Principles of credit management

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Principles of credit management
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What is credit management?
In simple words, credit management is that
procedure in the financial world, where the
payments that a customer has to make to the
vendor are monitored and eventually collected. A
person or a business that has good credit
management score would have less amount to
finally pay to the debt collectors. In order to
have liquidity and cash flow, having a good
credit management score is really very important.
this would help in times when the business would
want to venture on a profitable idea but does not
have sufficient funds to make it possible. Credit
management for banks is based on certain
principles.
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Liquidity
As mentioned above, maintaining a good credit
score is very important in order to keep
liquidity. Liquidity means having cash flow in
times of need. Credit score is checked by any
bank before granting the business loan of any
kinds. When you borrow money from bank to expand
your business, the bank does not give it without
you first producing some kind of security.
Failure of payment of the loan finally leads to
the bank seizing the asset that was produced as
security. Assets that can provide enough
liquidity are the ones that bank allows one to
keep as security, so that when the public needs
money, the do not have problem producing that.
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Safety
Here safety means that the business that is
borrowing the money should be able to repay the
money being borrowed, along with interest in the
stipulated period of time. Two things that the
repayment depends on is the nature of the
security kept as mortgage and the ability of the
borrower to pay the money in time. It is very
necessary and important to the bank that the
asset that has been kept as security can fetch
enough money if there comes any adverse
situation. It needs to have steady and easy to
calculate too.
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Diversity
When lending money or selecting the portfolio of
investment, the bank should adhere to the
diversity principle. A bank should take care that
is never allows all its funds to go into some
specific security types only. It should take
cautious decision of investing in different
security types. There can be debentures, shares,
property, investment of ESG funds etc. Why should
this be done? This should be done in order to
reduce the investment risk of the bank. This
principle in applicable while giving loans to all
firms, businesses, markets and factories.
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Profitability
Last but not the least, profitability is one of
the most important objectives in credit
management. Why would a bank lend if they arent
going to gain anything? A bank should make
cautious decision of investing in assets that
would give good and profitable returns. However,
when it comes to branches of the government, this
does see an exception in terms of interest. For
others, the banks should focus on investing in
securities that would not carry tax exceptions.
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Thank You
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