Credit Management & Issues of Bad Debts in India

5 mins read
by Angel One

Banking is a serious business since it involves transacting with your customers’ money and generating returns from them. Thus, banks have to be extra cautious to offer promised returns to their depositors and earn additional borrowers’ returns. This is where the importance of credit management in India arises for the sustainable functioning of any bank.

Banks thus play a major role in developing any economy by bridging the gap between the lenders and the borrowers. This financial intermediation between two parties is the main function of any commercial bank. Credit management thus becomes a key deciding factor in determining the success of any bank. We will delve into the details of this in this article.

Importance of Credit Management

A major portion of any bank’s income is generated through the interest income they earn from their borrowers to whom they have lent. They can pay their depositors and even their employees’ salaries only when they are recovering their loans on time. Thus, the role of loan or credit management becomes even more crucial, especially in the context of India that is known for higher bad debts.

Stages in Credit Management in India

Credit management is not a one-time straightforward process consisting of a few steps; rather, it is a continuous process involving multiple stages. These stages are:

  1. Pre-Sanction Stage
  2. Post- Sanction Stage

These stages have further sub-stages that are defined as follows:

  1. Pre-Sanction Stage

Know your Borrower:

The foremost process in this stage is to get to know your borrower completely. A bank should examine the borrower’s profile from all possible angles and conduct background checks on the information provided by him. This will ensure credit management and issues of bad debts in commercial banks in India can be curbed through this to some extent.

Document Verification:

The next step is to analyse all the documents submitted by the borrower. For instance: Double-checking and verifying ID proofs, bank account statements to ensure they are not forged goes a long way in ensuring that sound credit management practices are followed.

Credit Score Evaluation:

This can be the first step as well, wherein the bank asks for the borrower’s credit information from the registered credit bureaus in India. The credit score is the key component of credit information that tells a lot about the repayment habits of a borrower. Simply reject the loan application if the borrower’s credit score is substandard to ensure high levels of credit management and issues of bad debts in commercial banks in India can be tackled with this practice.

Financial Statement & Ratio Analysis:

The next in line is the analysis of the borrower’s financials to assess his cash flows and repayment capacity. If it’s a company, then analysis of its income statement, balance sheet, and cash flow statement. Financial ratios like inventory turnover ratio, current ratio, debt to equity ratio, etc., are computed to arrive at the borrower’s financial stability.

Collateral Valuation/Restricted Covenants:

Big-ticket loans are sanctioned only after taking collateral from the borrower. As credit management in India practices, a bank should ideally conduct a background check of the collateral for its valuation. The bank can also put restricted covenants which disallow the borrowing company to carry out certain activities.

  1. Post-Sanction Stage

Loan Account Monitoring:

The task of sound credit management in India doesn’t end once the loan is sanctioned. Much of it is there even once the loan is sanctioned that includes loan account monitoring. This consists of tracking whether the borrower is servicing the principal and interest on time or not. If the repayment is delayed repeatedly and the loan is disbursed in tranches, then the bank has to freeze the upcoming tranches.

Timely Checking of Project:

If the loan is taken by a corporation for a project, then the bank has to visit the project site for inspection on a regular basis. This is to ensure credit management and issues of bad debts in commercial banks in India go down.

Monitoring Collateral:

A big-ticket loan is mostly a secured loan that is backed by collateral. The collateral can be a financial instrument or real estate of gold whose value changes over time. Thus, as a good credit management practice, the bank should conduct a regular valuation of collateral to monitor the change in its value.

Issues of Bad Debts in Commercial Banks in India

This section will explain the lingering problem of bad debts or NPAs (Non-Performing Assets), known in the Indian banking system. There have been many laws and reforms that have been introduced by the central bank to curb the menace of bad debts. SARFAESI Act, Corporate Debt Restructuring, Joint Lenders Forum (JLF), Bad Bank, Debt Recovery Tribunal (DRT), Insolvency and Bankruptcy Code, etc. These laws have been successful to some extent in the Indian context.

Fortunately, the NPA situation is getting better compared to how it was a few years ago, as per the RBI data. All this is mostly because of the good policies of credit management in India. However, having said that, there is still a lot that needs to be done in this space to reach the NPA levels of global standards.


This is all we had for you in this edition of credit management and issues of bad debts in commercial banks in India. We hope you get a good understanding of what credit management is, why it is important, what the stages and sub-stages in which it is implemented, and how it is implemented. We have also covered the issue of bad debt in the Indian banking sector. To know more about banking in general and stock trading, open a Demat account with Angel One by clicking here.