Credit management involves monitoring customer payments to vendors and collecting debts owed. Maintaining a good credit score is important for business liquidity and cash flow, such as obtaining loans. There are several key principles of credit management for banks: safety, ensuring borrowers can repay loans; diversity, investing across different security types to reduce risk; and profitability, selecting investments that provide good returns.

1. Principles of credit management
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In simple words, credit management is that procedure in the financial
world, where the payments that a customer has to make to the vendor are
monitored and eventually collected. A person or a business that has good
credit management score would have less amount to finally pay to the
debt collectors. In order to have liquidity and cash flow, having a good
credit management score is really very important. this would help in times
when the business would want to venture on a profitable idea but does not
have sufficient funds to make it possible. Credit management for banks is
based on certain principles.
What is credit management?

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As mentioned above, maintaining a good credit score is very important in order
to keep liquidity. Liquidity means having cash flow in times of need. Credit
score is checked by any bank before granting the business loan of any kinds.
When you borrow money from bank to expand your business, the bank does
not give it without you first producing some kind of security. Failure of
payment of the loan finally leads to the bank seizing the asset that was
produced as security. Assets that can provide enough liquidity are the ones that
bank allows one to keep as security, so that when the public needs money, the
do not have problem producing that.
Liquidity

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Here safety means that the business that is borrowing the money should be
able to repay the money being borrowed, along with interest in the
stipulated period of time. Two things that the repayment depends on is the
nature of the security kept as mortgage and the ability of the borrower to
pay the money in time. It is very necessary and important to the bank that
the asset that has been kept as security can fetch enough money if there
comes any adverse situation. It needs to have steady and easy to calculate
too.
Safety

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When lending money or selecting the portfolio of investment, the bank
should adhere to the diversity principle. A bank should take care that is
never allows all its funds to go into some specific security types only. It
should take cautious decision of investing in different security types. There
can be debentures, shares, property, investment of ESG funds etc. Why
should this be done? This should be done in order to reduce the investment
risk of the bank. This principle in applicable while giving loans to all firms,
businesses, markets and factories.
Diversity

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Last but not the least, profitability is one of the most important objectives
in credit management. Why would a bank lend if they aren’t going to gain
anything? A bank should make cautious decision of investing in assets that
would give good and profitable returns. However, when it comes to
branches of the government, this does see an exception in terms of interest.
For others, the banks should focus on investing in securities that would not
carry tax exceptions.
Profitability

7. Thank You
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