Reviewed by Sep 30, 2020| Updated on
The country limit is defined as the overall limit that banks can place on borrowers in a foreign country. Some banks cap their number of loans that they can issue to borrowers in a specific country to limit the risk of concentration. The country limit can be compared with the industry limits imposed by fund managers to limit the concentration risk to safeguard the investors' capital.
It doesn't matter if the borrowers are public, private, individual, or institutional, country limits, when applied will be in place for all borrowers. Country limits will apply to the mortgage, personal loans, vehicle loans, business loans, and all other kinds of loans. Creditworthiness or credit score of individuals will not matter when a country limit is in place. No matter how good the credit score of an individual is, the country limit will prevent banks from issuing loans.
The main objective of imposing country limits is to make sure that banks diversify their lending business geographically to alleviate the risk of concentration. If a bank’s lending business is significantly exposed to a specific country, then any political, geographical, economic, and currency disaster will put the bank’s business in negative terrain. Hence, abiding by the country limit becomes a necessity for all banks and financial institutions.
Numerous parameters are considered while imposing a country limit. The most significant factor here is political stability as any unprecedented political tension may result in loan default, regardless of how creditworthy an individual is.
Following the norms of the country, the limit is important for banks as it reduces their concentration risk and thus preventing them from suffering unnecessary losses. When the country limit is placed, no matter how good an individual's credit score is, they will not be able to avail loans. This has nothing to do with political and economic stability. This is done purely to avoid concentration risk.