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Rural Financial Services and Institutions _2_

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Rural Financial Services and Institutions  _2_ Powered By Docstoc
					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

                   Prof. Rushen Chahal
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

                        Prof. Rushen Chahal
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
                Prof. Rushen Chahal
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

                           Prof. Rushen Chahal
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


                 Prof. Rushen Chahal
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

                    Prof. Rushen Chahal
Types of credit products
   Debt-service ratio:
      - Ratio of net incremental income to
      instalment due
            Net incremental income
   DSR = --------------------------------
            Instalment due


                  Prof. Rushen Chahal
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

                     Prof. Rushen Chahal
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

                 Prof. Rushen Chahal
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
                  Prof. Rushen Chahal
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
                  Prof. Rushen Chahal
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
                    Prof. Rushen Chahal
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
                  Prof. Rushen Chahal