IBC), the Prompt Corrective Action (PCA) framework for banks, and the promotion of asset reconstruction companies. In addition, measures such as the sustainable structure of stressed assets and the selling of non-performing assets to alternative investment funds have been implemented.

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