Question

Numerous corporations have substantial lines of credit at commercial banks. What is the importance of these lines of credit during the Corona pandemic? How does drawing on a line of credit affect the banks’ assets? How does it alter the banks’ liabilities?

Answer 1

Line of credit is a borrowing option forwarded by the banks or the financial institutions to their customers. A customer can borrow and repay multiple times as long as the credit line remains open. Moreover, they have to pay interest only on the amount that the customer has used.

Importance of credit line during the COVID19 pandemic

• Helpful for the small businesses and retail borrowers as many banks are taking the initiative to adjust the terms of line of credit.
• With the interest rates smoothening out, the customers can save themselves from the financial issues.
• There are also other benefits provided by the banks to reduce the burden of the crisis on their customers. Such as extension of the payment, pardoning the late payment report, etc.
• Due bill payments are being made possible with the aid of the line of credit.
• Some banks have also increased the card line limit so that their customers are able to buy the necessities.

Drawing by the borrower on their line of credit is recorded as an asset in the balance sheet of banks.

Line of credit can be unsecured or secured loan. With an unsecured line of credit accompanying with a high-interest rate.

With the crisis on the rise, many corporations and individuals have been opting for the loans or the line of credit. This has strained the financial health of commercial banks.

The borrowers who are hit by the crisis might not be able to repay back the loan. Due to this, the lenders can become exposed to credit risk if such a situation continues on.

On the other hand, there is an increase in the asset and liquidity of the banks. There is a rise in the drawing of unused commitments of the line of credit by the customers.