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: - Borrower’s 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