Financing and Marketing Management

Unit 4- Fishery Financial Management

4.2. 3 R's of credit: Returns, Repayment Capacity and Risk bearing ability
Returns from the investment
This is an important measure in the credit analysis. The banker needs to have an idea about the extent of returns likely to be obtained from the proposed investment. The demand for credit can be accepted only when the borrower will be able to generate returns that will enable him to tide over the costs. The main concern here is that the borrower should be able to generate incremental income when they go for the additional returns from the borrowed funds.
Repayment capacity:
This simply means the ability of the borrower to clear off the loan obtained for production purposes within the time stipulated by the bank. The loan amount may be productive enough to generate additional income to the borrower, but it may not be productive enough to repay the loan. Hence, the necessary condition here is that the loan should not only be profitable but also have potential for effecting repayment. Then only the borrower has a favorable point on his side.
Risk bearing ability
It is the ability of the borrower to withstand the risks that arise due to financial loss. Risk can be quantified through statistical techniques like coefficient of variation, standard deviation, programming models etc.
Probabilities can be estimated and ascribed to the measurement of uncertainty phenomenon.
The borrower may satisfy the banker with regard to returns and repayments capacity, but yet another factor to be fulfilled is risk – bearing ability. This is vital because at times our estimates go away and the expected output may not be forthcoming because of the risks enumerated above may stand in the way. Consequently our plans turn topsy-turvy. Here what we wish to know is whether the borrower has got shock absorbing capacity to withstand the onslaught of the unforeseen events or not. How is the risk bearing ability estimated under such situations? The productivity of any enterprise or investment activity is gauged by its past performance. Similarly, in estimating the risk bearing ability, we need to find out what has been the variation in the yields or returns for the given enterprise over the past 5 to 10 years. This variation can be computed using coefficient of variation technique.
Repayment capacity under risk = Deflated gross returns- (working expenses excluding proposed loan
(Risk bearing ability) +family living expense + other loans due +miscellaneous expenditure + crop loan)…..
After allowing the possible reduction in gross income the repayment capacity is also increased with the loan amount. It infers that the borrower has the risk bearing ability in using the borrowed funds. His is a very sound case for consideration of extending loan by the banker.
Risk Bearing Ability and Recovery in Fisheries Sector Ability of a loaner to with stand unforeseen expenditure and unexpected losses of income and still continue the business he is carrying on. Examine whether the loaner is capable of repaying a loan even in bad years. This calls for assessing his credit worthiness and moral character