"Credit is a contractual agreement in which a borrower receives something of a value with the explicit agreement to repay the lender at some date in future. The borrower pays interest as a compensation to the lender for allowing the use of fund."
"Credit management is the management of credit portfolio of the bankers and financial institutions. The credit refers to short-term loan and advances as well as medium/long term loans and off balance sheet transaction. Management includes within its preview pre-sanction appraisal, sanction, documentation, disbursement and post lending supervison and control." O.P. Aprawal
A specified sum of money lent by banks to a customer usually for a specified time at specified rate of interest. In the most cases bank require some form of security for loans specially if the loan is to a commercial enterprises." Oxford Dictionary of Business Second edition.
According to Bank and Financial Institution Act (BAFIA) 2073, "Credit means a direct or indirect commitment to supply funds and in return therefore, the right to recover the invested funds, and payment of interest or other charges on such credit, refinance issued against security of a credit or investment, restructuring and renewal of a credit, security issued for there to be carried on through automated teller machines and cash dispensing machines as well as those to be carried on through charge cards, debit card and credit cards."
Funded loan refers to the loan which is disbursed in the form of cash or any other payments made on the behalf of customers. Whenever a bank disburses a loan and cash goes out of the bank immediately, then it is classified as funded loan. Funded loans are recorded in the books of accounts and appear in the balance sheet under the heading of loan and advances.
Some examples of funded loans are
Bank's commitment for the future payment or any other conditional payment on the behalf of its customer is known as non-funded loan. in non-funded facilities bank don't have to pay cash but need to commit a conditional payment. Non-funded facility involves the issuing banks' commitment to honor certain promises as per the letter of credit or guarantee or similar documents favoring a third party, without requiring any immediate outlay of funds by the bank at the time of making commitment. However outlay may take place in the event of development of commitment on issuing bank. These commitment do not appear in the bank balance sheet. It is presented as contingent liabilities outside the balance sheet hence they are also known as off balance sheet items.
Some examples of non-funded loans are
The loans which are granted for the creation of longer-term assets (Capital expenditure) are known as fixed term loans. These type of loans are generally more than one year and repaid on fixed instalment over the loan tenor. These types of loan are secured mortgaging the specific fixed assets financed or entire block of fixed assets of a particular project.
Some examples of fixed term loans are
Business requires working capital for its day to day operation. Working capital loans are granted to finance the working capital requirements of the business. Working capital requirement relate to processing, production, sale of goods and services which are granted for bridging the financial gaps in production cycle of the business. Bank sanction a specified credit limit to the borrower against the security of stock, book debts or any other assets acceptable to the banks which are pledged/hypothecated.
Some examples of Working Capital loans are
Retail/Consumer loans are the loans that are granted for consumption purposes. These loans are based on the security and the future cash flow (disposable income) of the borrower.
Some examples of Retail/consumer loans are
Corporate loans are the loans that are granted to big business houses, the corporate loans are appraised on the basis of detailed analysis of the borrowers past, projected balance sheet, profit and loss account, cash flow statement, etc. to determine financial liability of the project and its debt serving capacity. The technical, managerial, commercial liabilitiesof the project are also critically examined by the bank before granting these loans. For example: all the loans disbursed to corporate sector
Loan granted to customer purchasing different types of commercial bills viz Travellers cheque, Bank cheques, Export/ Import bills. These types of limits are granted for very short period of time (generally 90 days).
Limit assigned to the borrower and loaded in a card to make withdrawals or to pay the prices of goods and services. Repayment can be made after a fixed period of time. The bank generally avail revolving types of limits for credit card customer.
Banks lend against fixed deposit receipt of their own bank as well as other banks.