Explain Credit Delivery System.
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The credit delivery system refers to the process by which financial institutions, such as banks and microfinance institutions, provide credit (loans or financial assistance) to individuals, businesses, and organizations to meet their financial needs and promote economic activities. The system encompasses various stages and actors involved in facilitating access to credit:
Financial Institutions: These include banks, cooperatives, credit unions, microfinance institutions, and other formal financial entities that mobilize savings and provide credit to borrowers.
Borrowers: Individuals, entrepreneurs, farmers, small businesses, and organizations seeking financial assistance to invest in productive activities, purchase assets, or meet personal or business-related expenses.
Credit Assessment: Financial institutions assess the creditworthiness of borrowers by evaluating their financial history, income levels, collateral (if applicable), and ability to repay loans. This helps determine the terms and conditions of credit, including interest rates and repayment schedules.
Loan Disbursement: Once approved, loans are disbursed to borrowers based on agreed terms. Disbursement methods may vary, including direct transfer to bank accounts, issuance of cheques, or cash withdrawal.
Repayment and Collection: Borrowers are required to repay loans according to the agreed terms, including principal amount and interest. Financial institutions manage loan repayment through various channels, such as automatic deductions, bank transfers, or in-person payments.
Risk Management: Credit delivery systems also involve risk management practices to mitigate credit risks, including credit assessment, loan diversification, collateral requirements, and credit monitoring to minimize defaults and non-performing assets.
Government Policies and Support: Government policies, regulations, and support programs play a crucial role in shaping the credit delivery system, promoting financial inclusion, and ensuring equitable access to credit for underserved and marginalized populations.
Overall, the credit delivery system is essential for stimulating economic growth, fostering entrepreneurship, promoting investment in productive sectors, and improving financial well-being by providing individuals and businesses with access to timely and affordable credit resources. Effective credit delivery systems contribute to economic development, poverty reduction, and inclusive growth by expanding financial access and opportunities for individuals and communities.