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Money and credit - Ivanov V.М.

Topic 19. FORMS OF CREDIT

19.1. Bank credit and its tasks

Currently, intra-economic circulation mainly uses a cash loan, presented primarily in the form of a bank loan.

A bank loan is a movement of loan capital provided by banks for a loan on terms of security, repayment, urgency. It expresses economic relations between creditors (banks) and lending subjects (borrowers), which can be both legal entities and individuals.

Bank credit is associated with the accumulation of temporarily free cash, their redistribution on terms of repayment, as well as with the issue of currency in circulation through the credit system. The return form of the movement of monetary resources creates the opportunity to redistribute monetary resources more than once. The need to use a bank loan is determined by the circulation of enterprise funds in the reproduction process, the features of the organization of working capital and fixed assets, the self-supporting interests of the creditor and the borrower.

Bank loans are provided mainly by commercial banks for the following tasks:

• increase in the fixed and working capital of economic entities;

• accounting (rediscounting) of bills;

• meeting consumer needs of citizens;

• redemption of state property;

• for other purposes in the event of a mismatch in receipts and payments in the process of circulation of equity.

The use of a loan to overcome financial difficulties arising from mismanagement and losses is not allowed.

Banks can provide loans in both national and foreign currency. Loans are issued as a result of concluding a loan agreement for each borrower individually so that the degree of risk of the loan transaction is minimal. In the event that the legislative and executive authorities make decisions on granting loans on preferential terms, compensation for losses to commercial banks is carried out at the expense of the body that made this decision, or at the expense of the corresponding budgets.

Issuance of a bank loan NBU is regulated by the law on this bank. Usually, the NBU and its institutions do not lend to business entities, except for cases provided for by law.

Bank credit can be direct and indirect. Direct (bank-borrower) credit relations prevail. Less commonly, indirect bank lending is used, that is, the provision of a loan to a borrower through an intermediary.

The system of bank crediting includes principles, objects of crediting, the mechanism of granting and return of loans, and also control in the process of crediting. The principles of lending are the main provisions, the rules that must be observed when lending. These regulations and rules are determined by the nature, role, functions of credit and the social conditions in which they are manifested.

Credit as an economic category is associated with other value categories, therefore there are principles of general economic order that are inherent in all these categories, including credit, for example, economy, completeness, differentiation.

Economic efficiency characterizes the achievement of the most efficient use of a loan with the lowest credit investments, such a policy is important for the creditor and the borrower. For the bank economy leads to the possibility of accelerating the circulation of credit resources; For the borrower, the economy in the use of credit ensures a reduction in the amount of payment for a loan, increases its incomes. Completeness implies the implementation of a credit policy taking into account the patterns of development in a certain period. Differentiation - a different approach to lending to certain categories of borrowers.

Principles of lending stemming from the nature of the loan: urgency and repayment; The target character; Material security, pay (mandatory payment of interest to the bank for the use of credit). Urgency and repayment mean that loans extended to the borrower must be returned to the bank within the time limit specified in the loan agreement. The economic basis for the urgency of the loan is the continuity of the circulation of public funds and money in the economy, since with this continuity, at the end of each turnover there is a constant release of cash, which creates the possibility of repaying a bank loan.

The loan term is the period of using the loan, calculated from the moment the loan is received to its final repayment. For the period of use, loans are divided into short (up to 1 year), medium (from 1 to 3 years) and long-term (more than 3 years). Each of them has specific organizational methods of lending, special conditions for issuing and paying off, lending facilities. Economic delimitation by the terms is based on the peculiarities of the circulation, reproduction and formation of the basic and circulating funds and circulation funds of enterprises. The creation and recoupment of fixed assets require a long-term attraction of monetary resources, so a long-term loan is applied here, the maximum term of which may coincide with the terms of full depreciation. The objects of long-term credit are capital expenditures for the reconstruction, modernization and expansion of existing fixed assets, for new construction, and privatization.

The value of circulating assets is released completely after the completion of the circuit. This predetermines the short-term nature of the loan. A short-term loan is provided by the bank for a period of time, resulting from the production plan, the sale of products, and the reduction of inventories of inventories. It accounts for most of the banking assets. Inventories are the main object of bank lending. Banks also credit the needs of economic entities arising in connection with the calculations, production costs not covered by revenues in a certain period. Bank credit can mediate both the full cycle of the fund, and the movement of circulating assets at certain stages of the circulation of funds and costs that do not have a direct connection with the movement of funds through the stages of the circuit.

Medium-term loans can be provided for future periods (to pay for equipment), ie, the object of credit can be both current costs and capital expenditures.

According to the maturity of the loan, there are urgent, deferred and overdue loans. Urgent - loans, the maturity of which has come or will come in the near future. Deferred (prolonged) - loans, the repayment period of which was postponed by the bank for a later period at the request of the client. Overdue loans are loans that have not been returned in due time. Early repayment is practiced on the initiative of both the borrower and the lender, for example, with the additional release of cash, the deterioration of the borrower, which calls into question the advisability of further lending.

The purpose of the loan, its appointment is determined primarily by the borrower, however, the bank in the allocation of the loan proceeds from its value, from a specific facility of lending. Without compliance with the principle of targeted credit, it is difficult to ensure its repayment in a timely manner.

The principle of material security of lending means that the borrower must acquire those tangible assets or realize the costs for which the loan was issued.

When granting loans as collateral for bank loans, the following can be accepted: a pledge for property; guarantee; Bail; Insurance certificate on insurance of the borrower's liability for non-repayment of loans; Any free from the pledge of the borrower's property, which can be levied in accordance with the current legislation. A material guarantee of repayment can be given either directly by the borrower or by its guarantor (another bank, the enterprise).

In terms of risk, bank loans are classified as follows:

• standard;

• with increased risk (substandard);

• Prolonged;

• overdue;

• uncollectible to maturity.

Standard loans include loans issued under such circumstances: when the loan and the pledge agreement are properly executed; At the expense of the borrower, funds are constantly received, the pledge is provided in sufficient volume and is easily implemented; Guarantee, surety or insurance contract are reliable.

To substandard (with increased risk) it is possible to include loans that are insufficiently guaranteed by the debtor's capital and solvency or a certain pledge, and loans to the borrower whose financial position at the time of assessment raises concerns.

To prolonged include loans, the maturity of which is postponed after the onset of contractual maturities. Overdue loans are loans that are not repaid through the realization of collateral or collection under the guarantee, surety, insurance contract and charged to the account of overdue loans.

Hopeless to maturity - loans that can not be repaid and whose preservation on the balance sheet of the bank as an asset does not make sense. The category of bad loans also includes loans, the limitation period for which has expired and they must be written off in accordance with the established procedure.