What is Credit Policy? What are the features of a good credit policy?
Credit policy is a set of rules and regulations that guides the lending decisions of a bank. It is formulated in line with the Bangladesh Bank’s regulatory guidelines and the bank’s own strategic objectives. The primary purpose of a credit policy is to minimize credit risk, protect depositors’ money, and ensure sustainable earnings for the bank.
A well-designed credit policy provides a clear framework for all credit officers and decision-makers. It removes ambiguity from the lending process and ensures consistency across all branches and business units.
Features of a Good Credit Policy
A good credit policy has the following distinguished features:
Credit Volume
A good credit policy defines the target amount of loan disbursement during the planning period across different sectors and borrower segments.
Earning Target
It sets the expected income from lending activities, ensuring the bank’s profitability goals are embedded in the credit plan.
Asset Quality Standards
It establishes criteria to maintain a healthy loan portfolio by setting acceptable risk grades, NPL limits, and provisioning standards.
Regulatory Compliance
It covers all mandatory requirements, including:
- CMSME lending targets
- Agricultural credit quotas
- Large loan concentration limits
- Single borrower exposure limits
- ICRRS rating, and
- CIB reporting requirements.
Application Procedure
A good credit policy describes the process a borrower must follow to apply for a loan, including required documents and submission procedures.
Credit Appraisal Process
It defines committee formation, assessment stages, and evaluation procedures to ensure every loan proposal is properly scrutinized before approval.
Loan Pricing Method
It sets the method for determining interest rates on loans, including the reference rate, risk premium, and spread over the cost of funds.
Delegation of Power
Loans may be disbursed from the branch, zone, head office, or board, depending on loan size and type. A good credit policy specifies who can approve loans at what level.
Documentation Guidelines
A good credit policy lists all required documents for loan sanction and disbursement, including legal and collateral documents.
Monitoring and Supervision
A good credit policy should include a monitoring and supervision clause. It explains how loans are tracked and reviewed after disbursement to ensure proper use of funds and timely repayment.
Management of NPLs
It defines clear procedures for dealing with non-performing loans, including rescheduling, write-off, and recovery strategies.
Legal Action Framework
It sets out the steps for recovering loans through courts, Artha Rin Adalat, and other legal processes when borrowers default.
Credit Operations & Management, Module A, 99th Exam Q1(b), 7th Exam 1(b)
