(^360) Financial Management
Concept of Credit Quality
The credit quality of a prospective business borrower is revealed to the lending banker
through inquiries made of the companyís trade creditors; through reports requested
of credit-rating agencies; through analysis of the companyís financial statements;
and by ìtrade comparisonî - comparisons of the prospective borrowerís financial
situation with that of other similarly sized firms in the same general line of
business activity.
Required Security
There are four basic types of securities the bank can ask for:
- Hypothecation: A charge that is made against movable property (like inventory)
for an amount of debt where neither the ownership nor possession is passed to
the creditor. Banks generally grant hypothecation on the basis of itís satisfying
itself with the quality of the assets. - ledge: Under this arrangement the borrower is required to transfer the physical
possession of the property offered as a security to the bank to obtain credit. The
bank retains the right to sell off the property to recover its dues its loans are not
paid on time. - Mortgage: It is the transfer of legal or equitable interest in a specific immovable
property for the payment of debt. In case of mortgage, the physical possession of
the property may remain with the borrower with the lender getting the full legal
title. - Lien: Lien means right of the lender to retain property belonging to the
borrower until he repays credit. It can be a particular lien in which the right
is retained until the claim associated with the property is fully paid. General
lien, on the other hand, is applicable till all dues of the lender are paid. Banks
usually enjoy the facilities of general lien so as to more securely safeguard their
interests.
A combination of 1 and 4 above is used in India.
Public deposits
Public deposits, also known as fixed deposits, had been an important source of raising
money for working capital. But because of many scams of the finance companies, the
term fixed deposits earned so much bad publicity that it is now only used by companies
with good credit standing. However, the market is quite small now compared to the one
that existed earlier.