The definition of ‘limit’
The term “country limit” refers to the aggregate limit that a Bank places on all borrowers in a given foreign country. The country typically apply to all borrowers, regardless of whether they are public or private, individual or institutional. They also apply to all types of loans, including mortgage loans, commercial loans and lines of credit, personal loans, institutional loans and other forms of borrowing. The creditworthiness of the borrower and the currency involved is also irrelevant for the purposes of this restriction.
Breaking down the ‘limit’
Country limits are set by banks as a means of limiting their lending risk by limiting the amount of money in the Bank is lent to borrowers in a particular country. Similar to diversification of a portfolio of securities, banks use country limits to diversify their loan portfolios and reduce risks.
The criteria used to establish the limits of the country
Many factors are used to determine the limit of the country. Political stability in the country is extremely important, as the political instability in the country may lead to loan default, regardless of the stability of personal or institutional borrower. Even in politically stable countries, the political climate must be considered when choosing a country to limit, because the political nation, the climate has a strong influence on its financial sustainability and economic policy.
Other factors the Bank may consider in determining the country to limit include economic stability of the country; country with a strong economy may be a candidate for a higher country limit, as borrowers will be more likely to be able to repay your debts. However, if the nation is galloping inflation and a weak economy limit, you may need to set lower to compensate for the credit risk posed to the borrowers. In addition, banks consider the regulatory environment in the country, establishing the country; the government may try to use the rules to encourage higher limits of the country of the banks operating within its borders. Some banks also prefer to work in countries where there are fewer rules and less control from the government. If the Bank operates in several countries, it could put the country in those countries which it considers to be simple and less risky to work in, while reducing the country’s in those that he finds risky or difficult to work with.
The country and individual borrowers
Although the country dictate how much money the Bank is willing to lend to borrowers in this country, it does not mean that borrowers in this country are not subject to scrutiny before they get the loan. Personal and institutional borrowers are subject to verification of credit history, and banks, as a rule, try to choose low-risk borrowers, regardless of any restrictions on the country.