Research On Revolving Credit Of Commercial Bank

Revolving Credit is a kind of credit business of commercial bank. Costumers pay a commitment fee and then get the access to a specified amount of cash on demand for short-term funding needs. Costumers get the commitment from the bank or group of banks for specified period of time, usually one to three years, in which the bank agrees to extend credit up to a specified maximum amount for their liquidity needs. Banks must give the credit facility to borrowers during the commitment term according to the contracts and the borrowers can use the funds needed whenever they want. Borrowers also can use their returned funds circularly as long as the total using credit at any time during the commitment term would not exceed the revolving credit line.Revolving credit offers the customers a flexible funding way. Borrowers have the free options to use or not, use more or less according to their situation in order to make use of the fund most reasonably and enhance the efficiency of funds. At the meanwhile, revolving credit is the business which can increase the profit of bank that can get the fixed commitment fee and interest.Foreign commercial banks usually focus on the businesses of the corporation revolving credit, credit cards and revolving credit on personal real estate. They put their attention to the corporations because the commitment funds are almost above 100 million which can bring more profit. Revolving credit business in China is narrow and domestic commercial banks mostly focus on the credit cards, settlement overdraft and revolving credit on personal real estate. The last one is on expansion since last year.It is at the beginning of this business in China, so there are some cases, such as vicious overdraft of credit cards and the funds from the revolving credit on real estate which enter the stock market illegally. These cases show some problems on risk management of revolving credit. Commercial banks should pay attention to these risks arisen from this business.This paper concludes the definition, the characters, interest calculation and sorts of the revolving credit and modifies the model of profit on this business at the base of analysis of its cost and income. There are two parts of the income. One part is the commitment fee and the other part is interest of using credit. The cost is arising from getting funds for offering the revolving credit. This paper has found 11 variables which affects the profit of revolving credit. They are divided into 4 categories: interest rate variables, borrowers controlling variables, variables decided in the agreement, variables involved in this business. This paper analyzes their effects on the profit with mathematics methods like differential coefficient theory and then finds the connection with the bank management risk, especially on the liquidity risk of revolving credit.According to the data from China Central Bank in Jan 2007, the deposits of financial institutions are more than 3400 billion. Commercial bank will ignore the liquidity risk when doing the business of revolving credit for such huge deposits. That's the reason why commercial bank should pay more attention to the risk of this business, especially for the unstate-owned commercial banks. The banks face the risks of liquidity, interest rate, credit and operating. The paper gives some suggestion on the risk managements of this business.There are six parts in this paper. The first part will conclude the recent researches, the purpose and method used and the meaning and innovation of the research on revolving credit. The second part will illustrate the definition, the characters and sorts of revolving credit. The third part will modify the cost and incoming model of revolving credit and analyze how the 11 variables affect the profit. The fourth part will conclude three cases on revolving credit in order to emphasize the necessary and importance of the risk management on it. The fifth part will conclude the sorts of risk this business will bring. There mostly are liquidity risk, interest rate risk, credit risk, operating risk. The last part will bring forward the problems domestic commercial bank faces when they're doing revolving credit business and table some proposals to improve the management.In conclusion, this paper has mainly discussed the theory and risk management of revolving credit. There must be some bugs and please point out and give suggestion. I will do better on this paper and future work.