New Types of Credit Lines. When and Why Are They Used?

With the development and integration of the global banking market, credit institutions began to provide more services to transnational corporations. Thus, in the credit policy of large banks with an international branch network, there began to arise conditions, in accordance with which credit line nominees were given the right to choose the country, currency and borrowing interest rate. This type of credit line is called the “multi-currency credit line.”

In most cases, the credit line is provided to one particular borrower, in which case it is personal. However, in practice there are cases when banks establish a credit line for a group of borrowers (most often for the parent and subsidiary companies). At the same time, each borrower is responsible for his part of the loan (of course, if the contract does not provide for joint responsibility or one borrower provides a guarantee for the other). Such a system allows a holding company to exercise more flexible management – to obtain a loan through a division that has the best conditions in terms of economic activity, accounting and taxation.

Appearance of Different Types of Credit Lines

The meaning of multicurrency credit lines is that the borrower has the right to receive credit resources in any currency of the interbank market, which helps him manage currency risks.

International banking practice has also given rise to so-called multi-option credit lines – a combination of credit lines of a binding nature for a bank with the right of a borrower to choose various instruments of the financial market.

The flexibility of this type of credit lines gives the borrower the opportunity to choose the cheapest sources of resources in the necessary currency from a wide range of banking services. Most of these lines are provided exclusively for large customers, since administrative costs make these operations economically unprofitable for small transactions.

International Practice of Use of Credit Lines

In international practice, the most widely developed credit lines with the right to choose the conditions of borrowing. Foreign experience shows that credit lines can replace traditional contractual forms of credit resources.

The experience of American and European banks gained in establishing credit lines and their modes of operation, therefore, represents a huge potential for improving the services of the Filipino banks. However, the implementation of a number of credit operations in the Philippines is fraught with many difficulties. Multi-lines require the development of financial infrastructure, the formation of a solid structure of credit instruments, and high quality banking services. Since this infrastructure is at the initial stage of formation, such operations can be developed in the Philippines only in the future. For the time being, Filipino banks are forced to focus on guarantees for the return of credit resources and to choose the mode of operation of credit lines depending on the guarantee of repayment.

However, it is impossible not to see that credit lines are the most universal type of banking service. They are very convenient both for the bank and for the client, and the competitive position of the credit institution in the market depends on which more advanced forms of lending will be used in banking practice.

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