4R’s, 5C’s and 7 P’s of credit, repayment plans

The 4Rs in credit repayment

The 4Rs in credit repayment are a economic device used to highlight four key principles that are essential for effective credit management and repayment. Here’s what each “R” stands for:

Responsibility:

• Borrowers should take responsibility for their debts and prioritize timely repayment.
• This involves understanding the terms and conditions of the credit agreement, including interest rates, repayment schedules, and any penalties for late payments.
• Responsible borrowers make regular payments on time and communicate with lenders if they encounter difficulties in meeting their obligations.

Reliability:

• Reliability refers to the consistency and dependability of borrowers in meeting their credit obligations.
• Lenders value borrowers who demonstrate a track record of timely payments and financial stability.
• Reliability builds trust between borrowers and lenders and can lead to improved creditworthiness over time.

Resourcefulness:

Resourcefulness involves being proactive in managing one’s finances and seeking solutions to overcome financial challenges.

Being resourceful can help borrowers avoid default and protect their credit rating.

Resilience: Resilience refers to the ability to bounce back from setbacks and overcome financial difficulties. Borrowers may encounter unexpected events, such as job loss, illness, or economic downturns, that impact their ability to repay debts.

The 5C in credit repayment

Character:

• The basis for any credit transaction is trust.
• Even though the bank insists up on security while lending a loan, an element of trust by the banker will also play a major role.
• The confidence of an institutional financial agency on its borrowers is influenced by the moral characters of the borrower like honesty, integrity, commitment, hard work, promptness etc.
• Therefore both mental and moral character of the borrowers will be examined while advancing a loan.
• Generally people with good mental and moral character will have good credit character as well.

Capacity:

• It means capacity of an individual borrower to repay the loans when they fall due. It largely depends upon the income obtained from the farm.
• C= f(Y) where C= capacity and Y = income

Capital:

• Capital indicates the availability of money with the farmer – borrower.
• When his capacity and character are proved to be inadequate the capital will be considered.
• It represents the networth of the farmer.
• It is related to the repayment capacity and risk bearing ability of the farmer – borrower.

Condition:

It refers to the conditions needed for obtaining loan from financial institutions i.e. procedure to be followed while advancing a loan.

Commonsense:

This relates to the perfect understanding between the lender and the borrower in credit transactions. This is in fact prima-facie requirement in obtaining credit by the borrower.

7 P’s of credit repayment Plans

1. Principle of Productive Purpose

This principle refers that the loan amount given to a farmer – borrower should be capable of generating additional income. The examples relevant here are loans for dairy animals, sheep and goat, poultry birds, installation of pump sets on group action, etc.

2. Principle of personality

• Over the years of experiences in lending, the bankers have identified an important factor in credit transactions i.e. trustworthiness of the borrower. It has relevance with the personality of the individual.
• Therefore the safety element of the loan is not totally depends up on the security offered but also on the personality (credit character) of the borrower.
• When a farmer borrower fails to repay the loan due to the crop failure caused by natural calamities, he will not be considered as willful – defaulter,
• whereas a large farmer who is using the loan amount profitably but fails to repay the loan, is considered as willful – defaulter. This character of the big farmer is considered as dishonesty.

3. Principle of Productivity

• This principle underlines that the credit which is not just meant for increasing production from that enterprise alone but also it should be able to increase the productivity of other factors employed in that enterprise.
• For example the use of high yielding varieties (HYVs) in crops and superior breeds of animals not only increases the productivity of the enterprises, but also should increase the productivity of other complementary factors employed in the respective production activities.

4. Principle of phased disbursement

• This principle underlines that the loan amount needs to be distributed in phases, so as to make it productive and at the same time banker can also be sure about the proper end use of the borrowed funds. Ex: loan for digging wells

5. Principle of Proper Utilization

• Proper utilization implies that the borrowed funds are to be utilized for the purpose for which the amount has been lent.
• It depends upon the situation prevailing in the rural areas viz., the resources like seeds, fertilizers, pesticides etc., are free from adulteration, whether infrastructural facilities like storage, transportation, marketing etc., are available.
• Therefore proper utilization of funds is possible, if there exists suitable conditions for investment.

6. Principle of payment

• This principle deals with the fixing of repayment schedules of the loans advanced by the institutional financial agencies.
• For investment credit advanced to irrigation structures, tractors, etc the annual repayments are fixed over a number of years based on the incremental returns that are supposed to be obtained after deducting the consumption needs of the farmers.

7. Principle of protection

• Because of unforeseen natural calamities striking farming more often, institutional financial agencies can not keep away themselves from extending loans to the farmers.

Therefore they resort to safety measures while advancing loans like

• Insurance coverage
• Linking credit with marketing
• Providing finance on production of warehouse receipt
• Taking sureties: Banks advance loans either by hypothecation or mortgage of assets
• Credit guarantee: When banks fail to recover loans advanced to the weaker sections, Deposit Insurance Credit Guarantee Corporation of India (DICGC) reimburses the loans to the lending agencies on behalf of the borrowers