The 7 P's of credit are a set of principles that guide lending decisions, particularly for banks, to ensure responsible and effective credit management. They represent key factors to consider when evaluating a loan application and managing the loan portfolio. These principles are:
The 7 P's of Credit Explained
| P | Description | Example |
|---|---|---|
| Productive Purpose | Loans should be used for income-generating activities. Banks should ensure the loan will enhance the borrower's ability to repay. | A loan for a farmer to purchase new equipment that will increase crop yield. |
| Personality | The borrower's trustworthiness and character are considered. This involves evaluating their past credit history, reputation, and integrity. | Checking the borrower's credit score and references to assess their reliability. |
| Productivity | The loan should maximize resource productivity. The project financed by the loan should result in efficient use of resources and increased output. | Providing a loan to a business to upgrade its technology, leading to higher production rates with the same amount of labor and materials. |
| Phased Disbursement | Loans are disbursed in stages rather than all at once. This allows for monitoring progress and adjusting the loan amount if needed. | Releasing funds to a construction project in installments as different phases of the building are completed. |
| Proper Utilization | Ensuring the loan is used for its intended purpose. Regular monitoring and verification are essential to prevent misuse of funds. | Regularly visiting the farm or business to verify that the loan funds are being used for the purchase of equipment or other specified activities. |
| Payment | A clear repayment plan is established. The loan terms, including interest rates and repayment schedule, are structured to be manageable for the borrower. | Creating a loan repayment schedule that aligns with the borrower's cash flow and income cycle, such as allowing farmers to repay after harvest season. |
| Protection | Adequate measures are in place to protect the loan. This may involve collateral, insurance, or other risk mitigation strategies. | Requiring collateral, such as land or equipment, to secure the loan and reduce the lender's risk. |
These 7 P's, as the reference explains, guide banks to lend responsibly by focusing on income generation, borrower trustworthiness, maximizing resource productivity, phased loan disbursement, ensuring proper loan utilization, structuring appropriate payment plans, and implementing protective measures.
