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Author: Aman Kumar, pursuing LL.M. from Chanakya National Law University


This research work has been set about to evaluate the prior factors of credit management and bad debts in commercial banks. In this research work, I have tried to simplify the factors of credit management and how they can help in the proliferation of those commercial banks which are burgeoning with bad debts.

  1. This research paper also highlights the factors that cause mismanagement in project evaluation and the subjective effect of bad debts of commercial banks.

  2. The data included in this research work has been obtained from several primary as well as secondary sources.


Making money isn't complicated. It's just a matter of understanding your cash flow direction. Anyone can do this and become rich by learning about the credibility of risk management. In the era of strenuous economic growth, there is a prior difference between economic units and deficit economic units. On the other hand, the bifurcation of the savings-investment mechanism has imported the need or existence of the financial institution. A financial institution keeps an eagle eye on the transfer of funds from the hands of savers to the investors[i]. There are some key points on which financial institutions centralize their viewpoint on investors.

  1. The vital financial institution which keeps an eye on the transfer of funds in a country is commercial banks.

  2. Commercial banks act as trustees between the lender and investor.

  3. A trustee or we can say commercial banks lay out a systematic approach for the dispersion of surplus economic units and also conceptualize the pace and dimension of economic development in a country.

The methodologies used by the banks as an intermediary entity are to render equitable knowledge of the resultants of lending[ii]. Such knowledge works in the favour of proper allocation of funds and certifies the profitability in the return on investment. While all the decisions related to lending function fall, consider uncertainty and risk of credit management. It is advised that the lending decisions must be taken based on minimal quantitative data and broadly on principles so that a subjective and unbiased judgment can be obtained in the scenario of risk obligation in bad debts.


Credit management is the methodology to affirm that the customers are liable to pay for the products they receive or the services availed to them. Credit Management plays an important role in the cash flow of your income. While lack of cash can lead you to bankruptcy, it can also be profitable if you have an idea to ascertain the risk factors of credit management[iii]. In that case, your business can also be taken over by someone who has better knowledge of credit management. In other words, we can say that credit management comes, which impromptu risk factors as well as perpetual profit simultaneously. Proper guidance and adequate knowledge about credit management can play a vital key in the long-term growth of a business and it also diminishes the inadequacy of credit risk.

As time is on the one-sided path of progress, development in technology is advancing in the same direction. Earlier we had to depend on paperwork and a plethora of risk calculations to ascertain adequate credit management in an entity. Now, we have technology-enabled credit management and it has plummeted the hefty manual work in the calculation. Technology-enabled credit management uses an algorithm to deduce and present the credit history and behaviour of the potential client to gauge the risk of non-payment. While in the traditional methods of credit risk management, various variables are considered in the algorithm while determining the risk in the credit management.

There is a long list of credit management in a business entity, it works correspondingly with several departments of a company, such as Credit Ops, Risk manager, and collection team. Different entities have different perspectives about credit management. In the world of credit risk management, it is advisable that losing money to inflation is better than losing money to poor investing. If you're not sure about an investment, test the waters with 1% of your net worth. If you're very sure about an investment, get the cheapest loan you can and put that money into the investment on top of your capital.

  1. End-user perspective: better credit management can eventually lead to a better risk score and we know that a better risk score means better terms when you take a loan from a Bank/ Financial institution.

  2. Bank Perspective: Better credit management means the bank will have to keep low capital in reserve for the future. It can also pave the way for better profitability and better return on investments.


Bad loans can turn out to be profitable. The housing crisis is a big example of a business being good then bailout is a good option as a loan to the company. Banks make a lot more money from what we keep in there by investing our savings and leaving us out on ROI (Return on Investment). The complication of bad debts in banks are hypothetical and several financial and economic experts have varied purviews on the bad debts of Indian commercial banks. After the GFC (Global financial crisis) the ECB (external commercial borrowing) said it would do whatever it takes to stabilize the Euro[iv]. In the current situation, the RBI stands by to provide all the liquidity that is required. Sound banking practice requires that banks only lend to "those who don’t need it. In the previous year, even SBI was concealing bad loans and RBI had to intervene[v]. Fuel consumption was the main source of Tax and it was consumed very little, gold imports were less than 40%.[vi] Banks loan book has risen during pandemic and moratorium remained low[vii]. If no business was running, why did the loan book increase? It's a clear sign of using new loans to fund old ones.

A surmounting bad debt can also jostle the result of Net Income as we are evaluating bad debt Expense for the period whether there is no real bad debt Expense as more than what we thought we would have not collected is collected. Banks and financial institutions took collateral at lower values to cope with bad debts in the future. This is why banks tend to take houses or real estate properties as collateral or mortgage at less than their market price to ensure they preserve their money. For example, if your house is worth Rs 30 lakh, they would pledge that house for Rs. 20 lakhs as collateral for Rs 20. as a loan.

Banks don’t create money out of thin air. You need to tell the difference between cash flow and obligations. And it's normal for the bank to take money from you in exchange for interest and lend it to another for higher interest. The bank, just like any other business.


A few months back, the finance minister of India had announced the first-ever bad bank (A bank that will deal with surmounting bad debts of commercial banks)[viii]. It could be considered as a big step if they had mentioned something which already isn’t happening in the country. There are a lot of ARCS (asset reconstruction companies) in India and they have failed to create the market for distressed assets that is NPA even for smaller amounts. Now the government doesn't have to recapitalize the public sector bank every year through the government budget. Those funds can be used for education, health, and infrastructure purposes.


The notion of a bad bank was conceptualized at the Pittsburgh- headquarter of Mellon bank in the year 1988. It would work as a separate entity and it would purchase Non-Performing Assets from debt drowning banks[ix]. Bad Banks has a primary focus on the recovery of the bank from bad debts. A huge portfolio of bad debts may accumulate in a commercial bank which can eventually lead to bankruptcy. In the end, it becomes hard for commercial banks to raise capital owing to the large volume of NPA. In such circumstances, Bad bank comes as a saviour and segregates good assets and bad assets.


There is also a contradiction in the bad banks, Bad bank is bad for the public but good for industries/business. NARCL (National Asset Reconstruction Company Limited) will help in the management of bad debts/ assists/ NPA of those banks which are on the verge of collapse or bankruptcy. NARCL will buy over 2 lakh crores of bad debts of debt-laden banks. In return, NARCL will pay 15% immediately for the bad debts to the banks and the remaining 85% will be recovered by the NARCL[x]. It will also introduce a securitization receipt to the bank in return for the purchasing of bad debts, the receipt will state that the asset reconstruction company will be liable to pay the rest percentage of the bad debts in due course.


Reliable lending requires properly articulated and easily obtainable policy documents which signify the methodologies of lending. With the help of the above research on credit management and bad debts in commercial banks, it can be inferred that:-

  • It is prior for the banks that the loans should be granted after proper scrutiny of the collateral offered by the customers.

  • In the end, it all depends upon the proper forecasting of risks coming with the debts.

The managing authority should work in the direction to minimize the risk that comes with the non-performing assets and inadequate collateral security. If we understand financial knowledge practically then it would become easy for us to be financially established throughout our life. So, in this research paper, the main concern was to get the real knowledge of assets and liabilities in a practical world and to cope with it in such a manner that it generates perpetual profit.

[i] https://www.worldbank.org/en/topic/financialinclusion/overview#1