CCP exam | Credit Delivery | Chapter 4 [FREE EPDF]

Before we dive in, watch this video for a complete breakdown:

00:00:02 – Welcome and Introduction to Credit Delivery

The session opens with a warm welcome and an introduction to the importance of understanding credit delivery. This segment sets the stage by emphasizing how mastering credit facilities is crucial for anyone preparing for CCP certification or working in the banking sector. The friendly tone immediately invites you to explore the core concepts that will shape your financial knowledge.

00:00:29 – What is a Credit Facility?

At its core, a credit facility is a loan or an advance provided by a bank to its customer. In simple terms, whenever a bank offers a loan or an advance, it’s providing a credit facility. This segment clearly defines the concept and highlights the fundamental role credit plays in banking. Think of it as the backbone of financial operations—without it, businesses and individuals wouldn’t have the flexibility to manage their day-to-day operations.

00:01:01 – Types of Credit Facilities and Their Variations

Credit facilities are not one-size-fits-all. Banks offer a basic credit facility to all customers, which is then customized with additional features. For example:

• Cash Credit: A basic facility with a variation in the form of lines of credit.
• Overdraft: An extension of the basic credit facility that allows withdrawals beyond your account balance.
• Bill Finance & Demand Loans: Other variations that cater to specific business needs.

Using bullet points and clear language makes these concepts accessible—even if you’re new to banking terms.

00:02:04 – RBI’s Loan System for Credit Delivery

The Reserve Bank of India (RBI) has introduced a loan system targeting large borrowers. If a company receives a working capital loan above a certain threshold (say, ₹150 crore), it falls under this framework. The system typically splits the loan into two parts:

• 60% as a working capital loan
• 40% as a cash credit facility

This 60/40 structure helps maintain financial discipline and ensures that banks do not overextend their lending capabilities.

00:03:51 – RBI Guidelines: Minimum Loan Component and Credit Discipline

Here, the focus is on the minimum loan component—usually fixed at 60%—that banks must adhere to when providing loans. Even if a bank has invested in a borrower’s commercial paper, these investments are factored into this calculation. This guideline is designed to enforce financial discipline and prevent overdependence on bank credit, ensuring that borrowers maintain a balanced financial portfolio.

00:05:02 – Enhancing Credit Supply for Large Borrowers

The RBI also lays down guidelines to enhance credit supply for large borrowers by encouraging them to diversify funding sources. Instead of solely relying on bank loans, companies are urged to tap into capital markets, money markets, or bond issues. This approach not only spreads the risk but also ensures that banks can maintain a healthy credit delivery system without facing excessive exposure.

00:10:02 – Modes of Credit Delivery in Banking

Banks adopt several methods to deliver credit:

• Sole Banking: One bank handles the entire credit need, ideal for small and medium enterprises.
• Multiple Banking: Borrowers obtain loans independently from several banks.
• Consortium Lending: A group of banks collaboratively provides a loan, sharing risk and responsibilities.
• Joint Lending: Multiple banks come together, negotiate common terms, and share both benefits and risks.

These modes offer flexibility and risk diversification—key components in today’s dynamic banking environment.

Certified Credit Professional | Credit Policy Part 2 [Free Epdf]

00:15:08 – Pros and Cons of Different Credit Delivery Modes

Each mode has its advantages and trade-offs:

• Sole Banking is faster but may expose the bank to higher risks.
• Multiple Banking offers flexibility but demands more documentation.
• Consortium Lending ensures risk sharing but requires coordination among banks.
• Joint Lending provides uniform terms, though decision-making may slow down due to multiple parties.

Consider these points carefully when choosing your credit strategy.

00:22:26 – Opening Cash Credit and Overdraft Accounts

Banks regulate the opening of cash credit and overdraft accounts based on the borrower’s exposure. A borrower with minimal credit exposure can open accounts with any bank, while larger exposures are restricted to the bank where the borrower holds maximum exposure. This ensures that banks are not overwhelmed by excessive risk from a single customer.

00:25:51 – Syndication Lending: Structure and Benefits

Syndication lending is where multiple banks come together to fund a large loan. The process involves a lead bank that coordinates the deal, negotiates terms, and oversees documentation. This approach:

• Spreads risk among participating banks
• Offers competitive pricing and flexible terms
• Facilitates financing for very large projects that a single bank cannot handle alone

00:29:28 – Downselling in Syndication and Different Syndicate Loan Types

In some cases, the lead bank may sell part of its loan portion to reduce its risk—a process known as downselling. Other syndication types include:

• Best Effort Syndication: The lead bank promises its best effort, though the loan amount might fall short.
• Club Deals: Equal participation by a small group of banks without a dominant lead.
• Form Commitment & Underwritten Deals: Where the lead bank guarantees the full loan amount, covering any shortfall if necessary.

00:34:00 – Credit Priority and Priority Sector Lending Guidelines

Banks also need to balance their lending portfolios by prioritizing certain sectors such as agriculture, education, and micro-enterprises. RBI guidelines enforce priority sector lending targets, ensuring that vital sectors receive a mandated share of the bank’s total lending. This strategy boosts economic growth and fosters financial inclusion.

00:40:17 – Credit Acquisition and Portfolio Strategy

Credit acquisition involves the process by which banks expand their loan portfolios—whether organically (primary acquisition) or by buying existing loans from other banks (secondary acquisition). A well-balanced credit portfolio strategy involves:

• Diversifying across risk levels
• Setting clear criteria for low, moderate, and high-risk lending
• Maintaining stringent documentation and monitoring processes

00:47:04 – Statutory and Regulatory Restrictions on Credit Delivery

Finally, banks must comply with various statutory and regulatory restrictions. These include:

• Fixed exposure limits for single and group borrowers
• Restrictions on lending to directors or using a bank’s own shares as collateral
• Maintaining adequate liquidity ratios as per RBI norms. For more details, check out the official RBI guidelines on banking regulations.

Conclusion

In summary, this session on credit delivery provides a deep dive into the core mechanisms of credit facilities and lending arrangements. We explored the definition and types of credit facilities, RBI’s structured approach to loan delivery, and various credit delivery modes—from sole banking to syndication lending. The discussion further highlighted the importance of adhering to regulatory guidelines, managing credit risk, and maintaining a balanced portfolio.

Whether you’re a banking professional aiming for CCP certification or simply eager to learn more about financial strategies, these insights are designed to empower you. Take these learnings and apply them in your financial decision-making process. If you have questions or need further clarification, please leave your comments below. Don’t forget to subscribe, follow, and explore our related content to stay updated with the latest in banking and finance!

Download the PDF

For your convenience, you can download a PDF version of this guide to have all these insights at your fingertips. Use it as a quick reference for your studies or professional development.