Credit Agreement
What is Credit Agreement?
A Credit Agreement is a formal contract between a borrower and a lender that outlines the terms and conditions under which credit will be extended. It details how much can be borrowed, how the credit can be used, the repayment schedule, interest rate, and legal obligations of both parties.
Key Components
- Loan Amount and Type: Specifies the credit limit or sanctioned loan amount and whether it's a term loan, revolving credit, or line of credit.
- Interest Rate: Can be fixed or floating; clearly defined along with calculation method.
- Repayment Terms: Includes the tenure, payment frequency (e.g., monthly EMIs), and any grace periods.
- Covenants: Conditions the borrower must meet, such as maintaining certain financial ratios or restrictions on further borrowing.
- Collateral (if any): Describes assets pledged as security for the loan.
- Default Clauses: Defines what constitutes default and the consequences, including penalties and legal action.
Purpose and Importance
- Serves as a legally binding document that protects both the lender and the borrower.
- Ensures transparency in the borrowing process.
- Helps avoid disputes by clearly outlining expectations and obligations.
Example
A company signs a credit agreement with a bank to borrow ₹50 crore for working capital. The agreement specifies a 9% annual interest rate, a tenure of 3 years, quarterly repayments, and a charge on inventory as collateral.
Indian Context
In India, credit agreements are governed by the Indian Contract Act, 1872. Banks and financial institutions follow RBI guidelines when drafting these agreements. For large corporate loans, syndicated credit agreements involving multiple lenders are common.
