BASICS OF CREDIT

The word “credit” comes from the Latin word “credo” which means “I believe”. Hence, credit is based upon belief, confidence, trust and faith. The loan is based upon the confidence of borrower’s future solvency and repayment. Hence, credit means ability to command the other’s capital in return for a promise to re-pay at some specified time in future. Besides, credit is the combination of “ability to borrow” and “willingness to borrow”. Infact, credit is an individual’s borrowing capacity, often being considered as an “economic good” to be produced, managed and marketed.

There are four C’s of credit, viz, character, capacity, capital and condition that must be considered in lending or using. The term character implies here the credit character related to those qualities of an individual which make him conscious about his debt. These characters may include borrower’s moral qualities like honesty, integrity, sense of responsibility and trust worthiness. If a person has been borrowing the loan and also timely repaying the debt, it reflects that he possesses ideal credit character and vice-versa.

Character is one of the basic cornerstones in assessing the risk bearing ability. A man of high credit character can withstand unforeseen events and may save himself from becoming insolvent. Character has also a bearing on returns and repayment capacity.

The term capacity means the ability to pay his debt as and whenever it becomes due. Since payments usually depend upon income, the capacity is a function of income rather than savings. Moreover, income alone does not indicate capacity.

The term capital refers to the equity or net worth of an individual or business. It assures that funds are available to repay the loan, if character and capacity prove to be inadequate. Hence, capital represents as one of the cornerstones for measuring the risk-bearing ability.

The term condition also signifies the financial condition of the borrower which has direct relevance with the risk bearing ability.

These are seven P’s of credit, viz, purpose, person, productivity-planning scheme or projections, phased disbursement, proper utilization, payment of instalment or repayment and protection security. All these characters determine the soundness of credit, i.e. generating adequate income (relates to purpose and productivity planning scheme or projections), repaying the same whenever falls due (payment of instalment or repayment) and maintaining risk-bearing ability (person and protection-security).