First of all, it seems that the name of such type of loans as “credit by credit line” does not express its specifics, does not distinguish its features, but, on the contrary, counts it in the total mass of modern short-term loans provided to various types of borrowers. It is unclear, for example, how the type of loan in question differs from overdraft lending, special purpose loans, and other loans whose debt is also limited.
How is loan classification changing?
From an economic point of view (but not from an organizational point of view) we are inclined to consider the classification of loans depending on the extent of mediation of customer needs by a loan. Successful is the division of loans, depending on the objects of lending into two groups:
- loans on an enlarged object
- loans on a private object.
What is the difference between them? We will answer that the first category of loans, we refer to the overdraft loan and the loan under consideration, which we recommend to call the loan on the enlarged object within the credit line. This loan is issued for a variety of objects connected to one (total, cumulative) object. This loan within the credit line accounts for 22 to 65% of all short-term loan investments.
The peculiarity of the credit line in foreign practice is that it is not an unconditional contract binding on a bank. The latter may cancel the contract before the expiration date, if, for example, the client’s financial situation deteriorates significantly or some of the conditions of the contract are not fulfilled. Philippines banks do not always follow this rule. In the event of a decrease in the borrower’s creditworthiness class, they often do not even revise the credit line limit.
Specific terms of reducing body of the loan
Based on the content and components of the calculation of the credit line, it can be noted that the repayment of this loan is due not so much to the fact that free funds appear on the borrower’s current account, but to the specific terms of reducing credited stocks and costs.
In our opinion, this requires a thorough study of at least the following group of questions:
- justification and selection of the method for determining and revising the credit line;
- determination of the maximum term of the credit line and repayment of individual loans issued within its framework;
- calculation of the amount of interest for the loan;
- selection of a loan security method;
- determining the procedure for lending in the event of a deterioration in the financial situation of the borrower and a violation of the conditions established in the contract;
- considering the possibility of converting individual loans and all debts into a one-time term loan.
Unfortunately, all these issues are not thoroughly studied by the bank, so the actual debt on these bank loans differs significantly from the planned limit. Read more about tendencies of banking system development in other articles of our blog.