Whether it’s an NBFC providing small-ticket personal loans or established banks offering full-fledged home loans, no lender will be comfortable with the idea of lending money without any kind of risk management. This is exactly where a lending strategy comes into picture. It involves offering a credit limit to a user only after taking into account their profile and the risk associated with providing them money. This business strategy is also known as credit control. Keep reading this blog to explore credit control meaning, importance, factors and more.
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Credit control meaning is when an organisation regulates and controls the amount of money provided to a borrower based on a predefined strategy. From banks and non-banking companies to any organisation that engages in providing credit has a credit control strategy in place. Following this minimises the risk associated with lending the money as it ensures timely repayments which helps improve the business.
The lenders carry out credit control by thoroughly assessing the credit profile of an applicant before lending them money. Maintaining a good credit score, clean repayment history and strong credit profile reduces your borrowing risk because of which you can get a higher credit limit.
A lender makes their profit by charging interest rate on personal loans. But this will only happen if the borrower repays their loan on time. And that’s the objective of credit control strategies. It ensures that the borrower repays the money according to their repayment schedule and avoids bad debt.
Lenders follow various credit control methods that help them filter out their borrowers based on their risk appetite and give them an appropriate limit. This involves performing background checks of profiles, setting credit limits, regularly monitoring their repayment behaviour, implementing an effective collection strategy, etc. This allows them to minimise their risk and maximise their profits.
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A crucial type of credit control is carrying out a risk assessment before offering a loan by evaluating the credit score, repayment history, and overall credit behaviour of a borrower.
Setting transparent terms and conditions of borrowing ensures that the borrower is entitled to repay the loan. This includes information like repayment tenure, EMI plan, interest rate, etc.
Credit control doesn’t end with assessing risk or setting limits. The lender regularly monitors the credit activities of their borrower by tracking their missed repayments.
Even after implementing the credit control strategies mentioned above, there will be borrowers who default on their personal loan repayments. And setting a collection strategy ensures that bad debt is minimised. An effective collection strategy involves regular follow-ups and payment reminders to complete the repayment.
An insurance policy can protect a lender from the default of the borrowers. They get coverage for any outstanding payments which help them minimise their loss.
The perks of implementing credit control methods are beyond the fact that it maximises profits for an organisation.
Here’s why every banking and non-banking company should have an effective credit control strategy in place:
It Minimises the Risk Associated With Lending Money to Any Borrower:
If a lender provides a loan to a person with a bad credit score due to the absence of a risk assessment, then there’s an increased chance that the borrower defaults on the loan. This means the lender will end up incurring a loss due to the absence of a credit control system.
It Plays an Integral Role in Maintaining the Cash Flow of a business:
If the lack of a credit control strategy leads to default in payments at a larger scale, then it can negatively impact the cash flow of the business. This is because any credit-related organisation makes their profit from the interest on loans which is only possible with timely repayments.
There are some important steps to implement when setting up an effective credit control process for an organisation.
1) Make sure you’re gathering the correct personal and credit information of the borrowers. This includes their credit score, phone number, email address, etc.
2) Implement an effective strategy to evaluate the eligibility and risk of the borrower. This includes assessing their credit score, repayment history and overall profile.
3) Set an appropriate credit limit on the basis of the evaluation of the credit profile of the borrower that also manages the risk exposure of the lender.
4) Keep monitoring ongoing payments to ensure there are minimum defaults. This also involves regularly checking for any missed repayments and upcoming EMIs.
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Before you implement your credit control strategy, it’s important you look at your plan holistically and don’t miss out on any important factors.
Some basic factors to consider are given below:
The Profiles of Borrowers: A factor that plays an integral role in creating a credit control strategy is the profile of the borrower. Getting a clear insight into the repayment habits of the borrowers can help allocate the right credit limit to them.
Risk Capacity: An important factor to consider is the risk a lender can afford to take when providing credit.Regulatory requirements: It is important for any bank, non-banking organization or institution to be in compliance with all the regulatory requirements of the RBI.
Other Factors: There are some other factors like the change in economic conditions, competitors in the market, industry-specific risks, interest rate, inflation rate, etc. that can affect the credit control strategy being put in place.
With diligent credit assessment, transparent terms of borrowing, consistent monitoring of repayment behaviour, and implementing best collection practices, any credit organisation can create an effective credit control strategy, which cannot be ignored.
Doing this will promote responsible and regulated borrowing practices that help maintain a sweet spot of increasing sales by providing credit to more users and minimising the risk of defaulting on payments.
Assessing the repayment history and credit profile of a borrower to evaluate their eligibility before giving them a set credit limit is an example of credit control.
Credit control risk is the risk that an organisation takes to provide credit to a borrower. The risk associated with the same is the possibility of late repayment or default from the borrower’s end.
From assessing the risk of a borrower before providing them credit to following up with them to complete their payment or monitoring their repayments – this entire process is known as the credit control cycle.
The methods used by organisations to set a credit control strategy in place may depend on factors like the policies they’re following. However, some common methods of credit control are:· Credit and risk assessment· Terms of borrowing· Regular credit monitoring· Repayment collection· Credit Insurance
An effective strategy for credit management and control minimises the risk associated with lending money to any borrower and plays an integral role in maintaining the cash flow of any lending business.
The process of determining the credit worthiness of a borrower to determine the risk associated with lending them is referred to as the credit control process.