Types of credit facilities
The forms of bank credit granted vary from one bank to another and from one country to another, and the bases used to classify or classify the granted credit facilities vary. More than one type or standard.
In the following, these types will be explained in detail:
First: Credit facilities according to the purpose
This criterion is based on the credit rating according to the purpose for which it is granted or the beneficiary sector. We find commercial, industrial, agricultural, real estate, personal facilities, as well as the mining sector and the service sector (tourism and hotel, transportation and public services)
1. Commercial facilities
They represent the most important types of facilities for commercial banks, as they are guaranteed and have short terms. They are granted to finance internal and external trade. These facilities are often guaranteed by imported goods or shipping documents. These facilities are used by wholesalers and retailers (singular) and other intermediaries to increase their supply of goods or increase their stocks or to cover their financial obligations. As for the import and export of goods, traders often resort to the use of documentary credits as a form of indirect credit facilities.
2. Industrial facilities
They are the facilities requested by factories or craftsmen (especially loans) either for short periods in order to cover the industrial cycle and to fill the shortfall in operating capital or for medium and long periods in order to finance the new construction and equipping machines and machines or modernization and expansion and opening branches. Usually, specialized banks (the Industrial Bank in Iraq) grant industrial facilities as they fall within its specialized activity.
The industrial facilities granted by commercial banks in developing countries are still below the required level, because commercial banks direct most of the credit facilities to finance the general trade sector, mainly because their durations are short-term and the degree of their liquidity is high. in the economies of those countries)
3. Agricultural facilities
Agricultural credit facilities occupy a great importance in supplying the agricultural sector (especially for countries for which agriculture is a major activity). Usually, specialized banks (the Agricultural Bank in Iraq) grant short-term loans to help farmers develop their production and increase their crops, As this money is often given to buy seeds, fertilizers and simple agricultural equipment that serve the agricultural season.
As for medium and long-term loans, they are granted for the purpose of purchasing large agricultural land and machinery, or they are granted with the aim of making qualitative and comprehensive adjustments in agricultural production.
Commercial banks refrain from financing such loans due to the exposure of agricultural activity to variables outside of control, such as fluctuations in climatic conditions or diseases that affect crops, which are usually the guarantees provided to banks in return for granting these loans.
4. Real estate facilities
Although there are specialized banks that grant real estate credit (the real estate bank in Iraq), commercial banks in most countries of the world contribute significantly to providing real estate loans to individuals and projects for the purpose of financing the purchase of land or real estate or building housing, and these properties are mortgaged to banks for the purpose of documentation or guarantee her debts
Some banks prefer this type of facility because lands and real estate in general are characterized by their upward value (and as it is said, the property gets sick and does not die), so these guarantees enjoy high reliability, in addition to the fact that this type of loan does not need a comprehensive and accurate study because the property will be mortgaged in the name of the bank. It should be noted that credit facilities are often for a long term, which may reach more than 15 years.
5. Personal facilities
These facilities are usually represented by consumer loans (buying a car, furniture, completing studies…) and they are granted or offered to employees or some segments of society who have social centers. Banks tend to document these facilities with the salary received by the credit applicant as a guarantee or with personal or in-kind guarantees.
Second: Credit facilities according to the time period
These facilities can be classified into three terms: short, medium and long
1. Short Term Credit Facility
The duration of the period is from one year or less. These facilities are often provided to individuals and projects with the aim of financing their various activities, especially the current business of operating capital.
2. Medium Term Credit Facility
The duration of these facilities ranges from 1 to 5 years, and these facilities are mostly provided to projects that need to renew their machinery or equipment or purchase various complementary requirements.
3. Long-term credit facilities
Its duration is more than 5 years to terms that may reach 20 years. These facilities are usually granted to finance activities of a capitalist nature, such as setting up projects for different economic sectors. The period of repayment of these credits is divided into three periods:
A. Duration of use: which includes spending on establishing and equipping the project in all respects, as well as the initial operational experiments.
B. The grace period, which is the period during which the good or service is produced, sold and its price collected, ie, the period that covers one cycle of the activity.
C. The repayment period, which is the period that comes after the end of the grace period and the achievement of the borrowed project for an appropriate return sufficient to pay the obligations related to the credit granted to it by the bank, and this credit is usually repaid in periodic installments.
Third: Credit facilities according to the type of guarantee
Banks seek to document their granted credits in order to achieve the recovery of their funds in the event the customer stops paying. In this regard, we often find two types of guarantees that banks require in return for their credit facilities:
1. Personal guarantees
The bank may grant certain credit facilities to specific customers without asking them for a specific guarantee, depending on the strength of their financial position, moral reputation and history in dealing with the bank. And often those customers are distinguished businessmen and big traders. Banks do not prefer to extend credit without guarantees or to limit themselves to personal guarantees or from another party.
2. Guarantees in kind
The guarantees provided by the credit applicant are in fact an enhancement or support to the customer’s ability to pay and not a substitute for it. Meaning, that after the bank completes the study of the customer’s case, his financial situation (as will be explained in a later chapter) and has reached a positive decision to grant facilities, it will ask for guarantees in kind in support of that decision.
In-kind guarantees can take multiple forms or forms, and the bank determines what suits the credit size, type, duration and other circumstances.
These guarantees must also fulfill certain conditions, including that they be monetized (converted to liquid cash) and subject to assessment, as well as the ease of transferring their ownership to the bank. Among the types of guarantees required by banks: real estate guarantees, which are the prevailing or most reliable guarantees, financial and commercial securities, seizure of dues with official bodies, vehicles, machinery, and machines.
Fourth, credit facilities according to the payment status
Credit facilities are classified on the basis of this criterion depending on the status of payment or the degree of payment guarantee. Accordingly, we find the following types:
Excellent credit: It is credit that completes all credit conditions and is documented with guarantees that meet the elements of the full guarantee.
Good credit: It is credit that is not due for repayment, meaning that the repayment date has not yet come, but the indicators express a positive situation in its estimation.
Medium credit: It is the credit that is due for repayment and the maturity of it or its installments has not passed 90 days.
Below-average credit: It is credit that is more than 90 days past due for one of its installments and interests.
Bad credit: It is credit that is more than 90 days past due.
Losing credit: It is credit that is more than one year past due.
Fifth: Credit facilities according to the donor
It is customary for one bank to grant credit to its customers and obtain interest, commissions and expenses, and not to sacrifice any credit request that meets the conditions. However, there are cases in which the credit facilities required from a customer (a giant company, for example) exceed the bank’s ability to provide them due to the large amount and the high degree of risk in it. At that time, the so-called syndicated credit is used, as several banks participate according to an agreement concluded between them in this regard. Sharing the amount, risks, costs and profits according to the participation rates of those banks, and usually one of those banks manages that credit (usually a loan).
Sixth: Credit facilities according to the requesting party
The credit facilities here are divided into two types: the first is granted to the state sector and its institutions, which are usually limited and constitute a small percentage of bank facilities. As for the second type, it is the credit facilities that are provided to individuals and companies (except for the government). These facilities represent the largest area of the credit activity of commercial banks.
Seventh: Credit facilities according to their nature
Credit facilities are divided according to their nature into direct and indirect cash credit, meaning that the credit is either cash granted to the customer directly, such as loans and advances, or it is a facility in the form of a pledge such as a letter of guarantee and documentary credit. Because this criterion in the division includes all types of credit facilities, it will be dealt with in two sections, one of which is concerned with clarifying the direct credit facilities, while the other undertakes the indirect credit facilities.
