CLASSIFICATION 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.

CLASSIFICATION OF CREDIT

Credit can be classified on the basis of time, purpose, security, lender and borrower.

(i) Time classification:- It classifies credit into three groups, i.e. short, medium and long term. The “short-term loans” are generally advanced for meeting annual recurring purchases such as, seed, feed, fertilizers, hired labour expenses, pesticides, weedicides, hired machinery charges, etc., and termed as seasonal loans/crop loans/production loans. It is expected that the loan plus interest would be repaid from the income received through the enterprise in which it was invested. The time limit to repay such loans is a year or at the most 18 months.

“Medium-term loans” are advanced for comparatively longer lived assets such as machinery, diesel engine, wells, irrigation structure, threshers, shelters, crushers, draught and milch animals, dairy/poultry sheds, etc., where the returns accruing from increase in farm assets in spread over more than one production period. The usual repayment period for such type of loan is from fifteen months to five years.

“Long-term loans” are related to the long lifed assets such as heavy machinery, land and its reclamation, errection of farm buildings, construction of permanent-drainage or irrigation system, etc. which require large sums of money for initial investment. The benefits generated through such assets are spread over the entire life of the asset. The normal repayment period for such loans ranges from five to fifteen or even upto 20 years.

(ii) Purpose classification:- Credit is also classified based on purpose of loans e.g. crop loan, poultry/dairy/piggery loan, irrigation loan, machinery and equipment loan, forestry loan, fishery loan etc. These loans signify the close relationship between time and use as well as rate of return (or profitability). Sometimes loans are also classified as production and consumption loans due to the fact that production loans are diverted for consumption purposes by the weaker sections. So, the banks have also started financing for consumption purposes (exclusively for home consumption expenditures) besides financing for the production purposes. The consumption loans are also to be repaid from the sale proceeds of the crop.

(iii) Security classification:- Security offered/obtained provides another basis for classifying the loans. The secured loans are advanced as against the security of some tangible personal property such as land, livestock and other capital assets, i.e., medium and long term loans. The borrower’s credit worthiness may act much more than the security offered, which if doubtful may result willful default. Moreover, the secured loans are further classified on the basis of type of security e.g. mortgage loans, where legal mortgage of some property such as land is offered to the lender, i.e., loans for intangible property such as land improvement, irrigation infrastructures, etc. and hypothecated loans, where legal ownership of the asset financed remains with the lender though physical possession with the borrowers i.e. loans for tangible property such as tractor, machinery and equipments. The private money lenders, usually possess items such as gold ornaments/jewellery or land as security, which reminds the borrower about his obligations of loan repayments. On the contrary, unsecured loans are generally advanced without offering any security e.g. short-term crop loans.

(iv) Lender classification:- Credit is also classified on the basis of lender such as (a) Institutional credit e.g. co-operative loans, commercial bank loans and government loans; (b) Non-institutional credit e.g. professional and agricultural money lenders, traders and commission agents, relatives and friends etc.

(v) Borrower classification:- The credit is also classified on the basis of type of borrowers (i.e., production or business activity as well as size of business) such as crop farmers, dairy farmers, poultry farmers, fisherman, rural artisans etc. or agricultural labourers, marginal/small/medium/large farmers, hill farmers or tribal farmers etc. Such classification has equity considerations.