The maximum lending limit is the maximum amount of funds that a bank can lend to certain borrowers. This limit is expressed as a percentage of the capital and surplus of an institution.
Calculating the Maximum Lending Limit
The Legal Lending Limit applies to banks and financial associations ( savings ) in all countries. The loan limit code states that financial institutions may not issue loans to single borrowers that are more than 15% of the capital and institutional surplus.
This is a basic standard that requires institutions to strictly follow the capital and surplus levels also regulated by law. Banks are allowed another 10% for loans that are pledged. As such, they can lend up to 25% of the capital and surplus if the loan is guaranteed.
Exclusion of Lending Limit
Some loans may be allowed with special loan limits. Loans that can qualify for special loan limits include the following:
- Loans that are guaranteed by a lading bill or warehouse receipt.
- Consumer paper installments.
- Loans guaranteed by livestock.
- Advances for project financing related to pre-qualification loan commitments.
Capital and Surplus Credit Limit
Banks are required to have large amounts of capital which usually causes the loan limit to apply only to institutional borrowers. In general, capital is divided into tiers based on that is, tier 1 capital which is the most liquid capital (such as mandatory reserves). In addition, Tier 2 capital which includes reserves were not disclosed and the general loss reserve. National banks are required to have a total capital to asset ratio of 8%.
A surplus can refer to a number of components in a bank. Categories included as surpluses can include profit , allowance for losses, and convertible debt.