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Bank lending

Bank lending is a method of financing the needs of an enterprise on the terms of payment, urgency and repayment.

Bank lending is a method of financing the needs of an enterprise on the terms of payment, urgency and repayment.

Credit relations can take different forms.Credit relations can be organized in the form of a bank loan, as well as in the form of commercial lending, when relations between enterprises (the borrower and the lender) are drawn up with a bill of exchange.A commercial loan can later be transformed into a bank loan by providing a loan on the security of a bill by the bank or by recording a bill of exchange.

Usually, direct bank lending is distinguished, when the credit relations of an enterprise initially arise as a relationship with a bank, and indirect bank lending, when credit relations between enterprises initially arise, which later turn to the bank in search of a way to early receive money on a bill of exchange.

Credit operations are the most profitable item of the banking business, which forms the main part of the net profit of banks.But the main risks of banks are connected with credit operations, in particular the risk of default by the borrower on the principal and interest on the loan.

Lending is usually carried out on enlarged objects.Such enlarged objects, for example, for enterprises of industry, transport, communications, construction, consumer services are inventories and production costs included in the normalized working capital: goods shipped, the payment period which has not come;issued letters of credit, etc.Lending on enlarged objects significantly expands the rights of the enterprise, allowing it to maneuver with borrowed funds within the total amount of the loan



A bank loan, however, should not cover the financial needs of the enterprise, caused by losses, irreducible stocks of inventory and production costs, which should be covered by its own working capital, produced above-plan products, having limited sales, surplus and unused inventory balances.

The company has the right to receive a loan in the bank where it has a current account, and in any other bank.This procedure gives the company the opportunity, focusing on its own interests, to choose a bank where credit policy is more flexible, operations are performed faster and clearer, better information, a wider list of services provided.
Lending to enterprises is made on the basis of a loan agreement.The contract defines the rights and obligations of the enterprise-borrower and the bank, taking into account the nature of the loan provided and the financial condition of the company, establishes the parties ’responsibility for breach of the contract.The loan agreement also defines the following conditions as necessary: lending purposes, loan amount;terms and basic conditions for issuing and repaying a loan;ways to secure a loan commitment;interest rates for the loan;list of calculations and information necessary for lending, as well as the timing of their submission.
Depending on the loan term, loans are divided into short-term (up to 1 year), medium-term (from 1 year to 3 years) and long-term (over 3 years).
Before making a decision on granting a loan, the bank analyzes the creditworthiness of the company.
Under the company's creditworthiness is understood as the presence of the prerequisites for obtaining a loan and its return on time.The creditworthiness of an enterprise is determined by its accuracy in settling previously received loans, the current financial condition and the ability to mobilize funds from various sources, if necessary.
Each bank uses its own system for assessing the company's creditworthiness, which is a commercial secret of the bank.Typically, the rating system uses three categories of creditworthiness: reliable (creditworthy), unstable (partially creditworthy), unreliable (non-creditworthy).
The borrower recognized as reliable is credited on general terms;in this case, a preferential crediting procedure can also be applied.If the borrower turns out to be an unsustainable client, then when entering into a loan agreement, additional standards are provided for monitoring its activities and the repayment of the loan (for example, the need for collateral, guarantees, sureties, monthly collateral checks, application of higher interest rates, etc.).If the enterprise - the loan applicant is recognized as an unreliable client, then its lending is impractical.In this case, the bank can provide funds only on special conditions specifically provided for in the loan agreement.
The main reasons for the failure to ensure the creditworthiness of an enterprise are the presence of accounts receivable, violation of obligations, accumulation of excess production and inventories, low economic efficiency, slowing down of working capital turnover, etc.
The Bank monitors compliance with the terms of the loan agreement, the use of the loan by the company, and timely and full repayment.For these purposes, an analysis of the economic activity of the enterprise, its financial position is carried out; if necessary, a check of monetary and settlement documents, accounting records, reporting materials is carried out.
If an enterprise violates credit conditions, the bank applies sanctions to it - credit measures.A bank, for example, has the right to cease lending in full or in part, prematurely recover a loan in cases of unsecured debt, use of funds issued for purposes other than or with violation of established rules for lending, selling or spending pledged valuables without applying the amounts received to repay the bank debt, unsatisfactory storage inventory holdings of the bank, evading banking control.
If there is a systematic violation of the terms of repayment of loans, the Company loses the right to a new loan and only in some cases can it be used with a special guarantee (surety).If the company has arrears, and it does not have free cash, the bank stops lending and has the right to use the pledged commodity-material values (collateral) to repay the debt on loans.If the loan was issued under the guarantee of another organization, then in the absence of funds for its repayment in the current account of the borrowing company, the debt is recovered in indisputable order from the guarantor’s account.
At the initiative of the bank to the enterprise-borrower, not fulfilling obligations for the timely return of loans received, the following measures can be taken:
• the transfer of the operational management of the administration appointed with the participation of the creditor bank;
• reorganization;
• initiating in a court of arbitration a case on declaring an enterprise insolvent (bankrupt).



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