Credit policy

A credit policy is a set of guidelines and rules that govern the process of extending credit to customers, like a wise king defining the principles that shape his realm's prosperity and stability. By establishing and adhering to a credit policy, financial institutions can manage risks, maintain financial health, and ensure responsible lending practices in accordance with regulatory requirements.

Example

A bank's credit policy may outline the criteria for evaluating loan applications, such as credit score requirements, income thresholds, and debt-to-income ratios. Additionally, it might specify the terms and conditions of the loans, including interest rates, repayment schedules, and collateral requirements. By implementing a well-defined credit policy, the bank can make informed lending decisions, minimize the risk of non-performing loans, and maintain a healthy and sustainable loan portfolio. Moreover, a robust credit policy helps protect both the lender and the borrower, ensuring that loans are granted only to customers who have the ability to repay them and reducing the likelihood of default and financial hardship.