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

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

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

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

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

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

Types of credit products

Debt-service ratio:- Ratio of net incremental

income to instalment due Net incremental income

DSR = -------------------------------- Instalment due

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

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

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

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

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

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