Term Financing and Compensating Balances

Abstract

Banks in developing financial markets are faced with two conflicting requirements. The first is to serve as an important source of funds for firms wanting to expand or modernize; the second is to accommodate the capital funding needs of these firms through a method other than overdraft financing. In repressed financial markets, banks extended overdraft facilities to their business customers. These facilities were used to finance inventories, plant and equipment expansion or modernization, funding business losses, and for other unspecified purposes. While limits and review periods were established, these limits tended to be increased, and reviews were mainly to justify limit expansion. Business borrowers were seldom required to repay overdrafts or to demonstrate to management the assets being funded by the credit facility.