The opening of credit is the contract through which a credit institution is obliged to grant a loan in the future in favor of a client, setting the modality, amount, interest and terms, subject to the condition that the client will return the amount of the credit (plus interest) or it will be canceled.
Credit and access to it under acceptable conditions in terms of cost, is through interest rates and its repayment term, they represent two of the most important variables for companies and for individuals (those to whom that a line of credit has been opened to them).
Characteristics of the opening of credit
Without the existence of this, an economy could not develop and would have significant problems, that is why credit must flow, and there must be a balanced balance between the supply and demand of credit. Historically, we have recently seen credit restriction situations between 2008 and 2012, this liquidity crisis has shaken many countries in economic matters, such as unemployment and business destruction.
Its expansion (granting of credit) supposes an outlet for any economy or country, since it allows obtaining financing that is injected mainly through banks, and enables the development of investments in productive sectors as well as the creation of employment, in addition to encouraging consumption.
It is important that financial agents with excess supply facilitate access to credit as long as there is a solvent demand. Therefore, excess supply and solvent demand are the two most important variables for a financial institution to lend money and flow in the economy in the form of the creation of new businesses and stable jobs.
Therefore, entities must allow access to credit at a reasonable cost and natural or legal persons who borrow money must do so by demonstrating that they have the ability to pay. Otherwise, when defaults occur and delinquencies increase, financial institutions are put into serious problems since if there is an excessive accumulation of defaults, the default ratio of the entity can rise and can infect the financial sector and to other sectors of the economy.
This factor was, among others, one of the determinants of one of the most important recent crises after the collapse of Lehman Brothers. Therefore, after the experience, countries and their regulators seek to intensify and measure these risks through sophisticated tools and mathematical calculations that take into account all possible factors to avoid the risk of default on debt from occurring. .
An example of important measures carried out is contemplated by the international guidelines developed through the Basel Accords.
Tags: finance economic-dictionary Colombia