Types of credit products

1
Types of credit products

• 1. According to duration of repayment period
• a. Short term (seasonal loans, crop loans,
  production loans)
• - Raw material for industry
• - Seasonal inputs in agriculture
• - Repayment period 6 months to 18 months
• - Recovered in one installment

2
Types of credit products

• b. Medium term (investment loans)
• - Working capital assets such as machinery,
  pumps, dairy animals
• - Repayment period up to 5 years
• c. Long term
• - Establishment of orchards with long
  gestation period
• - Permanent land improvements
• - Repayment period up to 20 years

3
Types of credit products

• 2. According to security offered
• (a) Unsecured loans
• - Offered on personal security of borrowers
• - Signature or thumb impressions on a piece of
  paper
• - Based on guarantee of a third party

4
Types of credit products

• (b) Secured loans
• - Based on tangible collateral security
• (i) Mortgage loans
• - Legal mortgage of some property for
  intangible property
• - Loans for land improvement, irrigation
  infrastructure
• (ii) Hypothecated loans
• - Loans for tangible property
• - Legal ownership of the asset remains with
  lender
• - Physical possession with borrower

5
Types of credit products

• 3. Based on liquidity
• (a) Self-liquidating loans
• - Generate enough income during the repayment
  period to repay itself
• - All short term loans are self-liquidating
  loans

6
Types of credit products

• (b) Non-self liquidating loans
• - Which yield income stream for a much longer
  period
• - Repayment in a relatively shorter period
• - Repayment is not only from incremental
  income generated from the loan but income from
  other resources also

7
Types of credit products

• Debt-service ratio
• - Ratio of net incremental income to
  instalment due
• Net incremental income
• DSR --------------------------------
• Instalment due

8
Calculation of net incremental income

• Crop loan Rs. 5,000
• Area under Paddy 2 ha
• Present paddy yield 20 q/ha
• With loan paddy yield 30 q/ha
• Present Input cost Rs. 1500/ha
• After loan Input cost Rs. 2500/ha
• Price of paddy Rs. 500/q
• Net incremental income ?
• Rs. 8000

9
Attributes of credit products

• Down payment
• - Borrowers contribution in total proposed
  investment
• Grace period
• - Period after which recovery starts
• - Investments with long gestation periods

10
Portfolio quality of RFI - indicators

• Advances
• - The amount of loan extended by any
  institution during a particular period
• Instalment
• - Amount due by a particular date
• Recovery
• - The amount that has already been realized
• - Related to demand (amount due) during the
  reference period

11
Portfolio quality of RFI - indicators

• Overdue
• - The amount that was due at a particular date
  but has not been recovered
• Loan outstanding
• - The principal plus interest that remains to
  be recovered
• - Always refers to a particular date

12
Portfolio quality of RFI - indicators

• Defaulted loans (bad debt)
• - loans with late payments
• - unlikely or impossible to recover
• Arrear rate
• - overdue as a percentage of total portfolio
  outstanding
• Portfolio at risk
• - amount outstanding of loans which are in
  arrears, as a percentage of total portfolio
  outstanding

13
Strategies to reduce the default rate

• Rescheduling of loans
• - Incase of non-willful default
• - Spreading repayments for one year over
  remaining instalments
• - Repayment period is unchanged
• Rephasing of loans
• - Incase of non-willful default
• - Extending the recovery period by one more
  instalment
• - Instalment amount remain same