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Most businesses provide credit for regular customers with a good credit history while making payments for goods/services purchased. So, there is a need for credit control tools that will help businesses control their credit facilities efficiently. Keep reading this article to know all about what is meant by credit control, its types, and the need for credit control mechanisms for managing finance.
In normal business parlance, credit control implies a business strategy for promoting the sale of goods or services by offering them on credit to customers. It is also known as credit management.
Businesses offer credit to customers with a strong credit history. An efficient consumer credit control system helps businesses increase sales and customer base. It helps manage cash flow through a regular inflow of customer payments/loans.
Credit control has a much larger role in a nation’s economy. The Reserve Bank of India (RBI) - the central bank of India regulates credit or liquidity in the economy. RBI controls credit extended by commercial banks to customers. Credit control forms an important aspect of the lending scenario in India.
What do you mean by credit control? It has to be understood from the lending perspective to evaluate its functioning and importance.
It refers to the consumer credit control (lending) mechanism applied by financial institutions and banks to lend money to their customers. Through this, banks and financial institutions offer credit to customers with a good credit score or credit history. It helps them identify customers with credible credit scores and a good track record of making regular bill payments.
The consumer credit control strategy aims to provide credit to customers with a good credit or credit history. Businesses apply this strategy to ensure that they grant credit to customers having a good track record of repaying their bills on time. So, granting credit to customers who show a probability of paying back their debts reduces the risk of default. Businesses' need for credit control also helps them identify customers or borrowers with poor credit records. It ensures judicious lending and minimizes losses from debt defaults.
The significance of what is credit control can be gauged by who can apply such a control mechanism. The strategy can be applied by banks, financial institutions, retailers, manufacturers, wholesalers, and the like to ensure profitable sale/lending.
RBI strives to achieve India’s economic development by regulating credit via the credit granted by commercial banks to their customers. The need for credit control becomes evident from the fact that through this measure, RBI aims to bring monetary stability to the economy while managing inflationary and deflationary pressure. Credit control is thus an important function of RBI.
The strategy holds equal relevance across business sectors. So, how can the importance of what do you mean by credit control? be explained for businesses.
For banks and financial institutions granting a new line of credit to customers, the strategy helps identify customers with a good credit score or credit history. Granting credit to such customers increases the probability of loans being repaid on time and reduces the likelihood of customers defaulting on their debts. It helps manage successful lending mechanisms through adequate liquidity in the system.
Likewise, it is an important way to manage a company’s cash flow. By regulating their credit system, businesses can ensure that they extend credit only to customers with a good track record of paying bills on time. Thus, companies can avoid bad debts and maintain a healthy financial system. Apart from liquidity for managing operations, a good credit system helps a company save time, energy, and money on recovering unpaid dues.
So, understanding what is a credit control mechanism is very important for businesses across sectors. For example, if a company’s bad debts or a lender’s non-performing debts pile up, then they could end up with insufficient liquidity for operating their business. In a worst-case scenario, such increasing default on debts could even lead to the closure of business operations.
Having a robust credit regulating measure ensures that credit is extended only to those customers with a good credit history or credit track record. So, they lend only where there is a high chance of the credit being repaid on time. It helps businesses, including lenders ensure profits on lending and minimal risk of default on debts.
What is meant by credit controltypes?The different types of credit control measures applied by the RBI for the Indian economy’s smooth functioning are:
· Quantitative Control for regulating credit flow
· Qualitative Control for regulating total credit volume
Key quantitative control credit measures used are:
· Bank Rate Policy - It is the official interest rate applied by RBI to rediscount a commercial bank’s approved bills. RBI increases bank rate policy to control credit, inflation and money supply.
· Open Market Operations - RBI conducts direct purchase and sale of securities/bills in the open market for controlling credit volume.
· Cash Reserve Ratio (CRR) – It refers to the portion of the total deposit that commercial banks need to maintain with RBI as cash reserves.
· Statutory Liquidity Ratio (SLR) - Portion of deposits to be maintained by commercial banks with themselves as liquid assets.
RBI applies qualitative control only for selective purposes like consumer credit regulation, margin requirements, and the like.
Effective lending policies are dependent on a company’s credit evaluation systems. The system needs to identify a potential customer’s creditworthiness to extend credit. The credit evaluation process has to maintain a fine balance between offering credit for increasing sales while minimizing losses from the risk of default.
Credit control is a vital part of the lending framework which helps business manage their operations and cash flow. Lenders like Tata Capital have robust credit regulation systems for providing easy loans to credible customers. To know more about what you mean by credit control, visit Tata Capital’s official website.
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