A Comprehensive Study of Credit Control in Banking Industries With Special Reference to ICICI Bank , NEW DELHI

by tunnyasthana (student)

University Degree Business and Administrative studies

DECLARATION

I am Beant Kaur, Enrollment No.10020 student of PGDM here by declares that “A Comprehensive Study of Credit Control in Banking Industries With Special Reference to ICICI Bank , NEW DELHI” in the specialization area “Finance” is prepared by me and it is original. The imperial findings in this report are based on the data collected by me.

BEANT KAUR

MBA-IVth Sem

FINANCE

TABLE OF CONTENTS

CH-1 INTRODUCTION

DEFINITION OF CREDIT CONTROL
OBJECTIVE OF STUDY
NEED FOR CREDIT CONTROL
BENEFITS AND DISADVANTAGES OF CREDIT

CONTROL

ACTION CHECKLIST
DO’S AND DONT’S FOR CONTROLLING CREDIT

CH-2 LITERATURE REVIEW

10 SIMPLE RULES OF CREDIT CONTROL
INTRODUCTION OF ICICI BANK
KEY SUBSIDIARIES OF ICICI BANK

CH-3 DATA ANALYSIS

FINANCIALS OF ICICI BANK
BUSINESS OVERVIEW
FINANCIAL SECTOR OVERVIEW
BUSINESS REVIEW
RISK MANAGEMENT
FINANCIALS AS PER INDIAN GAAP

CH-4 RESEARCH METHODOLOGY

CH-5 CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS

CONCLUSIONS
RECOMMENDATIONS
LIMITATIONS

BIBLIOGRAPHY

CH-1

INTRODUCTION

Definition of credit control

Objective of study

Need for credit control

Benefits and disadvantages of credit control

Action checklist

Do’s and Don’ts for controlling credit

CREDIT CONTROL

DEFINITION

Credit control is the process of control over payments coming into and going out of the firm. It is mainly concerned with the firm’s creditors (people who the firm owes money to) and the firm’s debtors (people who owe the money to the firm). Tight credit control is important if a firm wants to avoid cash flow problems.

Allowing customers and clients to defer payment for goods and services is a common and often necessary practice. Credit control is the totality of the policies, procedures and practices which ensure that the total amount of credit extended and the period for which it is extended are consistent with the organization’s policy. These will include ensuring that credit is granted on a systematic basis; the costs of extending credit are adequately recovered; the customer or client continues to pay within the agreed terms; and the need.

for access to liquid funds is achieved

Remember: "It's not sold until it's paid for!"

OBJECTIVE OF STUDY

PURPOSE OF CREDIT CONTROL

Effective credit control maximizes the cash flows from each area of the business and minimizes the risk of bad debts in an organization. It is vital that all decision makers in the organization are aware of the importance of cash management and fully co-operate with Finance Directorate Staff who manage the administrative process.

This credit control policy will enable the organization to run an efficient and effective method of credit control management. The long term aims of the policy are:-

To minimize the risk and proactively manage the debt so as to have no balances over one year old on the ledgers.
To create a new credit control ethos within the organization that will bring strong working relationships between the central team and the top management.

NEED FOR CREDIT CONTROL

Good credit management is an essential component and a fundamental part of our commercial strategy. It is as important as the sales and the profits stated on our monthly profit and loss accounts but should not be at odds with our desire to provide excellent service and care to our customers.
This policy and its implementation will ensure that the revenue we record translates itself into cash according to the terms of credit, which we extend to our customers.
A credit policy is not designed to be a restrictive straight jacket. The skill is to combine controls with sensible application of policies. Customer satisfaction at a profit.
A credit policy is not something that is only operated by the credit control department. All staff involved with customers, in any way, need to be aware of the credit policy and ensure that it is operated consistently. Customers do not have a divine right to take credit. Payment to our terms is an integral part of the contact the customer has entered into.

BENEFITS OF CREDIT CONTROL

Enable improved cash flow by reducing debtor collection days.
Enable reduction in numbers of doubtful and bad debts.
Attain higher levels of customer service.
Achieve consistency in application of credit control business rules.
Create synergies between customer service and customer service departments.
Reduce cost of credit control administration.
Efficient capture of credit control notes.

DISADVANTAGES OF CREDIT CONTROL

It is time consuming.
It may lead to difficult relations with customers and clients who have become accustomed to receiving uncontrolled credit.
It may leave an enterprise operating below maximum capacity.
It may result, in extreme cases, in fixed costs not being recovered.

None of these “disadvantages”, however, provides a good reason for not controlling credit.

ACTION CHECKLIST

1. ASSIGN RESPONSIBILITY FOR CREDIT CONTROL

Ensure that one person in your organization, at a suitably senior level, is ultimately responsible for negotiating, granting and supervising credit and for ensuring the prompt collection of monies due. Appoint someone who can supervise the Credit Controller and can be accountable if the credit position becomes questionable. The exercise of this authority should not detract from the relationships with customers and clients of individual members of staff, especially specialist sales staff. The latter still have a responsibility for ensuring that sales are made and goods and services paid for in. accordance with the firm's terms and conditions

2. INTRODUCE A CREDIT POLICY

Introduce a clear cut maximum credit policy--covering both amount and duration of credit. Write it down so it cannot be changed arbitrarily. Be sure that it is known to all your staff who may be involved in granting credit. Be sure also that customers and clients are informed about your policy. The Late Payments of Commercial Debts (Interest) Act 1998 gives small businesses the right to charge larger business customers interest on

Overdue accounts.

3. RE-EXAMINE TERMS OF SALE

Re-examine all quotations, price-lists, invoices, statements and similar documents which you issue. Do they show the terms on which you do business, especially the terms on which you grant credit? Don't be afraid of telling potential customers and clients your terms. If you are serious about credit control, they must know sooner or later. The chances are that they will respect you as a supplier with a businesslike approach rather than as one 'making up the rules as the game progresses', or, worse still, having no rules at all. Be aware that contracts are established and modified by each successive piece of paper prior to invoice. Care needs to be taken to ensure that your credit terms are not replaced by those of a customer or client as detailed on their order document.

4. ASSESS CREDIT RISKS

Be clear in your own mind how you assess credit risks for new and existing customers and clients and how you impose limits in terms of a customer or client's indebtedness and in terms of time. Satisfy yourself that you and your staff do this in a systematic way and that the potential volume of turnover which a customer or client may offer is not a factor which you take into account. Recognize that salesmen are optimists by nature--especially if commission is involved. Pursue other sources of information before increasing or establishing credit facilities for existing or potential customers or clients. Sources might include trade and bank references, credit agencies and rating registers.

5. RECHECK EXISTING CUSTOMERS AND CLIENTS

Recheck the financial standing of all customers and clients on a regular basis and also when purchases show a sudden substantial increase. Satisfy yourself that the increase is due to successful selling rather than to a competitor ceasing to supply--perhaps because of problems in securing payment.

6. RECOGNISE THE EFFECTS OF BAD DEBTS

Recognize that bad debts reduce bottom line profits and destroy all the effort made in reaching the much larger value of sales required to generate those profits. Recognize also that any bad debt means that much abortive effort will have been expended in trying to collect this money before it was written off and that the cost of this effort is probably 'hidden' and never identified. If you have no doubtful--as opposed to bad--debts, recognize that you may have been missing out on profitable business by being over-cautious.

7. REVIEW THE INVOICING PROCESS AND THE ISSUE OF MONTHLY STATEMENTS

The date on which a customer receives an invoice or statement will often determine when they will make payment. Take a fresh look at the interval between the supply of goods and services and the submission of invoices. See whether the process cannot be speeded

up--it probably can.

Likewise find out how soon monthly statements go out after the last day of the month. Ask yourself, honestly, whether their preparation and dispatch is being deferred to enable some work of lesser priority to be done.

8. LIST OVERDUE AND TOTAL INDEBTEDNESS

You should prepare an Aged Debtors Analysis, which is a monthly list of all those whose settlement is overdue. List their total indebtedness as well as the overdue amount analysed by the month in which payment was due. If slow paying habits reflect financial

difficulties, the whole debt may be at risk.

9. MONITOR THE AVERAGE LENGTH OF CREDIT

Calculate the average length of credit which your business is allowing--or which your customers or clients are taking. This can be calculated monthly, quarterly or even annually but ideally a monthly figure should be extracted. The only thing worse than bad.

news is bad news which arrives too late for remedial action

The calculation required is:

Total outstanding debtor balances at month end

(the amount you are owed in total) / Sales value for 12 months period ending at the same month end x 365 = Average number of days credit you are allowing

For example, if you divide your total outstanding debtor balances of ??10,000 by the sales value for the 12 month period of 100,000 [pounds sterling] and multiply that by 365, you find that you are allowing an average 36.5 days credit to each debtor.

Establish this calculation as a regular routine. Remember to adjust the annual sales value each time you make the calculation by deducting the sales value for the most remote month and adding the most recent figure. Keep a very simple graph which will show you whether the average period for which you are allowing credit is increasing or decreasing. The graph will look like this:

Look for movement between the end of one month and the end of the next AND look for the trend revealed by the graph as a whole. This particular approach will emphasise length of credit being allowed or taken rather than the amount. Both time and amount are relevant to profit and to liquidity.

10. INTRODUCE A COLLECTION PROCEDURE

If you do not have a collection procedure timetable introduce one. If you do have a timetable, check whether it is systematically followed. Be politely firm in your collection routines. Remember to always record details of any telephone calls, including dates and the names of people talked to. Attempt to get clear commitment to dates and amounts of payments.

DO’S AND DONT’S FOR CONTROLLING CREDIT

DO’S

Have a clear vision of what you require from credit control.
Remember that a business like approach is attractive to the right type of customer or client.
Regard the control of credit as a vital regular check on the financial wealth of your business.

DONT’S

Let credit control dominate everything else.
Allow the volume of sales to influence your view of credit-worthiness.
Make excuses for bad payers-leave that to them.

CH-2

LITERATURE REVIEW

Study of Customer Satisfaction in Bank of India

Dr.K.S.Thakur.

Reader & Head Institute of Commerce and Management,Jiwaji

University Gwalior.

Saurabh Goyal

Research scholor ,institute of commerce & management,jiwaji

University Gwalior

“The importance of consumer satisfaction for capturing business in bank has become as focus point in all stage of marketing of banking services, since almost all bank offering more or less the same product like various type of accounts, Various scheme, various type of deposits,loan,ATM etc., with little change in nomenclature.”

Financial Performance is based on District Control Cooperative Bank: The case of Haryana state.

Ranbir Singh Hooda

Lecturer in commerce, CRM

M.S.Tarun

Prof.Department of business management Hisar Haryana

“Cooperative banking is an important vehicle for disbursal of micro –credit production loan as well as consumption advances to rural india.These institution function in within a tiered structure at the state, district and village level,”

Introduction to ICICI Bank
Key subsidiaries of ICICI Bank

10 SIMPLE RULES FOR CREDIT CONTROL

WHY CONTROLLING CREDIT IS SO IMPORTANT?

Cash flow is the “lifeblood” of every business and poor credit control will greatly affect your cash flow and your ability to pay your debts on time. Bad debts can also increase the amount of interest that you pay, shrink profits, and ultimately, close the door on your business.

Yet in many industries, credit is a fact of life. By not offering credit, you could be losing customers to competitors who do give credit and this could jeopardize your business success.

By following some simple procedures, you can keep track of credit to minimize the risks and maximize your chances of hassle-free, prompt credit collection.

HOW CAN WE PROTECT OUR BUSINESS FROM CREDIT LOSSES?

If you are in manufacturing, wholesaling, service or retail business, and you find it necessary to give credit to your customers; you should take action to protect your business from credit losses.

You cannot afford to offer credit to your customers without including the cost of providing credit in your prices. And you cannot expect to give better credit terms to your customers than you receive from your suppliers. Remember, credit is a two-way function. Your own credit rating is based on your ability to pay and your customer should receive the same consideration.

An easy way to think of credit to a new customer is to regard it as lending money. Would you lend money to a total stranger without some security?

The following will provide you with some basic rules for controlling credit:

ESTABLISH WHO YOU ARE DEALING WITH

Set up a credit application form, which all customers must use before credit is allowed. This enables you to ascertain who you are dealing with, the credit limit sought, which can book credit up, are directors guarantees necessary and if so from whom, credit referees and other relevant information. Consider the credit collection pattern in your industry.

APPROVE CREDIT

Provide written response to a credit application promptly approving credit, declining credit or requesting further information. A credit approval letter should state the amount of credit given, credit terms, guarantors (including guarantee forms), penalty/default terms and any other terms and conditions pertaining to the credit approval. An alternative to be to request payment to invoice rather than the statement.

MAIL INVOICES PROMPTLY

Prompt and accurate invoicing with straightforward product descriptions will show your customer that you are serious about payment terms and conditions. It is often advantageous to close off your credit system mid-month to ensure that businesses that have end of month cheque runs for their creditors, have your statement early enough to effect payment at that time (rather than at the end of the following month).

KEEP UP TO DATE RECORDS

One of the keys to the effective credit management is to maintain accurate and up to date records. An ageing of debtors (how long they take to pay their accounts) should always be available. Follow up of debtors trading outside their approved credit terms should be immediate in all cases (treat large and small accounts the same). Do you have a clear and unambiguous credit policy? Such a policy determines and communicates:

when payments are due
the amount of interest (if any) that is to be charged and the total amount of each payment
the type of references (character and credit) and other information that is required for a customer to open an account with you
any discounts that are available for prompt payment

AVOID SPECIAL CASES

Making special arrangements can backfire. No company is so large and important

that you should let them ignore your terms. Rather than damaging goodwill,

insistence on firm, simple settlement terms will create a healthy respect for your

financial efficiency. Remember, it may only take that one exception to drain your

business of its cash. All verbal arrangements should be confirmed in writing.

A credit application form simplifies this process. If the customer is a company,

make sure that you get a personal guarantee for payment by one or more of its

Directors. Consult your solicitor for advice about the Credit Act and how it may

affect your business.

Ensure that a credit ceiling (a maximum amount of available credit) is established

for each account customer in view of their ability to repay their debts.

READ THE FINANCIAL PRESS AND TRADE JOURNALS Due to their day-to-day responsibilities, many small business operators neglect the “big picture” and are out of touch with changes in the marketplace or the economy. Financial media and trade journals are a cost-effective way to get the “feel” of your market. Where available, subscribe to an appropriate credit reference bureau.

START AT THE TOP When attempting to settle accounts, you should deal directly with the decision makers. Discussions with other people on overdue accounts can waste time. It’s usually far quicker and more effective to deal with the person whose signature appears on the cheque. By all means send a ...