Monday, February 2, 2015

Line of Credit (LoC)

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Line of Credit (LoC) - What do we get from the term?
To what extent (i.e., line) we can get loan / advance (i.e., credit). Of course, LoC are generally given to the corporate for business purpose (though, often we hear news about government giving Rs. XXX Line of Credit to ZZZ country for development)

Note that this is generally given to corporate for business, on their Cash Credit (CC) Accounts (already discussed about CC in my previous post. Please refer that)

General Procedure
Banks analyze the audited Balance sheet of the prospective borrower (businessman) to appraise their needs and checking their capacity to absorb the credit. The borrowers need to furnish their financial details in the form of Credit Monitoring Arrangement (CMA) data to the bankers and file an application for loan.

This application is then processed by the bank and a suitable Line of Credit (LoC) (limit) is allowed to the borrower.

The overall limit (LoC) is structured into various types of facilities or accounts - each with its own limit under the overall LoC (meaning, several accounts, which to be formed, have their own limit, which collectively is under overall LoC).

The borrower is then asked to surrender the security or title to the bank (as collateral) and open suitable accounts (mostly Cash Credit Accounts, with different underlying securities) with the bank.

Thereafter, the borrower can operate these accounts within the limit, i.e., Line of Credit.

Note - Don't confuse Line of Credit with Letter of Credit, which is a different concept (refer to previous post on Letter of Credit)

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