Credit plays a vital role in today’s economy. Whether it’s an individual applying for a personal loan or a business seeking funds to manage operations, borrowing has become a common financial practice. But what happens if credit is given freely without checks? It can quickly lead to defaults, losses, and instability in the financial system.
This is where credit control comes into the picture. It is the system used by banks, NBFCs, and even businesses to ensure that credit is extended responsibly. Let’s understand what credit control means, why it is important, and how the credit control process works.
What is Credit Control?
Credit control refers to the process of monitoring and managing how credit is given to borrowers. It ensures that loans, advances, or credit sales are provided only to those who are capable of repaying them within the agreed time.
For example:
- When you apply for a loan, the lender checks your credit score, income, and repayment history before approving it.
- Similarly, a business selling goods on credit will only do so for trusted customers who have a record of paying on time.
In simple terms, credit control ensures that money is lent safely and repayment is collected smoothly.
Why is Credit Control Important?
Credit control is more than a risk-avoidance tool. It directly impacts the financial health of lenders and borrowers.
Here’s why it matters:
- Reduces bad debts – prevents losses by lending only to creditworthy borrowers.
- Ensures cash flow – timely repayments help businesses and lenders manage liquidity.
- Encourages responsible borrowing – borrowers avoid overextending themselves.
- Strengthens trust – creates a healthy relationship between lenders and customers.
- Supports economic stability – ensures credit flows where it is most productive.
Types of Credit Control
Credit control measures are generally divided into two categories:
1. Quantitative Credit Control
These are economy-wide measures taken by the Reserve Bank of India (RBI) to regulate the supply of credit in the country. Common methods include:
- Repo Rate and Reverse Repo Rate – controlling the cost of borrowing.
- Cash Reserve Ratio (CRR) – requiring banks to keep a part of deposits with the RBI.
- Statutory Liquidity Ratio (SLR) – mandating banks to hold a percentage of deposits in liquid assets.
2. Qualitative Credit Control
These are selective measures aimed at directing credit to specific sectors or limiting risky lending. Examples include:
- Prioritising loans for MSMEs or agriculture.
- Restricting lending for speculative activities.
- Encouraging credit in sectors that support economic growth.
The Credit Control Process
For banks, NBFCs, and businesses, credit control follows a structured process. Here’s how it works:
Step 1: Defining Credit Policy
Every lender begins with a clear credit policy. This includes:
- Eligibility criteria for borrowers.
- Limits on how much credit can be extended.
- Repayment terms and penalties for delays.
Step 2: Assessing Creditworthiness
Before extending credit, lenders assess the borrower’s ability to repay. This involves:
- Checking credit score (CIBIL, Experian, etc.).
- Reviewing income, employment, and stability.
- For businesses, analysing balance sheets and outstanding debts.
Step 3: Approval and Disbursement
After the evaluation, the lender decides:
- Whether to approve the loan.
- How much to lend.
- At what interest rate and repayment schedule.
Step 4: Monitoring and Collections
Once the loan is disbursed, the borrower’s repayment activity is tracked. Lenders use:
- Automated payment reminders.
- Flexible EMI adjustments if needed.
- Collection measures in case of delays.
Step 5: Review and Policy Adjustments
The credit environment changes over time. Lenders regularly review their policies based on:
- Market conditions.
- Borrower repayment behaviour.
- Regulatory guidelines.
Best Practices in Credit Control
Effective credit control doesn’t mean strict denial of loans. Instead, it balances lending opportunities with risk management. Some best practices include:
- Clear and transparent loan terms.
- Using digital tools to track repayments.
- Regularly reviewing borrower performance.
- Offering repayment flexibility to genuine borrowers.
- Avoiding over-lending beyond repayment capacity.
Role of Technology in Credit Control
Technology has transformed the way lenders manage credit. Today’s digital tools make credit control faster and more reliable:
- AI-driven credit scoring – analyses multiple data points for better risk assessment.
- Automated KYC and income checks – speed up approvals.
- Digital dashboards – help monitor repayment behaviour in real-time.
For borrowers, this means quicker loan approvals. For lenders, it ensures reduced risk and better portfolio health.
Conclusion
Credit control is the backbone of any lending system. It ensures that money flows to the right people, under the right conditions, and is repaid on time. Without it, financial systems would be unstable and risky.
If you’re looking for a personal loan that is quick, transparent, and backed by responsible lending practices, LoanTap can help.
FAQs on Credit Control
1. What is the main purpose of credit control?
The main purpose is to reduce risks, prevent defaults, and ensure financial stability.
2. Who regulates credit control in India?
The RBI regulates credit control at the national level, while individual lenders follow their own credit policies.
3. How do lenders assess creditworthiness?
By checking credit scores, income proof, employment stability, and repayment history.
4. How does credit control help borrowers?
It prevents over-borrowing and ensures loans are affordable and manageable.
5. How is technology improving credit control?
AI, digital verification, and repayment tracking systems make credit control more accurate and efficient.
