adminSanderson Abel Business Correspondent
Bank credit refers to the amount of funds that individuals or businesses are able to borrow from one or more lending institutions. In effect, it is a measure of how much may be issued in the way of cash loans, based on the credit history and the assets of the companies or persons who have the capacity to borrow.
The basic principle underlying the banking system is that when money is loaned out, there must be a reasonable expectation of repayment of the loan, together with the accrued interest.
This means that a bank has to look at the overall financial status of the applicant. Being afforded credit means a bank believes you will repay the money that you are borrowing.
The issuance of credit by the banks is dependent on the underlying ability of the economy to mobilise adequate amount of deposits in the economy.
These deposits, together with other foreign sources of funding, form the loanable funds or total savings in an economy.
This means that on the domestic front, certain “surplus” economic units should be able to save so that the saved resources can be lent as loans or credit by the financial system to the “deficit” units in the economy.
Hence, at the core of the credit is the need for developing a serious savings culture in the country.
This then completes the whole cycle of financial intermediation.
Importance of credit
Credit is important in an economy especially for the productive industries responsible for producing goods and services.
Credit extended to them is something valuable.
Through credit, they are able to borrow funds or capital that is an essential means of expansion.
Credit helps firms to expand their production which means they will be able to offer more goods and services resulting in a surplus (profit).
Credit not only expands the production capabilities of the producers but it also creates greater consumption possibilities for households as they can borrow against future income to finance a higher level of current consumption.
This not only serves as a channel for increasing profit, i.e. as more retail product is sold for credit more income firms will gather, but the increased demand for goods and services due to the availability of credit stimulates growth and investment and creates new jobs.
The recent Confederation of Zimbabwe Industries survey identified working capital shortages as one of the fundamental constraints identified affecting the manufacturing sector.
Together with infrastructure bottlenecks; the high cost and lack of access to energy and water; use of antiquated machinery; high labour costs and low domestic demand.
In the present environment, resolving these challenges is a function, among other things, of the availability of credit either from domestic banking system or from offshore.
Under this scenario, as bankers we are called upon to source these funds through the mobilisation of domestic deposits or to seek international lines of credit.
The banking sector in Zimbabwe has been pivotal in advancing credit to the private sector. Statistics are avail-able to support this.
On a month-on-month basis, credit to the private sector registered a marginal growth of 0,61 percent in August 2013, from US$3,67 billion in July 2013 to US$3,69 billion.
The credit to the private sector was mostly dominated by loans and advances which accounted for 86 percent of the total loans and advances.
This was against total deposits in the banking sector of US$3,8 billion in August 2013.
Banks are therefore operating at a credit to deposit ratio of 96,7 percent, implying that of every one dollar deposit made with the bank, banks are advancing 97 cents as credit to either industry or individuals.
Given the centrality of the agricultural sector, credit to the private sector was skewed towards agriculture which accounted for 19,05 percent of all loans and advances.
Given the critical nature of the agriculture sector, adequate funding for this sector is important.
If properly funded, agriculture is key to economic growth, liquidity generation and food security for the country.
Other sectors to benefit from the credit advanced by the banks were the manufacturing sector (17,12 percent); distribution (15,99 percent) and households (16,55 percent).
All other sectors of the economy shared the remaining 31 percent.
The distribution of the loans and advances is reflective of the importance of the different sectors to driving growth in the country.
Factors that are considered in advancing credit
In an effort to screen credit applicants, banks have to set up certain criteria to avoid lending to the bad apples.
Some of the basic criteria that banks use for screening purposes include the borrower’s ability of the to repay, ownership of assets such as property, savings and stock accounts, current level of indebtedness, employment status and annual net salary or wages.
Bankers, use a formula known as the six C’s of credit when evaluating a credit application.
Understanding these will help you make your better decisions and providing better quality applications to your bank.
Before giving out a loan, your bankers will evaluate the following six basic criteria about a borrower.
- Character — This is essentially a summary of the individual or company.
Creditors look for people who appear to be trustworthy and reliable, and who are willing and able to meet their financial obligations.
- Capacity — This is the borrower’s ability to repay the loan; it is based on present and anticipated earnings balanced against existing debts.
- Collateral — These are item(s) pledged by the borrower as security for the loan, which may be real state, stocks, savings, a mortgage, etc.
- Conditions — Both regulatory and economic conditions are considered. Regulatory conditions apply to the lenders individual circumstances; for example, when banks are not lending in specific areas. Economic conditions determine the lender’s general policy towards the type of loan sought by the borrower. Both are affected by the current economic cycle.
- Credit — This is the borrowers’ credit history.
- Capital — This is the net worth on an individual or company as indicated by the financial statements.
- Sanderson Abel is an economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. He can be contacted on [email protected] or on 04-744686, 0772463008
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