The very first credit transaction in history certainly took place hundreds of years ago, before the existence of bank, credit bureaus, or credit departments. As the time passed, financial institutions developed to put funds from savers into the hands of borrowers who used this value to create economic value. Credit contributed to economic growth of countries throughout the world as it makes goods and services available to consumers, businesspersons, and governments.
Although the basic tasks of evaluating risk, extending credit, and collecting payments have not changed, the mechanisms for marketing and conducting credit programs have changed dramatically over the years. Computers using sophisticated credit scoring systems speed up the disbursement and collection of account balances. Credit bureaus maintain vast database of information about borrowers available online through computer networks. Lenders continue to find more ways to offer more credit options to businesses and consumers.
Definition of Credit
In a financial system of any economy, we know, financial surpluses mobilized from surplus economic unit and transferred to the deficit economic unit. In the banking world, the bank acts as an intermediary in between deficit economic unit & surplus economic unit. Bank mobilizes the fund from surplus economic unit as deposit & makes the fund available to the deficit unit. The style of making the fund available to the deficit unit is nothing but creation of credit. Credit is in true sense, making provision of fund by one party to another party under certain terms & conditions
Credit is a contractual agreement, in which a borrower receives something of value at present, with the agreement to repay the lender at some date in the future. One of the basic functions of bank is deposit extraction and credit extension. It helps this kind of organizations to earn around 80% of the total revenue. Managing credit operation, thus, is the crying need for any bank.
A Bank taps surplus money from the society and deploys it with the portion of society who want money for the maximum use of high productive unit.
From the following graphical presentation, we can see that a depositor deposits Tk. 100 with a bank and gets Tk 50 excess of his deposit. Bank invests the money and in turn gets Tk. 100 excess from which it spends Tk 50 to meet the cost and the rest Tk. 50 is its profit. The investor makes maximum use of productive units and returns Tk 200 to the bank and keeps Tk 100 as his profit.
Bank gets from borrower 200/-
Depositor deposits 100/-
Borrower makes 300/-
Depositor gets 150/-
Borrower‘s profit 100/-
Increase in total GDP= (100+50+50) 200/-
Bank’s profit 50/-
Depositor‘s profit 50/-
Figure- Fund Engineering
Importance of credit:
Credit plays a very vital role in national economy in the following ways- * It provides working capital for industrialization.
* It helps to create employment opportunities.
* Credit controls almost all kinds of production activities of the country. * People’s purchasing power increases for it.
* It brings social equity.
* Cash generation occurs for its successful performance. * Business cycle can run well only by the help of lending system. * Economic Stabilization.
* Raise standard of living.
Factors Related with Credit
| Operating Expense
| Legal considerations
Security or Collateral
| Finance Charges
Modes of Credit
Loan and advances primarily have been divided into two major groups. Continuous credit and fixed term loans. Continuing credits are the advances having no fixed repayment schedule, but have an expiry date at which it is renewable on satisfactory performance. Fixed term loans are the...
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