Unit-3

Six C's of Credit:- The "Six C's of Credit" are a set of factors lenders use to evaluate the creditworthiness
of a borrower. These factors are: Character, Capacity, Capital, Collateral, Conditions, and Credit score.
They help lenders assess the likelihood of a borrower repaying a loan.

Here is a closer look at each of the Six C’s, what they mean to lenders, and how they can impact your
chances of getting a loan.

1) Capacity:-This assesses a borrower's ability to repay the loan, looking at their income, expenses, and
other financial obligations. Lenders evaluate your capacity based on these factors:

 Financial Statements: Lenders want to see positive cash flow projections extending 12 months
or more. They may also ask to see your balance sheet, income statement (sometimes called a
profit and loss statement), and tax returns to evaluate your business’s financial health.
 Payment history: Timely payments to suppliers, vendors, and creditors show that your business
has the money to meet its financial obligations. Lenders will also check to see how long your
credit accounts have been open and your credit limits.
 Additional resources: Does your business have other cash reserves or resources you can tap to
repay the loan if necessary.

2) Character:-This refers to a borrower's reputation and trustworthiness, and how they have
managed debts in the past.Character incorporates your business and industry experience. Your
reputation in the industry and community is also a factor in how lenders evaluate character.
Building personal relationships with bankers and others in the local community can go a long
way toward demonstrating character. Other important elements of character are a history of
timely payments to suppliers, positive references from trade creditors, and strong financial
management skills.

On top of character, the total years your company has been in business, customer continuity and
turnover, and how long you’ve lived at or operated out of your current address will also factor into the
lender’s decision by showing them the stability of your business.

3) Capital: This refers to the borrower's financial assets and net worth, indicating their ability to
withstand financial setbacks.

 Investing some of your own money in a project is a must for loan approval. Banks
typically request between 10% to 30% of your own money at risk in a project before
they will commit.
 The owner of a company must have his/her capital invested in the firm before a bank
decides to risk in its investment. Capital refers to the proprietor's investment of the
proprietor in his / her company that he/she could lose if the business were unsuccessful.
4) Collateral: This is an asset that the borrower pledges as security for the loan,
providing the lender with a recourse if the borrower defaults.

 Collateral serves as security that if you cannot pay back the loan, the bank
can seize and sell the assets you’ve pledged. Collateral can include
equipment, machinery, inventory, real estate, accounts receivable or
securities. If your business does not have sufficient assets to serve as
collateral, you may need to pledge your personal assets, such as vehicles,
stocks, or your home. Not all loans require collateral; however, pledging
collateral may help you qualify for better loan terms or a larger loan.

5) Conditions: These are external factors that could affect the borrower's ability
to repay the loan, such as economic conditions or industry trends.

 Conditions refers to the type of business your customer is in, i.e., their
business environment. In other words, what are the potential risks
associated with their line of business, and the customers of your customers’
business classification in accordance to the various risks types
 Conditions are your plans for using the money, which give more context for
the other “C’s,” along with external factors like the market you’re in and
potential demand. The future conditions can make past data less relevant,
which is why lenders use the past and the future conditions when making a
decision.

6) Credit score: This is a numerical representation of a borrower's

creditworthiness, based on their credit history and other factors.

 Business credit scores give lenders a third-party evaluation of your current

debts and how often they’re being paid, so the lender can evaluate the risk
of giving you a business loan compared with the other “C’s” of credit.
Lenders have different thresholds for scores they’ll lend to, so talk with
 them about their requirements before applying, since loan applications can
cause a short-term hit to your score.

Conclusion:- By evaluating these six factors, lenders can gain a comprehensive

understanding of a borrower's financial standing and make more informed
decisions about whether to grant a loan.

Borrowers
Introduction:-
A borrower is an individual, company, or entity that receives funds or credit from
a financial institution (like a bank) with the understanding that they will repay the
borrowed amount, usually with interest. Borrowers utilize these funds for various
purposes, such as purchasing assets, financing projects, or managing cash flow.

Key aspects of a borrower:-

Receiving Funds:- A borrower obtains money from a lender for a specific purpose,
such as purchasing a home, starting a business, or covering personal expenses.

Repayment:- Borrowers are obligated to repay the principal amount borrowed, as

well as any agreed-upon interest charges, over a predetermined period.

Credit Facilities: Borrowers can access various credit facilities, including loans,
credit cards, lines of credit, and other forms of credit.

Types: Borrowers can be individuals (like consumers taking out personal loans or
mortgages), businesses (taking out business loans), or even governments.

Relationship with Lender: Borrowers and lenders have a contractual relationship,

where the borrower agrees to repay the borrowed amount according to the
terms agreed upon.

Types of borrowers:-
Borrowers can be broadly classified into individual, business, and
government/public sector entities. Individuals borrow for personal needs like
housing, education, or debt consolidation. Businesses borrow to finance
operations, expansion, or investment. Government/public sector entities borrow
to fund public infrastructure and services.

Individual Borrowers:
Home Loans: Borrowing to purchase a house.

Auto Loans: Funding the purchase of a vehicle.

Personal Loans: Used for various personal expenses like debt consolidation,
travel, or medical bills.

Student Loans: Used to finance education.

Debt Consolidation Loans: Combining multiple debts into a single loan.

Home Equity Loans: Borrowing against the equity in a home.

Gold Loans: Using gold as collateral for a loan.

Business Borrowers:
Business Loans: Used for various business purposes like working capital,
equipment financing, or expansion.

Commercial Real Estate Loans: Financing real estate projects.

Construction Loans: Funding construction projects.

Small Business Loans: Designed for smaller businesses.

Government/Public Sector Borrowers:

Government Bonds: Borrowing from the public to fund government operations
and projects.

State and Local Government Bonds: Borrowing at the state and local level for
infrastructure and public services.

Public Sector Entities: State-owned enterprises and corporations borrowing to

finance their activities.

Other Considerations:
Secured vs. Unsecured Loans: Loans can be secured by collateral (like a house or
car) or unsecured, with no collateral required.

Different Types of Borrowing Arrangements: Include loans, credit cards, lines of

credit, and overdrafts.

Legal Structures: Borrowers can be individuals, partnerships, companies, trusts, or

other legal entities.
 Fair Practice Code
Introduction:-
A Fair Practices Code (FPC) outlines the ethical and legal obligations of lenders
(banks, NBFCs, etc.) in their dealings with borrowers. It aims to ensure
transparency, fairness, and timeliness in loan applications, processing,
sanctioning, monitoring, and loan administration.

Key aspects of a Fair Practices Code:

Transparency and Clarity:-Loan terms, conditions, fees, and charges should be

clearly communicated to the borrower in a language they understand.
Timelines:-Lenders should provide timely responses to loan applications and
communicate loan decisions within a reasonable timeframe.

Non-Discrimination:-Lenders should not discriminate based on religion, caste,

sex, or any other factor.

Non-Coercive Recovery:-Lenders should not engage in abusive or unfair practices

during loan recovery.

Grievance Redressal:-A mechanism should be in place for borrowers to address

their grievances and concerns.

Information Secrecy:-Personal information of borrowers should be kept

confidential and not disclosed to third parties without their consent.

Compliance and Review:- Lenders should periodically review their compliance

with the FPC and ensure its effective implementation.

Example of FPC in action:

 A bank acknowledges a loan application within a specified timeframe and

informs the applicant about the decision within a reasonable period.
 A bank clearly outlines all loan terms, conditions, and fees in the loan
agreement, including the interest rate, processing fees, and prepayment
options.
 A bank handles loan recoveries in a non-coercive manner and avoids
harassment of borrowers.
 A bank provides a grievance redressal mechanism for borrowers to resolve
any complaints or issues they may have.

Conclusion:- In essence, a Fair Practices Code helps to build trust and confidence
between lenders and borrowers by promoting fair and ethical lending practices.

Six c's of Fair Practice Code:-

The "6 Cs" of fair practice codes in lending generally refer to six key principles that
ensure fair and ethical lending practices. These include: Clear and transparent
information, Comprehensive documentation, Competent staff, Careful
assessment, Confidentiality, and Complete compliance with regulations.

1. Clear and Transparent Information:

Lenders should provide borrowers with clear, concise, and understandable

information about loan products, including interest rates, fees, charges,
repayment schedules, and any other relevant details.

This information should be provided in a language the borrower understands and

should be readily accessible.

2. Comprehensive Documentation:

Lenders should provide borrowers with detailed loan agreements and other
relevant documents that outline the terms and conditions of the loan.

These documents should be clear, concise, and easy to understand.

3. Competent Staff:

Lenders should have staff who are well-trained and knowledgeable about lending
practices and regulations.

These staff should be able to provide accurate and reliable information to

borrowers.

4. Careful Assessment:

Lenders should carefully assess a borrower's ability to repay the loan before
approving it.

This assessment should take into account the borrower's financial situation, credit
history, and other relevant factors.

5. Confidentiality:
Lenders should maintain the confidentiality of borrower information and should
not share it with third parties without the borrower's consent.

This includes protecting the borrower's personal information, financial

information, and any other confidential information.

6. Complete Compliance with Regulations:

Lenders should comply with all applicable laws, regulations, and fair lending
practices.

This includes complying with laws related to credit, lending, and consumer
protection.

Conclusion:-

These six principles are essential for ensuring that lending practices are fair,
ethical, and transparent. By adhering to these principles, lenders can help protect
borrowers from harm and build trust with their customers.