10.5.5-RISK AND THE RELATION TO TRADE CREDIT-AVAILABILITY AND COST OF CREDIT
Availability and cost of credit
The availability of credit
depends on a bank's overall exposure to a given country (each bank applies a 'country limit') or commodity, and the net collateral value (assets, stocks) an individual borrower may be able to provide (pledge). The ratio to pledgeable assets at which banks provide overdraft facilities varies but will never be 100%.
Non-pledgeable assets are not considered, and banks always cap (set a limit to) their exposure to each individual borrower. Borrowers must appreciate that while gaining market share and making margins is important to banks, these are not the primary considerations when evaluating credit applications.
The cost of credit
to a borrower is built up from the regular lending rate to include all the considerations discussed under trend and trade specific risks. Each consideration adds to the base lending rate until one arrives at an interest rate at which both the risk factors and the bank's profitability are adequately covered. This is why lending rates differ from country to country, and from borrower to borrower.
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