The upper limit of the interest rate for the loan is determined. Interest rates
In a market economy, where the presence of inflation is obligatory, there are nominal and real interest rates for loans.
The real rate is adjusted to take into account the rate of inflation.
It is the real interest rate that is important when deciding whether to use a loan.
The upper limit of interest on a loan is determined by market conditions. The lower limit takes into account the bank’s costs of raising funds and ensuring its own functioning.
When calculating the interest rate in each specific transaction, a commercial bank takes into account:
- a) the level of the base interest rate, which is calculated based on the real cost of raising funds;
- b) the level of the bank’s own expenses;
- c) the planned rate of profitability of lending operations;
- d) risk premium taking into account the terms of the loan agreement.
Prime interest rates are the average interest rates at which loans are made to prime borrowers.
The risk premium is set depending on the following criteria:
- a) the creditworthiness of the borrower;
- b) availability of collateral for the loan;
- c) loan term;
- d) relationship between the client and the bank;
Considering that fees for attracted resources occupy a significant place in the bank’s expenses, the issue of the difference between the average rates on loans issued and attraction of deposits (interest margin) is of great importance.
Fixed and floating rate.
Interest rates can be fixed or floating.
The fixed interest rate is set for the entire loan period and is not subject to revision. This is beneficial for both the lender and the borrower since both parties have the opportunity to accurately calculate their income and expenses associated with the use of the loan provided. Fixed interest rates are usually used for short-term lending.
A floating interest rate is a rate that constantly changes depending on the situation in the credit markets and in the country's financial market.
In world practice, the following groups of floating interest rates are used:
- 1) Official interest rates (discount rate and refinancing rate) are set by the country's Central Bank. At these rates, the Central Bank provides loans to commercial banks.
- 2) Interbank supply rates for credit resources. Interest rates at which banks provide loans to each other. The most widely used reference rate is LIBOR - London Interbank Offered Rate. These are the rates for deposits in GBP and USD. Calculated as the arithmetic average of the fixed rates at 11 am of each business day, respectively, 7 banks in England or 5 banks in the USA. The LIBOR rate on Euroloans is calculated, as a rule, for 12 currencies and for several periods (1 week, 1, 2, 3, 6, 9, 12 months). At the LIBOR rate, lending is carried out between first-class banks in the Eurocurrency market.
- 3) Prime rate (“prime rate”) is the published rate for loans to prime borrowers. It serves as a guide to the cost of the loan and is usually 1 - 2% higher than the first two rates.
- 4) Rate of loans to small firms and individuals.
Depending on the initial base, the amounts for calculating interest are distinguished between simple and compound interest.
Simple interest assume that the rate is applied to the same initial amount throughout the entire period of use of the loan.
Compound interest is calculated in relation to the amount with interest accrued in the previous period.
Interest is accrued in the amounts and terms stipulated by the agreement, but at least once a quarter, and is paid in installments according to the repayment schedule established by the bank for the interest amounts due. A one-time payment of interest when repaying the principal amount of debt is permitted only when issuing a loan for a period of no more than 3 months. If the amount contributed by the borrower is not sufficient to repay the urgent payment, overdue debt and accrued interest, then the interest is repaid first, then the overdue debt, and the remaining amount is used to repay the principal amount of the loan. This procedure is stipulated at the conclusion of the contract.
What does the interest rate depend on?
The main factors that a commercial bank takes into account when setting loan fees:
- - average interest rate on interbank loans;
- - average interest rate. paid by the bank to its customers for deposits of various types;
- - structure of the bank’s credit resources (the higher the share of attracted funds, the more expensive the loan);
- - supply and demand for loans from clients. Increased demand leads to higher interest rates;
- - term and types of loan, more precisely the degree of risk for the bank of non-repayment of the loan, depending on the collateral;
- - stability of monetary circulation in the country (the higher the inflation rate, the more expensive the loan date);
- - the nature of the relationship between the lender and the borrower;
- - costs of registration and control over the use and repayment of the loan.
The Central Bank refinancing rate serves as the main reference point for the level of loan interest.
Changing the refinancing rate affects the level of loan interest, because interest on the loan is included in the cost of production within the refinancing rate, and above this amount is paid out of profit. Interest on interbank loans is also included in bank expenses only within the limits of the refinancing rate; in excess of this norm, they are charged from profits.
The interest rate is influenced by the degree of risk of loan investments: the greater the risk, the higher the interest rate. On the other hand, the borrower also has to take risks. If a loan is issued at high rates, the risk of the operations being carried out increases significantly, because The borrower needs to invest funds in such a way as to repay not only the principal amount of the debt, but also the interest.
Credit boundaries Credit boundaries are determined by the level of development of credit relations in which the process of loan implementation balances the supply and demand for credit resources in conditions of a stable, moderate interest rate that is affordable for the vast majority of normally functioning borrowers. At the microeconomic level, credit limits are determined by: and the volume of demand for credit from borrowers at the nominal bank loan rate and the available...
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Topic 11. Objective boundaries of credit and loan interest
11.1. Credit limits
11.1. Credit limits
The boundaries of credit are determined by the level of development of credit relations in which the process of loan implementation balances the supply and demand for credit resources in conditions of a stable, moderate interest rate that is affordable for the vast majority of normally functioning borrowers.
At the microeconomic level, credit limits are determined by:
a) volumes of demand for credit from borrowers at the nominal bank loan rate and the available market interest rate;
b) the nature of fluctuations in the borrower’s needs for fixed and working capital;
c) according to the borrower’s level of equity capital and the efficiency of its use;
d) the effectiveness and return on investment of projects for the implementation of which funds are allocated.
Under such conditions, the dynamics of bank interest rates becomes the main indicator of compliance and violation of credit boundaries. Subjective attempts to increase the level of lending inevitably lead to the appearance of excess means of payment in circulation and negative consequences for individual enterprises and the economy as a whole. Conversely, a rapid increase in bank interest rates indicates an insufficient supply of credit, that is, a violation of credit boundaries and “underlending” of the economy.
The macroeconomic level of credit boundaries is formed under the influence of the volume and rate of GDP growth, the structure and level of development of the financial system and the state of public finances, the goals and methods of implementing state monetary policy, and the development of market relations.
11.2. Loan interest limits
Loan interest has certain limits, because... rate growth cannot be unlimited.
There is an objective top and bottom the limit of their bets.
Upper limit Loan interest determines the average profitability of enterprises and the level of income (savings) of individual clients.
The borrower who received the loan must repay the loan, pay interest, and receive income. At the same time, the borrower’s rate of income should not be lower than the social average level. Therefore, the interest rate must be calculated with the possibility of obtaining this necessary profit. If the interest rate is initially so high that it absorbs all profits, then using a loan is inappropriate.
Objective criterion lower limit interest on the loan is the bank's cost. The main thing in the banking pricing system is to establish a “dead point” of profitability. Its indicator is the minimum difference of 5 rates on active and passive operations min % margin.
Bank costs:
Accumulation and placement of resources;
Costs of creating required bank reserves;
To create various bank development funds;
Losses due to impairment of bank capital.
Therefore, when choosing a pricing strategy, the bank must take care of compensation for all costs.
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INTEREST RATE
The interest rate is the relative amount of interest payments on loan capital over a certain period of time (usually a year). It is calculated as the ratio of the absolute amount of interest payments for the year to the amount of loan capital.
Interest rates can be fixed or floating.
A fixed interest rate is established for the entire period of use of borrowed funds without the unilateral right to revise it. A floating interest rate is a rate on medium- and long-term loans, which consists of two parts: a moving basis, which changes in accordance with market conditions (usually the interbank supply rate for credit resources) and a fixed value, usually unchanged throughout the entire lending period or circulation of debt securities.
In the monetary sphere of economically developed countries, numerous interest rates are used. Gradually, in Russia the structure of interest rates is approaching the international one.
The interest rate system includes rates of the monetary and stock markets: rates on bank loans and deposits, treasury, bank and corporate bills, interest on government and corporate bonds, interest rates on the interbank market and many others. The comparative dynamics of interest rates is shown in Fig. 18.7. Data in Fig. 18.7 indicate the existence of this relationship between the dynamics of individual market interest rates: bank rates on loans and deposits, interest rates on interbank loans and the yield of government securities. Let us next consider the most important types of interest rates.
Year (as of January 1) for interbank loans; -c- yield of GKOs; deposit rate; - - loan rate, rub.
Rice. 18.7. Comparative dynamics of interest rates for various instruments in Russia
ACCOUNTING RATE OF INTEREST
The discount rate is the official lending rate to commercial banks by the central bank. Discount interest is one of the main instruments with which central banks of different countries regulate the volume of money supply in circulation, inflation rates, the balance of payments and the exchange rate.
Refinancing of commercial banks can be carried out either through direct short-term lending or through the rediscounting of commercial bills. In Russia, only one refinancing method is currently used - direct lending to commercial banks by the Bank of Russia.
Example 18.3. In 1997-1998, the Bank of Russia considered the feasibility of organizing rediscounting of bills of exchange of enterprises carrying out export operations from commercial banks.
The following scheme was planned; a commercial bank takes into account the enterprise’s bill of exchange and, if reinforcement with short-term resources is necessary, presents the bill of exchange for rediscounting to the Bank of Russia with the obligatory affixing of an endorsement, thereby assuming joint responsibility for paying the bill.
The positive aspect of this scheme was the direct connection of credit emission with the needs of production development. In practice, this project was not implemented.
A decrease in the official interest rate leads to a reduction in the cost of credit resources and an increase in their supply on the market; on the contrary, an increase in it leads to a compression of the money supply, a slowdown in inflation, but at the same time to a reduction in investment volumes.
Dynamics of the refinancing rate
changes since 1992 are shown in Fig. 18.8. These graphs make it possible to illustrate the policy of the Bank of Russia aimed at reducing the money supply in 1993-1995, as well as after the 1998 crisis, and stimulating investment in subsequent years.
refinancing
Bank of Russia
Rice. 18.8. Dynamics of the Bank of Russia refinancing rate
BANK INTEREST RATES FOR LOANS
Bank interest is one of the most developed forms of lending in Russia.
percent. This form appears when one of the subjects
The bank acts in credit relations.
The bank, like any credit institution, places borrowed funds rather than its own for a loan. The share of income received by the bank represents compensation for intermediation, the risk of non-repayment of the debt assumed by the bank, and an assessment of the borrower's creditworthiness. The risk of non-fulfillment of obligations to the bank for its assets exceeds the risk of non-fulfillment of obligations to the depositor for liabilities. Thus, the bank assumes the risk of loan defaults. In addition, depositors accept a lower interest rate on funds transferred to the bank so as not to have to search for clients and assess their creditworthiness.
When determining the interest rate in each specific transaction, a commercial bank takes into account: ?
base interest rate level; ?
risk premium.
The base interest rate (Pbaz) is determined based on the planned “cost” of loan capital and the planned level of profitability of the bank’s lending operations for the coming period:
Pbad = C, + C2 + Mn, (18.4)
where C is the average real price of all credit resources for the planned period;
C2 - the ratio of planned expenses to ensure the operation of the bank to the expected volume of productively allocated funds;
MP is the planned level of profitability of the bank's lending operations with minimal risk.
The average real price of credit resources (C^) is determined by the weighted arithmetic formula based on the price of a particular type of resource (Cy) and its share in the total amount of funds mobilized by the bank (paid and free).
The average real price of individual types of resources is established on the basis of the market nominal price of these resources and adjustments to the required reserve rate deposited with the Bank of Russia:
WITH; = Market nominal interest rate:
: (100 is the required reserve norm). (18.5)
Example 18.4. Commercial Bank A raised resources by issuing a promissory note with a rate of 16% per annum. If this bill was purchased by another commercial bank, the real price of the specified borrowing for Bank A will remain at the level of 16% per annum, since deductions to the Mandatory Reserve Fund (ORF) in accordance with the current procedure for transactions with credit institutions are not made.
If this bill is acquired by another legal entity, the real price of the loan will increase for Bank A to 17.6% per annum due to the unproductive diversion of 10% of the resources attracted to the FOR:
16% : (100% - 10%) = 17,6%.
The risk premium is differentiated depending on the following main criteria: ?
borrower's creditworthiness; ?
availability of loan collateral; ?
loan term; ?
the strength of the client’s relationship with the bank and the client’s credit history.
Thus, the upper limit of the interest rate for a loan is determined by market conditions. The lower limit takes into account the bank’s costs of raising funds and ensuring the functioning of the credit institution.
Example 18.5. An illustration of the above-discussed principle of forming interest rates on loan operations depending on the above factors can be a comparison of the level of rates on identical loans provided in the first case in the usual “cash” form and in the second case - for the purpose of purchasing bank bills.
If the rate on a cash loan is 25% per annum, the real cost of attracted resources (taking into account the financial reserve) is 12%, then the rate on a “bill” loan will be about 13% per annum (25% - 12%), since the bank does not bear the costs of attracting resources for lending purposes.
The private factors underlying the determination of the level of interest on active bank operations include: ?
cost of loan capital; ?
borrower's creditworthiness; ?
purpose of the loan; ?
the nature of the loan security; ?
term and volume of the loan provided.
DEPOSIT RATES
Deposit rates on passive operations of banks are influenced by the same market processes as rates on active operations, so the direction of their fluctuation is approximately the same. The deposit rate is always several points lower than the credit rate; the difference is called “spread”, or “interest margin?-; It covers the costs of maintaining the bank's operations and generates profit.
Deposit rates are closely related to other rates in the monetary and stock markets. For example, a legal entity that wants to deposit a certain amount of money with a certain return has alternative offers: purchase a package of government bonds, buy corporate bonds on the organized market or promissory notes on the unorganized market. A deposit with a bank is more convenient in terms of registration; as a rule, the client knows the solvency of the bank, but even so, the availability of alternative options for placing funds means that banks cannot lower interest rates on deposits too much.
INTERBANK INTEREST RATES
Interbank interest rate is the interest rate on loans in the interbank market. Such rates are the most flexible and more focused on market conditions. The interbank market is a wholesale market for credit resources; it provides commercial banks with access to resources for the purpose of providing liquidity and generating income on temporarily free funds that cannot be placed on more favorable terms. The most famous rates in the international financial market are LIBOR.
LIBOR is a scale of interest rates that are used by London banks operating in the Eurocurrency interbank market offering funds in different currencies and for different terms: 1, 2, 6 and 12 months. Each major London bank independently sets and changes the LIBOR rate depending on market conditions. In a narrow sense, this is the average LIBOR interest rate on the offer of funds by the largest UK banks. Traditionally, LIBOR rates are used as a “moving basis” for floating rate loans.
The Russian interbank market has certain features. This is primarily a market for short-term financial resources; The bulk of transactions are concluded on overnight terms. Interest rates are determined by market conditions and at the same time depend on an assessment of the solvency of a commercial bank. Such an assessment is carried out in the process of establishing and revising the credit risk limit for each counterparty bank with which agreements on interbank transactions are concluded.
In Russia, there are the following aggregate interbank market rates (Table 18.1):
MIBID is the average interest rate of the rates for attracting interbank loans announced daily by the largest Moscow banks;
MIBOR is the average interest rate based on the interbank loan rates announced daily by the largest Moscow banks;
MIACR is the interest rate weighted by the volume of actual transactions on the provision of interbank loans by commercial banks.
Table 18.1
Example of aggregated rates Point rate Loan term 1 day from 2 to 7 days from 8 to 30 days from 31 to 90 days from 91 to 180 days MIBID 0.77 2.14 3.74 5.82 7.63 MIBOR 1.8 4 .05 6.39 7.24 9.22 MIACR 1.45 2.36 3.19 5 - As a rule, the level of rates on the interbank market, other things being equal, exceeds deposit rates, but is at a lower level than rates on active operations. The interest margin on transactions on the interbank market may be minimal due to large volumes and low costs for conducting and processing transactions. This conclusion is generally confirmed by data on the dynamics of average interest rates by type of banking operations for the period from 1995 to 2003 (see Fig. 18.7).
TERM STRUCTURE OF INTEREST RATES
The relationship between long-term and short-term interest rates, called the term structure of interest rates, is important both for the borrower, who determines how long to borrow, and for the lender, who decides on the urgency of providing a loan or purchasing a debt obligation. Thus, it is very important to understand how long-term and short-term interest rates are related and what underlies their differences. There are several main theories devoted to this problem.
The theory of market segmentation is built on the following premise: each borrower and lender in the monetary market has certain preferences regarding the timing of placement and attraction of funds. So, if an industrial enterprise needs to finance the technical re-equipment of some production, then it needs long-term resources; if an agricultural enterprise needs to finance seasonal work, for example sowing, then it needs short-term borrowed funds. The same can be said about investors who have preferences for specific timing of placement of free funds.
According to this theory, the yield curve - a graph reflecting the relationship between the yield of debt obligations and their maturity dates - depends on the relationship between supply and demand in short-term and long-term financial markets. Thus, the yield curve increases if the supply of funds in the short-term market exceeds demand, but there is a shortage of resources in the long-term market. Otherwise, the yield curve falls. If the yield curve is flat, then there is a balance in the supply and demand of resources in both markets.
Liquidity preference theory. According to this theory, interest rates on long-term debt are higher than rates on short-term debt for two main reasons. Investors generally prefer to invest in short-term assets due to their greater liquidity and lower risk of loss of value over time. At the same time, borrowers, as a rule, prefer long-term borrowing, since attracting short-term resources involves the risk of repaying the debt while at the same time impossibility of raising additional funds in the event of an unfavorable combination of circumstances. Consequently, borrowers are willing to pay higher interest rates on long-term loans in order to increase their stability. These preferences of both borrowers and lenders give rise to a maturity risk premium (MRP) under normal circumstances.
Expectancy theory. According to this theory, the interest rate on debt obligations depends on the expected rate of inflation. We can say that, according to expectations theory, the nominal interest rate on debt maturing in t years will be
/=r+e(0, (18.6)
where r is the real “risk-free rate” of interest;
e is the expected inflation rate for t years.
Practice shows that each of the considered theories is justified. The term structure of interest rates, reflected in the debt yield curve, is determined by the interaction of a group of factors: the ratio of supply and demand of resources in the long-term and short-term financial markets, liquidity preferences of investors and the level of expected inflation. In certain time intervals, certain factors may dominate.
In the Russian monetary market, the same principles apply to the formation of the structure of interest rates depending on the maturity of debt obligations. A significant impact is exerted by the high level of inflation (see Fig. 18.5), which has reduced the volume of long-term lending to a minimum, the lack of complete investor confidence in government debt obligations after the 1998 crisis, and the difficulty of predicting the state of the monetary market.
INTEREST MARGIN
Since interest on active bank operations plays an important role in generating income, and fees for attracted resources occupy a significant place in expenses, the problem of determining the interest margin (Mfact) is relevant, i.e. the difference between the average rates on active (Pa) and passive (Pp) bank operations.
13.3. Bank interest
Bank interest is one of the most developed forms of loan interest in Russia. It arises when one of the subjects of credit relations is a bank.
A bank, like any credit institution, places borrowed funds rather than its own for a loan. The share of income received by the bank represents compensation for intermediation, “risk pooling” and credit assessment. The risk of non-fulfillment of obligations to the bank for its assets exceeds the risk of non-fulfillment of obligations to the depositor for liabilities. Thus, it assumes the risk of loan defaults. In addition, depositors accept a lower interest rate on funds transferred to the bank so as not to have to search for clients and assess their creditworthiness.
The level of bank interest on passive operations, in addition to the general factors discussed in §13.2, depends on:
Duration and size of attracted resources;
Reliability of a commercial bank;
Strength of relationship with the client.
The level of interest on the interbank money market, other things being equal, usually exceeds the deposit interest rate, since it takes into account the costs and interests of the credit institution providing the loan.
The private factors underlying the determination of the level of interest on active bank operations include:
Cost of loan capital;
The borrower's creditworthiness;
Purpose of the loan;
Nature of the collateral;
The term and volume of the loan provided.
The upper limit of the interest rate for the loan is determined by market conditions. The lower limit takes into account the bank’s costs of raising funds and ensuring the functioning of the credit institution.
When calculating the interest rate in each specific transaction, a commercial bank takes into account:
Base interest rate level;
Risk premium taking into account the terms of the loan agreement.
The base interest rate (Pbaz) is determined based on the estimated cost of credit investments and the established levels of profitability of the bank’s lending operations for the coming period:
Pbaz = C 1 +C 2 +P m ,
Where WITH 1 - the average real price of all credit resources for the planned period;
WITH 2 - the ratio of planned expenses to ensure the functioning of the bank to the expected volume of productively allocated funds;
P m - the planned level of profitability of the bank's lending operations with minimal risk.
The average real price of credit resources (C 1) is determined by the weighted average arithmetic formula based on the price of a particular type of resource and its share in the total amount of funds mobilized by the bank (paid and free).
The average real price of individual types of resources is determined on the basis of the market nominal price of these resources and adjustments to the required reserve rate deposited with the Central Bank of the Russian Federation.
In particular,
where C ∂ - the average real price of time deposits attracted by the bank;
P ∂ - average market level of deposit interest.
The average real price is determined similarly for other sources of funds that provide for the transfer of funds to the required reserve fund.
The risk premium is differentiated depending on the following criteria:
The borrower's creditworthiness;
Availability of loan collateral;
Loan term;
The strength of the client's relationship with the bank.
Considering that interest on active bank operations plays an important role in the formation of income, and the payment for attracted resources occupies a significant place in the composition of its expenses, the problem of determining the interest margin is of current importance (Mfact), those. differences between average rates for active (Pa) and passive bank operations (PP):
Mfact = Pa - Pp
The main factors influencing the size of the interest margin are the volume and composition of credit investments and their sources, payment terms, the nature of the applied interest rates and their movements.
Under the current lending practice in our country, as a rule, fixed interest rates are applied that are not subject to revision until the end of the loan transaction. However, moving along the path of creating a market mechanism, one cannot ignore the experience of Western countries, where at the same time there is a set of interest rates, which, in most cases, are revised depending on market conditions and adapt to it.
Under these conditions, all assets and liabilities are usually divided into four categories in accordance with the speed of regulation of interest payments and the transition to a new level of rates. There is the following classification:
A. Assets and liabilities subject to immediate and complete repricing of interest rates when market conditions change.
B. Full regulation within three months.
C. Assets and liabilities for which rates are revised over a period exceeding three months.
D. Fully funded assets and liabilities.
The interaction of these factors is determined by comparing the first two categories of assets (A + B) with similar liabilities, taking into account the current market situation.
During a period when interest rates are rising, the ratio is more favorable for the bank when
those. the number of assets with variable interest rates exceeds the corresponding amount of liabilities, and therefore the gap in rates on active and passive operations increases - the interest margin increases.
On the contrary, when the market interest rate falls, it is advisable to adhere to the following ratio:
and bolster fixed-rate assets with liabilities characterized by the urgency of repricing interest payments.
To effectively manage income from lending operations, the minimum interest margin is determined and analyzed, characterizing the current amount of costs not covered by received commissions and other income for each ruble of productively allocated funds:
Where P b- expenses for ensuring the functioning of the bank (all expenses, except for the amounts of accrued interest);
D P- other income of a credit institution (income, excluding income from active operations of the bank); reimbursement by clients of postal and telegraph expenses, received fees for services provided to enterprises, interest and commissions received in addition to previous years, and claimed interest and commissions overpaid to clients in previous years, other income;
A ∂ - an asset on the bank's balance sheet that generates income on invested funds: loan investments, purchased securities, funds transferred to enterprises to participate in their economic activities, etc.
The above approaches are used by commercial banks when carrying out interest policy on active and passive operations.
Having described the essence and principles of credit, it is advisable to move on to the issue of the boundaries of credit. Obviously, the boundaries of credit are those conditional lines, when beyond which credit ceases to generate and manifest its positive properties and disintegrates as an integral, specific economic phenomenon. The literature describes boundaries at the micro- and macro-level, qualitative and quantitative, internal and external, temporal and spatial, initial and final boundaries of the loan.
At the micro level An important characteristic of the boundaries of specific loans is their definition from the point of view of the borrower and from the point of view of the lender. The limits of the loan for the borrower are determined by his need for resources, which depends on the characteristics of the business and the individual circulation of funds. These boundaries can be quantitative or qualitative in nature. Thus, the quantitative limit of a specific loan is the level of production and sales of the credited products, which allows freeing up resources and returning the loan to the lender.
This takes into account the differences between the boundaries of an investment loan and a loan for working capital. In the first case, the boundaries are determined by the payback period; in the second, they are set depending on the funds released within the operational cycle of their use.
The qualitative boundary of a loan at the micro level is the borrower’s creditworthiness as a guarantee of timely repayment of the loan. This is a complex indicator that takes into account the nature of the loaned object, the risk of the loaned transaction, the amount and type of collateral, etc. If you have insufficient creditworthiness, expanding the boundaries of your loan is impossible.
Now let's look at the qualitative and quantitative boundaries of credit at the micro level on the part of the lender. The qualitative boundary is the economic interest of lenders in providing a loan. The limits depend on the type of loan. When granting a commercial loan, it is limited qualitatively by the close economic ties between the lender and the borrower, and quantitatively by the lender’s availability not of money, as in the case of a bank loan, but of material assets that can be sold with deferred payment.
If we have a bank loan, then any creditor bank is motivated to expand credit investments in order to increase the profitability of its business. What limits these investments? If we consider a single bank, then the quantitative limit is the totality of the credit resources of this bank, which has relationships with many borrowers. The limited resources of a particular bank in the form of deposits and other borrowed funds are an impersonal pool addressed to many potential borrowers. In addition, there are limits and standards of the central bank for loans to one borrower, for groups of related borrowers, and for large loans. Based on these standards and restrictions in the form of available resources, banks individualize relationships with specific borrowers, making a decision to issue or not issue a loan, taking into account the status and creditworthiness of the borrower.
In general, micro-level credit boundaries should be described using the term “optimality.” Under-lending, i.e. failure to reach the possible credit limit limits the possibilities for enterprise growth through credit, slows down the turnover, and reduces the possibilities for profit growth. This applies to both bank and commercial loans. If the credit limit is crossed and the enterprise is refinanced, this negatively affects prices, creates a credit bubble, and makes it difficult to repay the loan. That is why it is important to find adequate, optimal loan boundaries.
Moving to the meso-, macro- and global levels, banks in their credit policy set limits on industries, areas, countries for issuing loans within the limits of available resources. Their lending decisions depend on the state of affairs in potential niches, and on industry and country perspectives that influence the outcome of lending.
In general terms and to the greatest extent, the boundaries of credit at the macro level determined by the dynamics of output volumes and gross product. Of course, there is no exact correspondence and strict statistical correlation between economic expansion and credit growth and there cannot be. Often, output growth is ensured without credit sources, and vice versa, lending provides not only output growth. However, it is impossible to deny the fundamental follow-up of credit dynamics to the dynamics of the real sector.
So, macroeconomic factors influencing the boundaries and pulsation of credit include the dynamics of industrial production and the dynamics of development of other industries and areas, the cyclical nature of the economy, competition in the credit market and the level of its regulation, the type of monetary and financial policy, etc.
The situation at the global level also greatly influences lending boundaries. Thus, the global financial crisis has seriously narrowed the scope of credit in almost all countries. Lending levels relative to the gross product and assets of the Russian banking system in recent years are presented in Fig. 9.2. As can be seen, they have a tendency of progressive growth. If in the early 2000s. While the share of bank credit in the growth of aggregate domestic demand did not exceed 15%, currently this figure is 49%. We can say that loans expand in line with GDP growth. However, in terms of the level of loan saturation (the indicator “loans as a percentage of GDP”), the Russian Federation lags behind the level of developed countries and ranks 60th in the world.
Rice. 9.2.
Do credit boundaries vary depending on the type of economic system? Yes. The transition to a market and the construction of a two-tier banking system based on competition between banks seriously expanded the boundaries of credit and lending potential. In administrative-command economies, credit was a means of redistributing funds (often subjective) to finance the need for working capital. The categories of loan capital and loan interest had a detrimental, inferior appearance, and credit practically did not fulfill a stimulating role.
At the same time, in market economies, credit becomes more extensive in scale and is an obvious impetus for economic development. At the same time, it acquires the property of multiplication, which is due to a different configuration of the credit system, where the central bank and commercial banks interact. The fact is that, depending on the macroeconomic situation, lending boundaries may narrow even if the bank has credit resources. Conversely, credit can expand even without an adequate increase in the resources attracted by banks. When moving from a single bank to the banking system as a whole, we observe a virtual absence of credit boundaries. Each bank individually can lend only within the limits of attracted resources, but the banking system as a whole, including the central bank, can multiply loans. Credit multiplier (credit multiplier) measures the multiple expansion of credit under the influence of an initial change. Its action, along with the action of the deposit and money multiplier, is described in Chapter. 3.
The process of multiplication itself also conceals the danger of uncontrolled expansion of credit. When it goes beyond objective boundaries, credit becomes a brake rather than an impetus for growth. An oversaturation of credit in the economy leads to an increase in the money supply (remember that modern money is of a credit nature!), provokes inflation, leads to the emergence of excess stocks of credited products, slows down individual capital circulation and the reproduction process as a whole. Liberalization of access to credit, ensured, among other things, by the soft policy of the central bank, discourages enterprises. Credit, instead of a stimulus for rational economic management, becomes a limiter to its development.
A risk factor for unjustified expansion of credit boundaries is also the activation of credit secured by financial assets, i.e. valuable papers. Unlike material assets (traditional collateral), the value of securities, determined by stock market conditions, fluctuates much more strongly. An increase in their value during a period of recovery and recovery may abruptly give way to a fall to a level that does not ensure compliance with the interests of creditors. The emergence of unsecured loans is a major systemic risk to the banking system in an economy with a developed securities market.
Credit boundaries shift as a result of factors that increase the degree of uncertainty in the economy (growth of monetary and structural inflation, inadequately rapid growth of consumer lending, which did not exist at all in the pre-market era) or aggravate the situation with public finances (growth of the budget deficit and public debt, subsidies for ineffective enterprises and spheres). New lending niches are emerging, for example microcredit, which expands the boundaries of credit and carries increased risks.
Maintaining credit boundaries at the macro level is the prerogative and task of the central bank. Unlimited lending based on the credit multiplier is only possible in theory, but in reality it does not exist due to the regulatory intervention of the central bank in this process. The Central Bank uses a range of tools and methods for regulating (stimulating or limiting) credit boundaries - mandatory standards, including credit risk standards, requirements for loan reserves and capital, administrative restrictions, quotas and limits, interest rate policy, changes in refinancing policy, transactions with foreign currency and government securities, etc. The use of these instruments is carried out as part of the implementation of monetary policy, which will be discussed in Chapter. 13.
In Fig. 9.3 presents the main factors that determine the boundaries of the loan. As can be seen from the figure, the boundaries of credit in the modern economy are determined by a large number of different factors. They are not frozen and react quickly to changes in the national and global economy. This indicates the dynamism and flexibility of credit as an important social phenomenon.
