Modalities of bank loans in Cuba. advantages and disadvantages

Summary

The research was carried out in the Popular Savings Banks and the Credit and Commerce Banks, of the municipality of Ciego de Ávila, with the aim of knowing the various financial operations supported by a wide range of services to companies, entities, farmers, cooperatives and the general population, among which are the granting, control and recovery of bank loans and credits in both currencies. There are several loan repayment methods, among which the following stand out: the American method, the constant installment method, the variable installment method, the German method and the French method. For the choice of the amortization method, it was essential to adapt the amortization table to the company's projected cash budget.This condition facilitated its operations since the amortization and its financing were adjusted to its needs and guaranteed the recovery by the bank. Financing for natural persons must be tailored to the client's needs, always advised by the bank; in order to have the amount and the terms in which the client will return the loan to the bank, with their own income, identified between the two.

It is important to highlight that banks and clients must choose the method of amortization of the loans and credits granted taking into account the following elements: the client's cash flow, the performance of the operation, the quality of the loan and the credit risk.

Keywords: methods, loan repayment, banks, Cuba.

Abstract

The research was conducted in the Popular Banks of Saving and the Banks of Credos and Trade, province of Ciego de Avila with the objective of knowing, the diverse financial operations supported in one ample female deer of services to the companies, entities, peasant, cooperative and population in general, enter the ones that find the granting, control and recovery of the credits and bank loans in both coins. Several methods of lend-lease amortization they stand out inside exist: American Method, constant Fees Method Fees variables Method, German Method and French Method. It is necessary to Highlight, for the choice of the method of amortization it is essential to make suitable the picture of amortization to the budget of cash projected from the company.This condition makes easy the operations of the same right now than financing and your amortization make suitable his needs themselves and guarantee the recovery for the banking entity. the financings to the natural persons have to be a tailor-made suit of the needs of the customer, well-informed always for the bank; In order to have identified between both, the total sum and the terms that the customer will give back to the bank the loan in, with his own income. It is very important to highlight that banks and customers will in a general way have to choose the method of amortization of the loans and conceded credits taking the following elements into account: The customer's flow of box, the performance of the operation, the quality of the loan and the risk on credit.

Keywords: Methods, lend-lease amortization, banks, Cuba.

Introduction

The Central Bank of Cuba (BCC) endowed the country with an institution capable of concentrating its forces in the execution of the basic functions inherent to the central bank and established a two-tier banking system, integrated by the Central Bank of Cuba and a group of banks and non-bank financial institutions, capable of responding to the needs that arise from the development of new ways of structuring the country's internal and external economic relations. The latter carry out various financial operations providing a wide range of services to companies, entities, farmers, cooperatives and the general population, among which are the granting, control and recovery of bank credits and loans in both currencies, in accordance with existing principles.

Materials and methods

A bibliographic research was carried out to study the different sources of information that allowed to substantiate the aspects related to the bank credit granted by the Bank, by means of a contract to a client, of having, up to a predetermined limit, financial resources in a given time, which may be used partially or totally.

Resolution No. 99 of 2011 and the BCC Instructions and Procedures Manual were used, which is based on Resolution No. 99 issued by the Central Bank of Cuba.

The bank loan is the financing granted by the bank under contractual conditions, for a specified time, which is taken in its entirety by the applicant at the time of its granting. It is used to cover permanent financial needs and requires in each case the formalization of an independent contract.

These banking services are carried out in Cuba through the Popular Savings Banks (BPA) and the Credit and Commerce Banks (BANDEC) and depending on the term of their use, the loans will be classified as:

Short-term loans: those whose use is up to twelve months (one year) Medium-term loans: those whose use is greater than twelve months (one year) and up to 5 years Long-term loans: those whose use is greater than 5 years.

There are several methods of amortization of loans and various types of credits granted according to the modalities that exist which are:

American method.

In this method, the interest on the principal is amortized annually. Together with the interest for the last year, the principal is amortized, which remains the same until the last year of the loan without changing, so the annual interest is equal.

Constant fees method.

In this method, the same amount of principal is amortized during the loan period and the Amortization Fee = Initial loan / loan years is determined. The outstanding capital determines the interest by applying the established rate. The sum of the interest fee and the repayment fee determines the repayment term.

French method.

The principal and interest are paid periodically through a constant and single installment that includes both concepts. However, as time passes, the part of the installment corresponding to interest decreases and that corresponding to the amortization of the borrowed capital increases.

German method.

In this method, the annual amortization terms are constant and at the time of receiving the loan, the interest for the first year is paid since the interest payment that accrues on the capital is in advance, consequently at the end only the capital is amortized

Variable fees method.

In this method, all the repayment installments vary according to a certain percentage different from the interest rate.

Credits are granted through the following modalities:

a) Simple credit. Credit delivered in one go and amortized in one or more partial repayments within the maturity term agreed with the borrower. It will be used to facilitate purchase and sale operations, working capital needs and investments in fixed assets. Includes credits to cover overdrafts generated by urgent payment commitments and for the payment of the equivalent value in national currency of import operations in foreign currency. B) Line of credit. Maximum limit to which the loan can amount within the agreed maturity term. It will be used to cover the borrower's cash needs, facilitate purchasing operations, payment of salaries and creditors, investments in fixed assets, industrial productions from the preparation stage to start production until its sale and collection,and other productions and services c) Revolving credit line. It constitutes a line of credit in which the total or partial repayments of the principal release a credit limit equal to the difference between the loan balance and the authorized limit, which can be used within the agreed maturity term. It can be linear and decreasing. The linear form allows takings and retakes keeping the approved amount as a limit, while in the decreasing one the retakes decrease the total approved amount until reaching zero. The repayment terms will be set taking into account the client's cash flow, so partial payments may be agreed. Currently it is granted for one year in national currency and in six months in foreign currency. In the year interest and commission are charged,although in some cases the principal is paid in two installments, taking into account its due date d) Commercial discount.Authorization given by the bank to a client, to discount commercial effects such as the bill of exchange and the promissory note, which cover commercial operations. This loan is an operation by which the Bank advances the amount of the commercial documents that are delivered to it for that purpose, with a return against the client in case of non-payment. This type of credit can be made in MN and in MLC. E) Financial leasing. Source of financing that forces the lessee to make fixed payments for the use of physical assets such as equipment and land f) Foreign and domestic trade operations: Foreign operations are carried out through letters of credit, documentary credits or other forms The letter of credit being the most used form as it allows meeting the expectations of the buyer and the seller.The letter of credit is the form of collections and payments in which a bank acts as an intermediary, with the aim of facilitating the transaction and also offering a payment guarantee. In national operations, the local letter of credit is used.g) Syndicated loan. Resources contributed by several financial institutions (trustees) in favor of a borrower, and controlled by an authorized financial institution (agent). Each participant in this operation is responsible only for the part contributed and receives interest, commissions and amortizations of the principal according to their participation in the loan. Communications between the borrower and the lenders are made through the agent, who charges higher commissions than the receivers for this service.Financial or banking institutions must ensure the recovery of the loan even if they are not lenders and are only agents.

When a credit or loan is granted, the following elements must be established:

Conditions and validity of the Credit: The bases on which the approval of this loan is proposed must be reflected, which can be diverse, example: the loan will be recovered through a Collateral Account with 5% of the gross income of the entity For a period of 12 months, this aspect must be included in one of the clauses of the contract. Form of provision: It will be stated if the loan will be delivered in one go or if it is a Line of Credit, the dates will be set and the amounts of future deliveries. Interest rate: Loans will accrue interest from the date they are granted until they are fully amortized, both in MN and CUC.The interest rate that will accrue on the loan is reflected in accordance with Circular 2/2012 for CUP and in CUC by Circular No. 5/2012, both of the General Directorate of Treasury of the BCC. Interest will be calculated on the basis of the debit balances of the credit accounts, therefore all operations related to the financing granted are subject to the payment of interest from the date of its accounting. Form of amortization and payments: The proposed repayment terms as well as the collection instrument should be discussed; Example: the amortization will be made directly from the operations account by authorization letter of debit in account. The conditions agreed upon at the time of agreeing the loan determine which of the systems will be used.Interest will be calculated on the basis of the debit balances of the credit accounts, therefore all operations related to the financing granted are subject to the payment of interest from the date of its accounting. Form of amortization and payments: The proposed repayment terms as well as the collection instrument should be discussed; example: the amortization will be made directly from the operations account by authorization letter of debit account. The conditions agreed upon at the time of agreeing the loan determine which of the systems will be used.Interest will be calculated on the basis of the debit balances of the credit accounts, therefore all operations related to the financing granted are subject to the payment of interest from the date of its accounting. Form of amortization and payments: The proposed repayment terms as well as the collection instrument should be discussed; example: the amortization will be made directly from the operations account by authorization letter of debit account. The conditions agreed upon at the time of agreeing the loan determine which of the systems will be used.The proposed repayment terms as well as the collection instrument should be discussed; example: the amortization will be made directly from the operations account by authorization letter of debit account. The conditions agreed upon at the time of agreeing the loan determine which of the systems will be used.The proposed repayment terms as well as the collection instrument should be discussed; example: the amortization will be made directly from the operations account by authorization letter of debit account. The conditions agreed upon at the time of agreeing the loan determine which of the systems will be used.

The amount and the repayment term of the loan will be that which results from the risk analysis carried out by the bank, based on the applicant's ability to pay. If there is a default on the date of the agreed payments, an interest rate for default will be applied to the debtor on the amount of each pending installment, until the payment of the debts is regularized.

Credits and loans granted to individuals in both currencies (under Decree-Law 289/2011 and Resolution 99/2011 of the Minister President of the Central Bank of Cuba).

Credits to natural persons for the purchase of construction materials or payment of the labor service for constructive actions, the acquisition of goods that make up personal property, and to satisfy other needs: The loan is amortized by the French Method on a monthly basis. transaction TR15037A “Calculation of personal loans (new policy), the amount that the borrower can access, total interest and total debt to be paid is calculated. Income from stimulation in CUC will not be taken into account for the calculation of the payment capacity. The applicant may pay a monthly payment of up to 50% of his salary. The bank may only finance up to 33% of the capacity. applicant's payment (Monthly income minus monthly expenses);the amount resulting from applying 33% to the payment capacity, will constitute the monthly payment that this person can pay. In the event that a reduction is required for duly justified reasons, the corresponding analyzes will be made subject to approval by the Credit Committee.In cases where there are overdue loans, the guarantees will be executed in accordance with the instructions. in MIP 239-80 Execution of Guarantees, applying to the debtor a late charge of 10%, on the debt pending payment, until the payment of the debts is brought up to date, leading to the expiration of the principal and interest. Credits to natural persons authorized to exercise self-employment and other forms of non-state management, to finance the purchase of goods, supplies and equipment,and for any other purpose that contributes to the proper functioning of the activity: The loan is amortized by the American Method on a monthly basis. The sources of amortization are mainly the legal income obtained by said natural persons, from the activities that are financed, or any other income that they receive, as a result of the risk analysis carried out by the bank, based on the applicant's ability to pay Credits to small farmers that legally certify land tenure for the purchase and repair of equipment and means of work, to finance agricultural production, and the promotion, renovation or rehabilitation of plantations: The loan is repaid monthly using the American Method.The sources of amortization for the payment of credits are mainly the income obtained by small farmers from the production and marketing contracts concluded, or any other income they receive.Loans granted for houses: The loan is amortized by the French Method on a monthly basis.In each credit, interest will be charged first, and the rest will be applied to the principal.When there is more than one credit and the amount to be applied to collect all the loans does not reach, the oldest will be charged first, taking into account the date of its granting. When dealing with mergers, divisions and dissolutions, action will be taken in accordance with the legislation in this regard for each type of credit subject.or any other income they receive.Loans granted for homes: The loan is amortized using the French Method monthly.In each loan, interest will be charged first, and the rest will be applied to the principal.When there is more than one loan and the amount does not reach To apply to collect all the loans, the oldest one will be charged first, taking into account the date of its granting. When dealing with mergers, divisions and dissolutions, it will act in accordance with the legislation in this regard for each type of credit subject.or any other income they receive.Loans granted for homes: The loan is amortized using the French Method monthly.In each loan, interest will be charged first, and the rest will be applied to the principal.When there is more than one loan and the amount does not reach To apply to collect all the loans, the oldest one will be charged first, taking into account the date of its granting. When dealing with mergers, divisions and dissolutions, it will act in accordance with the legislation in this regard for each type of credit subject.The oldest one will be charged first, taking into account the date of its granting. When dealing with mergers, divisions and dissolutions, action will be taken in accordance with the legislation in this regard for each type of credit subject.The oldest one will be charged first, taking into account the date of its granting. When dealing with mergers, divisions and dissolutions, action will be taken in accordance with the legislation in this regard for each type of credit subject.

Credits and loans granted to legal persons, in both currencies, that carry out economic activities in the national territory (production, services, commercial circulation, investments or others).

Loans for working capital in both currencies (intended to finance the current assets of productive, commercial and service entities, whose production, sale and collection cycles do not exceed eighteen months): PRODUCTION AND SERVICE COMPANIES: For the election of the method there is no single criterion that is valid, it is necessary to take into account the capacity to generate resources, interpreted from the projection of the company's flows. It is amortized monthly NON-AGRICULTURAL COOPERATIVES: The amortization of the credits for the Initial working capital will be made in terms that do not exceed twelve (12) months according to the income from the sales of its productions, according to the production and commercialization contracts. It is amortized monthly. Investment loans: It is amortized monthly.When a loan becomes past due, the Bank will apply an interest rate for default previously agreed with the client and will be applied to the overdue and unpaid amortizations of each financing, which may not exceed 4% per year for loans in CUP and 2% for loans in CUC, above the originally agreed interest rate.In the cases of loans that are granted several years of grace and, therefore, have accumulated to pay the interest of said years, the collection of the first principal amortization may be deferred to the following year, so that the total amount to be paid in each amortization is proportional to the estimated income, without this entailing extending the total amortization term. Consequently, the first amortization may include only the payment of interest.MATERIAL INVESTMENTS: It is amortized monthly. It will be recovered with the depreciation of tangible fixed assets, the profit after tax generated by the new investment object of credit. If the amounts foreseen for the amortization of the credit are not enough, it may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.With the depreciation of tangible fixed assets, the profit after tax generated by the new investment object of credit will be recovered. If the amounts foreseen for the amortization of the credit are not enough, it may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.With the depreciation of tangible fixed assets, the profit after tax generated by the new investment object of credit will be recovered. If the amounts foreseen for the amortization of the credit are not enough, it may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.the profit after tax generated by the new investment object of credit. If the amounts foreseen for the amortization of the credit are not enough, it may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.the profit after tax generated by the new investment object of credit. If the amounts foreseen for the amortization of the credit are not enough, it may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.This may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.This may be covered with the depreciation of the rest of the assets in operation and the profit after tax generated by them. In both cases, the amortization of the loan will be prioritized in accordance with the agreed contract, before making the contribution for the performance of the state investment or the decentralized financing for other destinations AGRICULTURAL INVESTMENTS: It is amortized monthly. They are the investments of the credit subjects of the MIP 230-11 and are amortized with the results of their productions.They are the investments of MIP 230-11 credit subjects and are amortized with the results of their productions.They are the investments of MIP 230-11 credit subjects and are amortized with the results of their productions.

The first amortization will be paid:

Upon the settlement of the sale of the first marketable production, in the credits to promote permanent plantations, when this is obtained within the first 18 months from the sowing. Example: banana cane, bomb fruit, etc. Upon the settlement of the sale of the second marketable production, in credits for the promotion, renovation or rehabilitation of permanent plantations, when the first is obtained after 18 months from sowing or start of rehabilitation. Example: coffee, citrus fruits, etc. Approximately the third year after the credit is granted, in forest plantations with a cutting cycle of up to 7 years, depending on the variety and destination of the production. In those with a cutting cycle over 7 years, a single amortization will be paid, when the plantation is declared established,This occurs approximately the third year from sowing.NON-AGRICULTURAL INVESTMENTS It is amortized monthly Financing for tractors, irrigation system, combined, equipment, furniture, constructions of all kinds, projects, etc., are considered when amortized with the depreciation of your assets.

On the scheduled date for the recovery of the credit, the following will proceed:

If the client has a checking account with the entity, it will be automatically debited to amortize the accrued interest and the corresponding part of the principal. This will be previously agreed in the financing contract. If it is a farmer, the income that he / she obtains for the realization of their productions will be charged through the facilities offered by the payment of invoices. Failing that, the client will go to the Branch to make the repayment. The branches will demand the guarantees according to the risk they assume, the characteristics of the applicant to be financed, the possibilities of repaying the credit by the applicant, and other aspects of an economic or financial nature. that affect.

Results

The analysis process used in the investigation to obtain bank loans granted by the Central Bank of Cuba provided the following advantages and disadvantages in the use of different loan repayment methods.

The main advantage is that with the reorganization, Cuban banks have opened their doors to diversity in terms of granting loans and credits, earning interest for performing said service, companies also benefit as they develop their activities with the credit received while Natural persons are favored by being able to make personal investments and for the benefit of the state and the population in general.

The use of the French Method to repay the loans, in most cases, enables the faster collection of bank interest, taking into account that in the composition of the monthly payment the bank will charge more interest at the beginning, and less at the end, that is, to the extent that the loan is amortized, the interest to be charged in each period will be lower and the principal to be paid will be higher.

The variant of the French method used by our banks makes it possible that, when a client prepares the monthly payments or pays the credit in full, it is not necessary to recalculate interest, since these are calculated on a daily basis, and with the accumulated monthly, the monthly payment is formed, with which there is no interest pending payment at the end of the period.

Likewise, with the use of the American method, a higher amount of interest is perceived as the capital remains outstanding until the last year of the use of the bank loan.

On the other hand, there are weaknesses in the mechanisms for granting and recovering bank credits and loans:

Inadequate estimation of cash inflows and outflows by borrowers, from which the provisions and repayment terms of approved loans are set. There is a greater probability of declaring a past due loan when the American method is used already credit is not returned until the last year Lower interest is obtained with the use of the French method than with the American one Distortions in the results of financial indicators calculated by bank branches for the evaluation of credit applications certain state entities, based on financial statements presented by them, affected by deficiencies in their accounting records.Loan authorizations with guarantees that have been insufficient for the recovery on the maturity date of the loans granted, such as the balances in national currency of the current accounts or deposits in the collateral accounts of the borrowers, due to the reduction in income levels provided by these, due in many cases to non-compliance with the purchase and sale contracts signed with their debtors Approval of renegotiations or restructuring of debts to entities that had to be maintained or registered, as the case may be, as overdue loans, due to deterioration of health financial institutions, to force them to apply the necessary measures to improve this situation.Delays in the amortization of the loans of natural persons when receiving the granting of the social credits that causes delays in the recovery of the same.

Sometimes the control of the credits and loans granted is not executed efficiently and this makes it impossible to detect indisciplines such as the use of financing for purposes other than those approved or the breach of terms and conditions established in the loan contract with the Bank.

Conclusions

The bibliographic research showed that banks and clients should choose the method of repayment of loans and credits granted taking into account the following elements:

The client's cash flow The performance of the operation The quality of the loan Credit risk

If the client is relatively risky, it is better to use those methods where a faster recovery of the principal is guaranteed.

If the risk is low, the American method can be used so that the client can use the money for a longer time and the bank can obtain a greater amount of interest.

Consulted Bibliography

AYALA VILLEGAS S, «Los Créditos Financieros», 2005. Available at http://www.gestiopolis.com/canales5/fin/loscrefinan/. Visited April 30, 2015 BELLIDO SANCHEZ, P., Financial Administration, Scientific Technical Editorial, Lima, Peru, 1998, Collective of authors, Financial Market Institutions, Selection of topics, Editorial Félix Valera, La Habana, 2006. Sources, D., "Credit Modalities". Available at http://www.monografias.com/trabajos10/formulac/formulac.shtml. Accessed on April 30, 2015, Instruction 5/2013 of the Central Bank of Cuba, Instructions and Procedures Manual: «Credits». Update May 2008, Central Bank of Cuba, Resolution No. 99, Havana, November 18, 2011, Central Bank of Cuba Magazine. Evolution of the Cuban financial system.

Glossary of terms:

Financial institution: Any legal entity established in accordance with Cuban or foreign laws, whose corporate purpose is to carry out financial intermediation activities. This definition is applicable to banking and non-banking financial institutions. Credit: It is a risk asset through which the financial institution, assuming the risk of its recovery, provides or undertakes to deliver loan funds or other assets to a specific client, or guarantees the fulfillment of obligations contracted by this client before third parties.. Bank credit or line of credit:It is the authorization granted by a financial institution to a client, through a contract, so that the client has financial resources up to a certain amount, which may or may not be made available in full and through certain principles. General principles of bank credit: The lender (bank or other financial institution) will grant loans to the borrower (legal or natural person that receives the loan) up to the maximum amount of authorized credit, for a specific purpose, guaranteed with assets of the borrower or third parties and with the condition of recovering it on the expiration date. Credit contract:It is signed by both parties (lender and borrower), once the financing is approved; it establishes the terms and conditions under which it will operate. Interest: Remuneration in any type of currency that the lender receives from the borrower, in addition to the principal amount owed by the latter for the use of the money received from the former as a loan. Interest rate: Percentage applied by the financial institution for the collection (active interest rate) or the payment of the agreed interest (passive interest rate). Loan deliveries:They are delivered through funds transfers to the borrower's checking account, or to a specific account authorized when the loan is granted, upon presentation of payment documents, in cash or through other forms of payment authorized by the bank, depending on the type of borrower. or the terms and conditions of the loan. Recovery of loans: They are recovered through payments made by the borrower from his trading account, from a collateral or escrow account in favor of the bank, by the use of other forms of payment, or by applying previously agreed guarantees.. Loan guarantees:They constitute legal mechanisms that allow banks to assure the reimbursement of credits granted in cases of default by the debtor. These are an alternative source of payment, in the event that the debtor is unable to assume the cancellation of the contracted obligation, but its settlement requires a transaction cost and, therefore, they reduce the counterparty risk, but do not eliminate it.. Grace period: it is a condition by which the beginning of that part of the installment that contains the amortization of the principal is postponed. It is usually agreed for terms that take into account the borrower's liquidity capacity. Risk: possibility that the Credit will not be recovered.