In this article, we are going to talk about the one of the types of credit lines (https://dictionary.cambridge.org/dictionary/english/credit-line). Mandatory credit lines basically have two types of repayment terms:
- renewable (revolving).
About Non-renewable Credit Lines in Details
Non-renewable credit lines have a clear repayment schedule. In this case, any amount paid by the borrower of a predetermined period will be counted in the repayment of subsequent payments, depending on the terms of the contract, either directly (including the first and subsequent payments), or in reverse (including the last payments and shortening the loan period) repayment, and can not be used again. For banks, non-revolving credit lines are interesting because an orderly repayment schedule makes these assets a source of income at a constant level. The absence of restrictions on the return of the loan for the borrower is not always beneficial to the bank, since it violates its asset management. Therefore, banks seek to limit the borrower’s freedom to repay credit resources or impose fines on it.
Non-renewable credit lines are suitable for cases where repayment comes from certain sources that allow you to fairly accurately predict cash flow in a certain period.
In banking practice, there are two methods of repayment of the loan, which give the bank the ability to predict cash flow. The borrower is able to mitigate the burden of debt, optimizing cash flow to attract more profitable non-bank investors or implement swaps. These methods are the repayment of a loan in relatively small parts during the loan period and a larger amount upon maturity (ballon repayment) and a one-time repayment with a total amount at the end of the period (bullet repayment).
Use of Revolving Credit Lines for Reliable Borrowers
Since most industrial companies constantly need loans to cover working capital to maintain the stability of the production cycle, revolving credit lines are usually repaid by one amount at the end of a period. Consequently, banks, in order to prolong credit resources, use the repayment schedule in order to control the financial condition of borrowers.
For reliable borrowers, banks are ready to provide revolving credit lines for a period of 5-10 years for general production needs. Establishing such lines, banks reserve control over the targeted use of borrowed funds.
When the credit lines are renewable, the borrower has the right to repay the loan at any time and subsequently borrow resources again in accordance with the terms of the loan agreement. The commission is usually paid for unused credit lines.
Much attention in the process of lending to foreign banks is paid to pay the loan fee. They use loans with both fixed and floating interest rates. The choice between these rates depends on the bank’s risk management tactics and, importantly, from what trends interest rate fluctuations are expected. The fixed rate, as you know, does not insure the bank against the risk of losses, but allows you to make a profit if the rates go down. But if the rates continue to fall and the borrower returns the loan ahead of schedule, the risk of the bank increases by the likelihood of loss from new investment of the funds received at a lower rate. This loss is equal to the difference (in current value) between the income received from the subsequent investment and the cost of attracting credit resources for the remaining period.