What is Bank Credit? What is the Role of Credit Management in Banks?
What is Bank Credit?
The word “credit” is derived from the Latin word Credo. It means “I believe.” Credit is usually defined as one’s ability to buy with a promise to pay.
Bank Credit is the bank’s confidence in the borrower’s ability and willingness to repay the debt as per the repayment schedule.
In simple terms, Bank Credit is the system by which a bank provides finance, goods, or services to a borrower in return for deferred payments.
Bank Credit plays a vital role in promoting economic development by supplying funds to the productive activities of entrepreneurs and businesses.
Example: A garment factory owner borrows Tk. 2 crore from a bank to purchase machinery. He does not pay immediately. He repays from his future business earnings. This is bank credit in action.
What is Credit Management?
Credit management is the process of controlling and supervising all lending activities of a bank. It ensures that credit is given wisely, used properly, and recovered on time.
Role of Credit Management in Banks
Sound credit management is essential for protecting depositors’ money and maintaining the bank’s financial health. Have a look at the role of credit management in banks:
Revenue Generation
Credit is the biggest source of bank income. Good Credit Management ensures maximum return from lending activities.
Risk Control
Credit Risk is a serious concern for banks in Bangladesh. Sound Credit Management identifies and controls credit risk before it causes financial loss. This protects the bank from loan defaults and bad debts.
Protection of Depositors’ Money
Banks lend out depositors’ funds. Credit management ensures these funds are deployed safely and recovered on schedule.
Maintaining Capital Adequacy
Sound credit management prevents excessive loan loss provisions. It helps the bank to maintain its required capital base under regulatory standards.
Financial Stability
High Non-Performing Loans (NPLs) are a major threat to the stability of the banking sector in Bangladesh. Sound Risk Management controls the build-up of Non-Performing Loans (NPLs). In this way, Risk Management ensures the financial stability of the country.
Regulatory Compliance
Sound Risk Management keeps the bank aligned with Bangladesh Bank’s guidelines, including CMSME lending targets, large loan concentration limits, ICRRS, and CIB reporting requirements. It helps banks to comply with all the regulatory guidelines.
Economic Development
Risk management directs banks to provide credit to productive sectors. It supports banks in employment generation and contributes to national economic growth.
Credit Operations and Management, Module A, 99th BPE, 1(a), 96th BPE 1(a), 5th BPE 1(a)
