What is Credit Administration?
Credit administration involves a department in a bank or lending institution that is tasked with managing the entire credit process. Lending money is one of the core functions of a bank, and banks generate revenue by charging a higher interest rate on loans than the interest they pay on customer deposits.
The function of selecting and vetting borrowers is the role of the credit department of the bank, and the department is required to ascertain the borrower’s competency to utilize the funds to generate an income, and their ability to pay back the principal amount and interest. To learn more, check out CFI’s Credit Analyst Certification program.
Creditor administrators are tasked with performing credit-related functions and providing electronic solutions for credit transactions. They must work hand-in-hand with other departments to achieve all credit objectives within a defined timeframe.
- Credit administration is a department in a bank or lending institution that is tasked with managing the entire credit process.
- Credit administrators are responsible for conducting background checks on potential customers to determine their ability to pay back the principal and interest.
- They must be updated with the latest regulatory laws to ensure that the credit processes comply with the latest laws in the industry.
Who is a Credit Administrator?
A creditor administrator is responsible for managing the entire credit process, including the approval of credit to borrowers, assessment of the creditworthiness of potential customers, and credit review of existing borrowers. They are required to develop a credit policy for the bank, which will help manage the level of credit risk exposure. A credit policy is an important element of the finances of a business, and it provides guidelines on the amount of credit to be given to customers, how collections will be conducted, and the amount of bad debt losses that is considered acceptable.
Credit administrators are required to be updated with the regulatory laws governing the credit industry. They must also be familiar with the current industry trends to know whether or not to approve specific types of loans and if they will be beneficial to the bank.
Credit administrators are required to prepare and submit periodic reports to senior management, detailing the status of all loans provided to the creditors. The report may include information on the total amount of loans approved, amount of loans unpaid, bad debt losses, and the steps that the credit department is taking to collect payments from delinquent accounts.
Credit Policy in Credit Administration
A credit policy is a critical document for any loan company, and it provides guidelines on how the company provides loans to customers and how it collects delayed payments on overdue accounts. It is the backbone of the credit department, and it is used to determine which customers are extended credit, and the payment terms for the clients whom credit’s been provided to. The credit policy also sets the limits for outstanding accounts, as well as the procedures for dealing with delinquent accounts.
The following are the key components of a credit policy:
1. Credit terms
The credit terms section addresses the payment terms that the company will set when extending credit to customers. It means that when the credit department approves a loan application, they will need to agree when the payment is due. The payment terms will also include late-payment penalties and early-payment discounts.
The deposits section provides the amount that the company will require the borrower to pay in advance after the loan’s been extended.
3. Credit standards
The company may require potential borrowers to meet a specific financial strength in order to qualify for credit. Companies may use credit scores such as FICO score to measure the creditworthiness of a borrower and determine if they qualify for the credit.
4. Credit limits
The company provides the figure for the amount of credit that the company is willing to extend to potential customers under specific circumstances. For example, the company can set a loan limit of $1,000 for new customers, and if the customer wants to increase the loan limit to $10,000, they must provide financial statements and payment history that proves their ability to repay the loan, if granted.
5. Information requirements
They include the information that the lending company must receive or know about a customer before extending the loan. It may include the credit report, credit application documents, financial statements, years in business, duration of time at the current location, names of guarantors, etc.
6. Collection policy
The collection policy section details the procedures that the credit department will use when engaging in collection activities for overdue accounts. The collection progression may begin with notification calls to collection agencies and legal action if the borrower fails to make payments on overdue accounts.
Qualifications and Skills of a Credit Administrator
Credit administrators are required to obtain a minimum of a bachelor’s degree in finance, economics, or accounting. Credit administration involves money, and the people assigned to the department must be comfortable working with numbers. Previous work experience in a credit-related field is required for most junior and senior positions.
One of the skills that credit administrators must possess is interpersonal relationship skills. The day-to-day routine involves dealing with people, and the credit administrator must be able to interact and communicate with other people effectively. They must also demonstrate excellent multitasking abilities to be able to deal with multiple customers at the same time to reach the departmental and organizational goals within given time-frames. Credit administrators should be detail-oriented to be able to analyze customer information in detail to determine their ability to meet credit obligations.
CFI is the official provider of the global Certifed Banking & Credit Analyst (CBCA) program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: