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ARTICLE

QUALITY OF
LENDING VS.
CREDIT RISK

(A Research study on
Credit Risk)

R ealizing a good quality product in the market                    and testing products or services to check for statistically
              (whether it is a physical or service product) gives  significant variations.
              benefits to both organizations as well as their
              customers. "Quality Control" means a process         Bank is a financial institution that undertakes the banking
              through which a business seeks to ensure that        activities like, it accepts deposits and then lends the same
product or service quality is maintained or improved and           to earn profit. Lending or extending credit to needy persons
errors are reduced or eliminated. Quality control requires         is a major bank product.
the business to create an environment in which both
management and employees strive for perfection. This is            'Quality of Credit' and 'Credit Risk' is interrelated. Credit Risk
done by training personnel, creating benchmarks for quality,       is inversely proportional to Quality of lending. Credit Risk
                                                                   will decrease, if Quality of lending increases and vice versa.
             About the author                                      Due to poor quality of lending, banking industry is suffering
                                                                   with huge Non-performing Assets (NPAs). Thereby higher
             CMA Dr. P. Siva Rama Prasad                           provisions for NPAs, lower profits, additional capital to
             30 Years of Bankings Experience and 6                 maintain CRAR and decrease in rating of the bank etc are
             Years of General Insurance Experience.                the side effects of poor quality of credit or lending.

             Fellow Member of the following Professional           Prerequisites for a good Quality Lending:

Institutes:                                                        Scrutiny of Credit Proposal:

-The Institute of Cost Accountants of India, Kolkata               Scrutiny of proposals submited by prospective borrowers for
                                                                   credit is the first step in Credit Management Process.
-Institute of Company Secretaries of India, New Delhi              Whether to lend or not to lend depends on the 'quality
                                                                   scrutiny' of the credit proposal.A banker has to verify the
-Indian Institute of Banking and Finance, Mumbai

-Insurance Institute of India, Mumbai

and Member of All India Management Association, New
Delhi.

BANKING FINANCE |                                                  FEBRUARY | 2016 | 39

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