CREDIT POLICIES

PRESENTED BY-

RIKSHI RAJ GOGOI

ROLL NO.- 64.
MBA 2ND SEMESTER.

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 Credit Policy

Credit Policy:
Guidelines addressing how a company evaluates potential
customers who wish to buy on credit. Guidelines include credit
terms that specify discounts, interest rates, and credit limit.

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 Credit policy is the determination of credit standards
and credit analysis.

A credit policy of a firm provides the framework to

determine
 Whether or not to extend credit to a customer and
 How much credit to extend.

The credit policy of a firm has two dimensions:

 Credit standards and
 Credit analysis.

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Credit
Creditstandards:
standards:
 It represents the basic criteria or minimum requirement for
 It represents the basic criteria or minimum requirement for
extending credit to a customer.
extending credit to a customer.
The credit standards may be – tight or restrictive and
The credit standards may be – tight or restrictive and
- liberal or non restrictive
- liberal or non restrictive
The trade-off with reference to credit standards covers
The trade-off with reference to credit standards covers
 The collection cost
 The collection cost
 the average collection period/ investments in receivables.
 the average collection period/ investments in receivables.
 Level of bad debt losses and
 Level of bad debt losses and
 level of sales.
 level of sales.

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Collection costs:
If more credit extended (relaxed) the collection cost will be more
and If less credit extended (tightened credit standard) the cost will
be less.

Investment Receivables or the Average collection period:

 A relaxation in credit standards leads to higher average accounts
receivable.

 But in case of tightening of credit standards the average accounts

receivable will be lower (because of decrease in sales).

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Bad Debt Expenses:

It also affect the credit standards.

Bad debt expenses increase with relaxation in credit
standards and decrease if credit standards become more
restrictive.

Sales volume:

When credit standards are relaxed the sales are increased

and in case of tightening the sales are decline.

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Credit Analysis
It involves obtaining credit information and
evaluation of credit applicants.

Steps involved in credit investigation process:

 obtaining credit information and
 analysis of credit information

Here the information are obtained from internal and external

sources.
 Internal information are obtained from various forms and
documents filled up by the customers.

 External information are collect from Financial Statements, Bank

References, Trade References, etc.

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Analysis of Credit Information:

Quantitative- It is based on the factual information available from

the financial statements, the past records of the firm etc.

Qualitative: here the information are obtained from the suppliers,

bank references and specialist bureau reports.

At last decision is taken whether credit should be extend to the

customer or not.

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