In terms of credit management, most businesses understand that a well-organized credit review and renewal process is vital for maintaining financial health and a positive long-term partnership with the lenders. However, complex processes, errors and delays might pose a challenge for certain organizations. But, with the right knowledge and tools, it is easier than ever to streamline credit management processes and improve overall efficiency.
Meaning of Bank Credit Renewal – Explained
When a business loan or line of credit facility matures or expires, the process of extending or reestablishing its terms is known as credit renewal. Instead of repaying the entire amount and seeking an additional loan, the borrower might extend the credit capacity, typically with distinct terms. It ensures that the business has continuous access to finances without disturbance.
Whenever the loan maturity date nears, the lender may review certain borrower aspects such as credit profile, business financials, repayment history, funds utilization, etc. If the lender is satisfied that the financial health of the organizations is stable, it may grant the facility either with the same or amended terms and conditions. For example, the working capital of a company ABC, which was set to expire on March 31, was Rs. 1 cr. The bank evaluates their performance and chooses to extend the credit for another year, until March 31 of next year.
Points to note:
- Only borrower entities with clear repayment history and sound financials are eligible for credit renewals.
- Credit renewals and review procedures are generally associated for revolving business credit facilities maintained by business entities.
- Every credit renewal approved by the lender has a different maturity date, interest rates and repayment terms.
- Businesses exposed to higher risks might experience either reduced credit limits or stricter monitoring and repayment terms.
Bank Credit Review – Explained
A bank credit review is a recurring evaluation conducted by a lender to determine a borrower’s level of continued risk, loan repayment capacity, and overall financial health. Credit review also helps to ensure the borrower still meets the credit standards without posing any undue risk for the lender. Further, it helps to monitor risk, ensure compliance with terms, and spot early signs of stress.
Banks may conduct credit review in situations such as-
- Annually (generally for large sums or long-term loans) or pre-agreed periods as per agreed debt agreement.
- Before renewing a loan or line of credit facilities;
- At the time of borrowers’ requests for enhanced credit;
- When financial distress signs start appearing on the part of the borrower; like missed payments, etc.
Difference Between Renewal and Review in Bank Loans
Need for Bank Credit Renewal
Time-Bound Sanction-
Credit facilities, including working capital limits, are normally granted for a year. With renewal, the bank is prevented from extending credit perpetually without first reassessing the borrower’s present financial situation.
Credit Risk Management-
Over time, there may be significant changes in the credit exposure to the borrower entity due to factors such as Market factors, industry risks, or internal problems. Thus, credit renewal allows lenders to reassess and approve credit limits as per the financial health and risk level of the enterprise at the time of credit renewals.
Pricing and Adjustment of Terms-
Banks may regulate interest rates on the basis of factors such as credit rating, margins and repayment terms with the borrower entity. Thus, credit renewal helps lenders to amend lending terms in accordance with the financial health as well as market conditions.
Performance Monitoring-
Credit renewal enables banks to track the efficacy of credit consumption, detect early indicators of financial distress, and make decisions regarding whether the credit limit restrictions should be increased or reduced.
Need for Bank Credit Review
Continuous Credit Risk Monitoring-
The financial health of a business organization may be impacted due to internal or external conditions. However, early detection of repayment risk through credit review could save lenders from loan accounts later turning into non-performing assets.
Ensuring Compliance with Loan Terms-
The review process evaluates whether borrowers adhere with the loan terms and conditions (i.e. maintaining current ratio levels, submitting loan statements, etc. or not. It helps lenders to identify borrowers failing to fulfil necessary compliances and take strict action accordingly.
Portfolio Quality and Exposure Monitoring-
Reviews give the bank the opportunity to review exposure limits, revise ratings, and suggest exit plans for accounts posing high risk.
Internal Control and Audit Compliance-.
Internal credit policies need to be reviewed on a regular basis as part of risk control and auditing. It guarantees that the credit limit is maintained within the established policy parameters and risk appetite of the lender.
Assessing Changes in Business or Industry Conditions-
Bank credit review helps the bank to make changes into the borrower’s risk profile due to changes in business model, regulatory shifts, intense competition, etc.
Key Differences between Bank Credit Renewal and Bank Credit Review
Particulars |
Credit Renewal |
Credit Review |
| Definition | It is a formal process to reevaluate and extend the term of an existing credit facility | It is the process to evaluate the financial health and credit management aspects of a business. |
| Purpose | It enables continual access to funds beyond maturity date. | It allows lenders to monitor credit performance and risk levels of the borrower entity. |
| Trigger | Usually on an annual basis at the conclusion of the credit term. | Either quarterly/annually or on happening of certain events (e.g., signs of financial stress) |
| Mandatory | Compulsory if the borrower entity wishes to keep using the debt facility. | Compulsory as part of lender internal risk assessment policies. |
| Outcome | It can either result in approval of renewal, restructuring, or termination of the credit facility. | Updates to risk ratings, revisions to agreements, or early warning signs |
| Borrower impact | impacts the availability of ongoing funding | could have an impact on future renewal approval, terms, or pricing. |
Steps to Streamline Bank Credit Renewal and Review Process
- Organize and preserve financial information – Lenders seek reliable and current financial information to evaluate a borrower’s credibility. Therefore, borrower entities must maintain up to date financial statements, tax records and credit profile. It is recommended to create a digital depository to maintain all up-to-date financial records to avoid last minute rush.
- Set a Calendar for Internal Reviews- Create an internal schedule with significant checkpoints to avoid missing deadlines. Plan internal financial audits many months before the date of the lender’s evaluation and look for any early signs of distress. Taking proactive measures to manage deadlines can lower the likelihood of delays and boost lender confidence.
- Leverage Automation and Digital Tools- Automation saves precious time and improves accuracy assuring lenders receive reliable data. Thus, businesses should consider utilizing document management systems for storing and accessing financial data digitally, CRM tools for maintaining lender communications, and credit tracking applications to monitor credit profile. BankKeeping latest software designed specifically for borrowers can help manage all your credits at a single place. It also helps in reminders and preparation of important bank submissions like CMA data reports etc.
- Enhance Collaboration with Stakeholders- Credit renewal and review process necessitates focus and commitment among the stakeholders. Other than this, effective lender-borrower communication could help to avert confusions and unnecessary delays in the renewal process. If there are any concerns regarding the financial health of the organization, the borrower entity should discuss them transparently.
- Pre-evaluation of the organization- In order to ensure that the organization is financially viable, business entities should conduct internal stress tests prior to the formal credit evaluation. Try simulating various scenarios, such as dropping revenues or rising expenses, and determine its impact on business’s repayment capacity. Using such simulations will offer valuable insights into potential issues and enable organizations to resolve them even before any formal credit evaluation by the lender.
RBI Guidelines Addressing Renewal and Review of Bank Credit
Board-approved Credit Policy-
Every bank shall have a Board-approved credit policy. The policy should outline the frequency and mechanism for regularly reviewing and renewing credit facilities. The policy should incorporate varying time frames for review and renewal, particularly for riskier or lower-rated borrowers.
Timely and Comprehensive Review/Renewal-
Regular and ad hoc credit limits must be examined and renewed within the specified time frames from their due date or the ad hoc sanction date without any postponement. Delays in review/renewal beyond specific thresholds (e.g. 180 days) may result in the account being designated as a Non-Performing Asset.
Capturing Data and MIS-
Data and MIS must be accurately captured in the bank’s core banking and management information systems, including regular and ad-hoc reviews/renewals. Such data must be accessible to auditors, the RBI, and internal or concurrent audits.
Penal Charges/Penal Interest Charges-
Banks must comply with RBI standards for penal charges and interest while evaluating or renewing loans.
Avoid Misuse of Rolling/Renewal Facilities and Evergreening-
The RBI has debarred lenders from evergreening, or the perpetual extension of credit limits, which may be utilized to conceal credit degradation. As a result, every credit renewal assessment must analyze the borrower’s financial health, repayment capabilities, cash flows, etc.
Levying Penalty on Borrower Entity-
Any penalty imposed on the borrower should be fair, unbiased, and accurately disclosed. Furthermore, the terms (including rates of interest, security, and limits) should be reconsidered and signed post renewal/credit review.
Conclusion
Renewing and reviewing bank credit are interconnected procedures that supplement one another in managing credit risk. Contact BankKeeping before renewals for better terms and increased credit. Credit review assesses borrower’s financial health and risk profile, while credit renewal is a process of reevaluating and extending credit facility to borrower entity. Both these processes guarantee responsible lending choices, which are consistent with the RBI guidelines on risk reduction, discipline, and transparency in credit management.
Contact us at BankKeeping before renewals for better terms and increased credit.
FAQs
What is the difference between credit renewal and credit review in business loans?
Credit renewal is a formal process to reevaluate and extend the term of an existing credit facility while credit review is the process to evaluate the financial health and credit management aspects of a business.
Can a bank deny credit renewal for businesses after credit review?
Yes, If the results of the review are not in favor of the business or have red flags the bank may deny renewal or tighten the terms of the credit. These can be internal, like poor management, business distress and compliance issues or external like adversely changed policies, competition etc.
What is the frequency of credit review?
Annually in most cases but for high risk accounts or businesses with large exposure it may be done more frequently or on an ad-hoc basis.
What is the evergreening of loans?
It is a process wherein the lender keeps renewing the credit of a business without proper assessment. RBI prohibits such rolling over of credit as it does not showcase the actual credit risk and may lead to future defaults.