DEFINITION of Country Limit
The term "country limit" refers to the aggregate limit that a bank places on all borrowers in a given foreign country. Country limits typically apply to all borrowers, regardless of whether they are public or private, individual or institutional. They also apply to all kinds of loans, including mortgages, business loans and lines of credit, personal loans, institutional loans and any other forms of borrowing. The creditworthiness of the borrower and the unit of currency involved are also irrelevant for the purposes of this restriction.
BREAKING DOWN Country Limit
Country limits are set by banks as a means of limiting their lending risk by limiting the amount of money a bank has loaned to borrowers in any given country. Similar to diversifying a stock portfolio, banks use country limits to diversify their loan portfolios and lower risk.
Criteria Used to Set Country Limits
Many factors are used to determine a given country’s country limit. The nation’s political stability is of the utmost concern, because political unrest in a foreign country may result in a loan default, regardless of a personal or institutional borrower’s stability. Even in politically stable countries, the political climate should be considered when setting a country limit, because a nation’s political climate has a strong influence over its financial stability and economic policies.
Other factors a bank might consider when setting a country limit include the nation’s economic strength; a nation with a strong economy may be a candidate for a higher country limit, since borrowers there will be more likely to be able to repay their debts. However, if a nation has rampant inflation and a weak economy, the country limit may need to be set lower to compensate for the credit risk posed by borrowers there. Furthermore, banks consider the regulatory environment in a country when setting country limits; a nation’s government may attempt to use regulations to incentivize higher country limits from banks operating within its borders. Some banks also prefer to work in countries with fewer regulations and less government oversight. If a bank operates in a number of countries, it may raise country limits in those countries it finds easiest and least risky to work in, while lowering country limits in those it finds risky or difficult to work in.
Country Limits and Individual Borrowers
While country limits dictate how much money a bank is willing to lend to borrowers within a given country, they do not mean that borrowers within that country aren’t subject to careful scrutiny before they are awarded a loan. Personal and institutional borrowers are subject to credit checks, and banks will generally try to choose low-risk borrowers, regardless of any country limits in place.