Credit control is a financial strategy used by businesses and financial institutions to manage the extension of credit to customers. Thus, this strategy is important for ensuring timely payments and minimizing the risk of defaults. Typically, it involves assessing the creditworthiness of potential borrowers, setting appropriate credit limits, and collecting outstanding debts efficiently.
The objectives of credit control are clear – maintaining a healthy cash flow, reducing bad debts, and supporting overall financial stability. Thus, organizations can make informed lending decisions while building trust with customers.
In the following sections, we’ll understand how credit control works and its importance for organizations.
What is Credit Control?
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.
How Credit Control Works?
There are several steps involved in the credit control process. Businesses use these steps so they can effectively manage credit and minimize their financial risks.
- Establishing Credit Policies: Define clear guidelines on credit terms, payment schedules, and procedures for handling defaults. This ensures consistency and clarity in credit dealings.
- Assessing Customer Creditworthiness: Evaluate the financial stability and repayment history of potential customers before extending credit. This minimizes the risk of defaults.
- Setting Credit Limits: Based on the assessment, determine appropriate credit limits for each customer to manage exposure and safeguard cash flow.
- Issuing Invoices: Send out invoices immediately after goods or services are delivered to encourage timely payments and maintain steady cash inflow.
- Monitoring Receivables: Regularly track outstanding payments to identify overdue accounts and take proactive measures to address them.
- Sending Payment Reminders: Dispatch reminders to customers with pending dues to prompt timely settlements and reduce the incidence of bad debts.
- Implementing Collection Procedures: If payments remain overdue, initiate collection processes, which can include follow-up communications or engaging collection agencies for recovering dues.
Who Can Use Credit Control?
Credit control is widely used by businesses that extend credit to customers. These include:
- Manufacturers: Selling goods to retailers with payments collected later.
- Wholesalers: Supplying bulk products to stores on post-delivery payment terms.
- Service providers: Such as consultants or repair agencies who bill after service completion.
- Retailers: Offering credit to loyal customers or accepting payments via credit cards. This practice helps ensure timely collections and stable cash flow.
Importance of Credit Control
Let’s understand the importance and objectives of credit control:
- Paves the way for steady cash flow, helping businesses meet expenses and invest in growth.
- Reduces the risk of customer defaults and unpaid dues.
- Clarifies credit terms, leading to stronger, more transparent customer relationships.
- Prevents cash crunches that could disrupt day-to-day business operations.
Different Methods of Credit Control
Credit control is a crucial tool used by central banks like the Reserve Bank of India (RBI) to regulate the flow and cost of credit in the economy. These methods are broadly classified into qualitative and quantitative techniques, each serving different purposes.
Qualitative Credit Control Methods
These methods influence the direction and quality of credit distribution in the economy.
- Credit Rationing: RBI limits the credit supply to specific sectors by capping the maximum loan amount lenders can issue. This helps redirect credit towards priority sectors and limits it in less-desirable or speculative sectors.
- Margin Requirements: This is the difference between the loan amount granted and the market value of the collateral. It is adjusted based on inflationary or deflationary trends to either tighten or ease credit availability.
- Persuasion: RBI persuades and sometimes advises lenders to restrict credit expansion during inflation. Or it may stimulate credit during economic slowdown through official communications and circulars.
- Method of Publicity: RBI issues public reports and updates to influence and educate financial institutions. This method helps align lending practices with broader monetary policy goals.
- Regulation of Consumer Credit: This involves placing restrictions on the number of EMIs or loan tenures for consumer goods. It is particularly used during inflation to reduce excess demand.
- Direct Action: If a bank fails to follow RBI’s credit policies, RBI can take direct punitive action, such as restricting refinancing or imposing penalties.
Quantitative Credit Control Methods
These are used to manage the overall volume of credit in the financial system.
- Bank Rate Policy: RBI changes the bank rate, i.e. the rate at which it lends to commercial banks. An increased rate discourages borrowing and helps control inflation.
- Open Market Operations: RBI buys or sells government securities in the open market to regulate liquidity. Buying increases money supply; selling reduces it.
- Cash Reserve Ratio: Banks are required to keep a fixed portion of their deposits with RBI. Raising the CRR limits the funds banks can lend, tightening credit flow in the market.
Credit Control Factors
Credit Period: Defines how long a customer has to pay after purchase.
Cash Discounts: Offers price reductions for early payments, encouraging quicker cash flow.
Credit Standards: Sets the minimum financial criteria a customer must meet to receive credit; often includes FICO score checks.
Collection Policy: Outlines how actively a business pursues delayed payments; stricter policies may recover dues faster but risk losing customers.
Credit Management: Handled by a credit manager or committee, with input from finance, sales, and operations to balance risk and boost sales without increasing bad debts.
Conclusion
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.
FAQs
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.
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. Businesses’ need for credit control also helps them identify customers or borrowers with poor credit records.
The four key methods include bank rate policy, open market operations, cash reserve ratio (CRR), and qualitative controls like credit rationing and moral persuasion.
Aa an example, you can think of RBI raising the cash reserve ratio. This would reduce the amount banks can lend, thus controlling excess liquidity and stabilizing inflation.
This is an important practice for ensuring timely payments, reducing bad debts, maintaining cash flow, and paving the way for sound financial decision-making.
They adjust invoice values, helping maintain accurate accounts and ensuring customers are billed or refunded correctly, supporting effective credit control.
Outsourcing can improve efficiency, reduce administrative burden, and ensure professional handling of collections. But, this can adversely impact customer relationships if not managed well.
06 May 2025
6 mins read
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