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Credit Policy

Before you apply for a loan or credit card, understanding the credit policy of the lending institution is important. The credit control policy determines the repayment terms, eligibility criteria and other factors pertaining to your credit. Different types of credit policy give you an idea about the chances of credit approval and even help you maintain a good CIBIL score.

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About 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. 

Additional Reading: What is commercial cibil score?

What is the credit policy?

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. 

Additional Reading: How to check cibil defaulters list?

RBI Credit Policy

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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Importance of Credit Policy

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. 

Additional Reading: Top credit rating agencies in India

Types of Credit Policy

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. 

Additional Reading: Cibil score check free online by pan number

Credit Policy of Banks

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. 
  • 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. 

Additional Reading: How to read cibil report?

Credit Control Policy

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. 

Additional Reading: What is cibil grievance?

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Credit Policy FAQs

✅Do I need to follow a credit policy while applying for a loan?

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Yes. It is recommended that you follow the credit policy before applying for a loan to ensure that you will be able to fulfil the requirements of the loan, such as making timely repayments and providing necessary information to the bank for the processing of the loan. For example, you must check CIBIL Score PAN Card before applying for a loan to ensure that you fall within the required credit score range for the bank. 

✅How do credit policies affect credit scores?

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The credit policies affect your credit score in many ways: 

  • You can avoid rejection of the loan by following the eligibility criteria listed in the credit policy
  • You can make timely repayments based on the repayment terms 
  • You can determine the securities or other measures that allow you to get a loan without a CIBIL score

✅How to follow credit policies?

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The credit policy of banks is available on their website and in any branch of the lender that you approach for a loan. Before you send in your application for the loan, you should make sure that you read the credit policy thoroughly to understand the risk management procedures that the bank uses to ensure that repayments towards loans and collections are made on time. 

✅What is a credit policy example?

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The most common example of a credit policy is the credit limit available to customers. For example, if the credit policy reads that the credit card issuer can give you a limit of Rs.25000, this is the maximum amount that you can use through the credit card at any time. 

✅How do you evaluate credit policy?

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When you are evaluating the credit policy of banks, you must consider the following factors: 

  • The credit standards: This includes details like the credit report, the income, employment and other parameters that are used to determine the creditworthiness of the customer. 
  • The credit period: The tenure for which the credit is made available to the customer. 
  • Penalties and discounts: This helps you understand the liabilities in case you default on the loan, wish to make early repayments or the rewards provided for timely repayment. 
  • The collection effort: You can determine whether the lender uses any third-party collection agency, the legal action that may ensue in case of default etc. 

✅Is monetary policy and credit policy the same?

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The monetary policy is the credit policy of the Reserve Bank of India. This credit policy includes the terms of credit that the RBI extends to commercial banks. It determines the flow of credit within the country. On the other hand, a credit policy is an internal regulation created by individual lending institutions for their customers based on the monetary policy

✅Who is responsible for credit policy?

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Every bank is responsible for creating and enacting its own credit policy. This responsibility is assigned to the members of the board and other executives of the bank who are part of credit administration. 

✅What is the credit policy manual?

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A credit policy manual is a blueprint that is followed by banks to manage their credit and collections. This includes all the strategies for lending, the protocol for managing defaults and the collection measures that the bank can take in case the repayment is overdue beyond the period provided to the customer. 

✅Who declares the credit policy of India?

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Every year, the RBI governor announces the credit policy of India.