All India Management Association (AIMA) 2007 M.B.A Marketing Management Central Banking

Most banks will monitor compliance with the loan covenants on a quarterly basis with the receipt of quarterly and annual financial statements. Sometimes the bank will require a periodic certification by a corporate officer or independent accountant that no covenant violation has occurred
i. Restrictions on payment of dividends represent negative loan covenants.
ii. A requirement to insure opted assets is an affirmative loan covenant.
iii. Restrictions against taking on new debt represent negative loan covenants.
iv. The requirement of filing periodic financial statements with the bank is an affirmative loan covenant.
v. A requirement of securing bank approval before adding to a borrower's stock of fixed assets is considered a negative loan covenant.
vi. Requiring a borrowing customer to maintain a current ratio - a liquidity measure - no lower than 1.5x is an affirmative loan covenant.
vii. The stipulation that prior bank approval of a proposed merger must be found is a negative loan covenant.
Based primarily on the operating efficiencies that accrue from large transactions, nonstandard rates are offered as needed to secure profitable business for the Bank that would otherwise be transacted by members into competing, non-bank products.
2. In all developed countries and most developing countries, the Central Bank is charged with promoting stable money and a stable financial system. And these are extremely important goals. To see just how important, it is worth reflecting on the economic and human cost incurred by many countries when Central Banks got policy wrong and contributed to the strong deflation of the thirties, or reflecting on the economic and human cost incurred by those countries which experienced hyperinflation at a few stage during the last century or reflecting on the economic and human cost incurred by those countries, including many in our own region, which experienced severe banking sector crises in latest years. When Central Banks get it wrong, when they allow the value of the money which they problem to fluctuate substantially, as in the case of serious deflation or high inflation, or when they allow banking systems to become unstable, the damage which can be done is enormous. Savings can be destroyed as also businesses and jobs.
So, not to understate the importance of the role which Central Banks can play. When central banking is done well, it not only avoids those catastrophic outcomes which have been seen around the globe from time to time, but also makes a few positive contribution to economic growth, to social justice, and perhaps even to the integrity of society itself. < TOP >

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