It is important to use the experience of foreign banks that apply certain mechanisms for the operation of credit lines in the Philippines.
First of all, it concerns:
- the procedure for granting credit resources;
- loan repayment terms;
- principles of setting and charging interest rates;
- options for changing the basic terms of lending.
In certain cases, the provision of a loan is accompanied by a special procedure for opening a loan. Essentially, this procedure is a preliminary agreement of the client with the bank on the possibility of obtaining a loan without hindrance at the time of the need for a bank loan. This is a promise of banking assistance that is provided to the client under certain conditions and for a certain time.
Benefit of a Preliminary Agreement With the Bank Fir the Client
For the client, the benefit of a preliminary agreement with the bank is quite obvious:
- First, as a result of this framework agreement, the client is fully confident in receiving borrowed funds in the amount agreed with the bank.
- Secondly, this agreement does not obligate the client to really use the unconditional right to receive a loan. He can use this right completely, partially or not at all.
- Thirdly, after receiving a loan, the client can repay the loan by a lump sum or gradually, at the time that he himself has determined.
Of course, the promise of help is not the lending process itself, it is only a prelude to the stage of a real loan agreement. However, here the bank does not remain at a loss. For established but not used credit lines (for example, the so-called revolving or for the obligations of the bank to provide credit resources on a certain date), the client usually pays a fee for the unclaimed amount of liabilities. As the statistics show, the usual size of this commission is 0.05-0.5% per annum, depending on credit risk. An alternative method of payment is the accrual of interest on the established amount of the credit line, regardless of its use; margin for the actual use of credit resources usually takes into account this fee.
International Practice of Permanent Credit Lines
In foreign practice, there are also so-called permanent credit lines , so-called evergreen credit (https://financial-dictionary.thefreedictionary.com/Evergreen+credit). Agreements on them differ from different credit institutions, but their main feature remains unchanged for all – the absence of a fixed loan repayment date. If the bank nevertheless wants to claim its resources back, it sends a notification to the borrower. Otherwise, the credit lines remain at the borrower’s disposal for an arbitrarily long time, up to the full repayment of the loan.
Permanent credit lines attract borrowers with maximum flexibility. Banks usually do not send notice to the borrower until his financial situation or market conditions seriously deteriorate. This means that under normal conditions, the borrower receives a quasi-permanent source of funds that does not burden him with repayment schedules. A long notice period makes it easy to find an alternative source of resources. Paying for these resources gives an advantage to the client, since banks, as a rule, reduce the fee in the period after the notification, and it turns out to be even lower than the rates on long-term loans.