Credit Facility

Credit Facility
See also

Credit facility is the economic relationship between a lender and a borrower. A loan granting operation consists in the lender placing cash at the borrower's disposal for a specific purpose, and the borrower undertakes to use it under the terms and conditions specified in the agreement, return the amount of the loan used together with interest at specific repayment dates and pay commission on the loan. As a rule, the lender is a bank (J. Mbawuni, S. Nimako, 2015, pp. 1-3) .

The term credit facility is derived from the Latin word credere meaning to trust, to believe. Thus, credit means making assets available for use based on trust (K. Amoah-Binfoh, 2014, pp. 52).

The importance of credit facility

Lending is one of the basic forms of banking activity. Bank receivables on account of consumer and economic loans granted are the group of assets with a dominant share in the balance sheet total of commercial banks, generating the highest income and associated with the highest risk (K. Amoah-Binfoh, 2014, pp. 52-54). The Bank is the parent party of the loan relationship with the borrower: it determines the terms and conditions of the loan and is authorized to control its use. The loan plays an important role both as an instrument of financing the current activity of the company and a way of obtaining funds for investments. It has become an important element of economic life and is often necessary for running and developing an enterprise (K. Amoah-Binfoh, 2014, pp. 52-54).

Credit facility agreement

The credit agreement should be concluded in writing, and at the same time it should precisely define in particular (D. R. Van Deventer et al., 2013, pp. 694-699):

  • parties to the agreement
  • the amount of credit and its currency
  • the purpose for which the credit was granted
  • credit repayment terms and conditions
  • the interest rate of the loan, as well as the conditions for its change
  • the method of securing the repayment of the loan
  • the scope of the bank's powers related to the control of the use and repayment of the loan
  • the timing and method of transferring money to the borrower
  • the amount of the commission (if the agreement provides for it)
  • the conditions for amending and terminating the contract in the case of foreign currency loans, also the rules for determining the foreign currency exchange rate.

Types of credit facility

The distribution of credits may be made based on (G. Ekwere, D. Edem, 2014, pp. 36-38):

  • the duration of the loan,
  • the object of the credit (purpose),
  • a form of credit,
  • the method of securing the repayment of the loan,
  • the currency of the loan,
  • interest rate rule.

Credit facility functions

The credit has the following three functions S. A. Jones, 2018, pp. 489-505):

  • issuance (consisting in putting money into circulation),
  • stimulation (use of credit policy instruments for directions of economic development),
  • income (credit used in production triggers a mechanism of income growth due to the development of manufacturing activity).

Granting credit facility

The Bank decides whether to grant a loan to a borrower. The decision is primarily influenced by the creditworthiness of the borrower. Also, the Bank decides to grant a loan to a borrower (T. Adrian, et al., 2009, pp. 238-240):

  • the age of the borrower
  • owned property
  • form of employment
  • number of dependants
  • accommodation

If the borrower becomes uncreditworthy the bank can (T. Adrian, et al., 2009, pp. 238-240):

  • reduce the amount of credit granted
  • terminate the agreement

Foreign currency credit facility

The credit agreement should include rules for determining the exchange rate of the foreign currency (P V. Lakshmi, M. S. Murugan, 2009,pp.12). The repayment of such a loan may be made directly in a foreign currency. This right must not entail any additional costs for the borrower, e.g. the bank must not require the borrower to purchase currency to repay the loan (M. K. Kerfoot, et al., 2017, pp. 118).

References

  • Adrian T., Burke C. R., McAndrews J., (2009), The Federal Reserve’s Primary Dealer Credit Facility, 238-240
  • Amoah-Binfoh K., Velmurugan T., Charles R., (2014), The Impact of Credit Facilities Given by Rural and Community Banks to Farmers – A Special reference to Ghana, "Conference: Assessing and Developing Sustainable Business Model; Financial Perspective", SRM University, 52-54
  • Bouteille S., Coogan-Pushner D., (2012), The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures
  • Ekwere G., Edem D. (2014), Effects of agricultural credit facility on the agricultural production and rural development, 36-38
  • Jones S. A., (2018), The Credit Facility Application: A Practical Guide to Risk Evaluation and Structuring, "Trade and Receivables Finance", 489-505
  • Kerfoot M. K., Alicandri J. R., Perkins R. G., (2017), The ABCs of Fund Finance: Credit Facilities for Secondaries Funds and Funds of Funds, "Journal of Investment Compliance", 118
  • Lakshmi P V.,Murugan M. S., (2009), A Market Study on Bank Credit Facilities to Small and Medium Enterprises,
  • Mbawuni J., Nimako S., (2015), Predicting Clients’ Intentions to Acquire Credit Facilities, "Ghanaian Financial Market", 1-3
  • Popli G.S., Puri S.K., (2013), Strategic credit managment in banks
  • Reeve J., Warren C., (2006), Corporate Financial Accounting
  • Van Deventer D. R., Imai K., Mesler M., (2013), Pricing and Valuing Revolving Credit and Other Facilities, "Advanced Financial Risk Management: Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management", 694-699,

Author: Dominika Pasek