Limit Excess: How a Bank Decides Each One

A limit is the credit approval in its most practical form: the most the bank has agreed to lend on that facility. Anything above it is lending nobody has approved. When the payments due through an account would take the balance over the limit, the bank's systems hold them for a decision, and a banker or a lending operations team must decide before the payment deadline that day.

Returning an item is not a neutral act. A dishonoured wages run, tax payment or supplier payment can cost the customer more than the excess is worth. Paying it means extending unapproved credit for an unknown period. So each excess is a small credit decision made in hours, on whatever the banker knows about the customer that morning.

Most excesses come from payments presented against an account already close to its limit: a payroll file, a supplier run, card settlements, direct debits. Others arise without any payment at all, when month-end interest and fees are debited to a fully drawn overdraft, or when currency movements push a multi-currency or foreign-exchange line over its limit. Card, guarantee and settlement limits can be exceeded too.

Most banks produce an excess report every morning, listing the amount, the percentage over, how many days the facility has been over, and its recent history. A named approver then deals with each item: paid within that person's authority, sent back unpaid, or covered by a transfer from the customer. Approval authorities for excesses are commonly separate from, and smaller than, those for new limits, and banks often apply the four-eyes principle to them. Facility terms or the fee schedule usually set a cost for the customer: an extra margin on whatever is over the limit, a fee for each approval, or both. Anything longer than a bridge goes back through credit as a request for a higher limit.

A timber merchant, constructed for this page like every figure in it, has an overdraft limit of US$400,000. Its terms charge 6% a year above the overdraft rate on any amount over the limit and US$50 for each excess the bank approves. On a Tuesday in July the balance is US$371,000 when a supplier run of US$60,500 is presented. The merchant's finance manager says a builder's payment of US$48,000 is due on Friday. The rates and fee belong to the example and are not offered as market norms.

The July excess is the easy case: a known receipt with a date, a modest amount, an extra cost of about US$66 to the customer on top of ordinary interest. The banker approves it, the builder pays on Friday, and the account returns inside its limit.

The quarter tells a different story. Each month the excesses come more often, last longer and reach higher, until September's has no end date at all: the balance has been over the limit for 19 days and peaked at 14.5% over. Either the merchant's receipts are arriving later, perhaps because one builder is paying slowly, or its trade needs more working capital than the limit allows. Neither is a matter for the morning report. And the count has started. A banker's approval of an excess does not change the limit the customer has been advised, so under the UK and Australian rules, and New Zealand's for banks using internal models, the days over that limit are the days the overdraft is past due (in the UK on a material amount, which this excess easily is). A New Zealand standardised bank counts a revolving line as past due while it stays continuously outside its limit. Left as it is, the facility reaches ninety days past due in about ten weeks.

Hardcore is the part of an overdraft that does not repay. It sits inside the limit, and it says the business has a permanent need being met by a short-term facility. An excess is the balance going past the limit. One is about shape, the other about size, and both say the facility no longer fits. Hardcore is usually cured by moving the core into a term loan. An excess first needs an answer to why.

An excess also differs from drawing with no limit at all. Australia's prudential standard treats an overdraft without an authorised limit as having a limit of zero, so the past-due count runs from the first drawing, and the UK rule counts credit drawn without authorisation in the same way. Whether an excess also breaches the facility's terms depends on the document. On an overdraft repayable on demand, the bank's usual response is to decline the item or ask for the excess to be repaid, not to call the whole facility.

DEFINED IN ONE PARAGRAPH → · PRODUCT FILE: THE OVERDRAFT → · NINETY DAYS PAST DUE →

Excess history is one of the first early warning indicators a portfolio team watches, because it shows up weeks before arrears or a covenant breach. A file with a pattern like the timber merchant's goes to one of three decisions. If the need is seasonal or tied to a contract, the bank sets a temporary limit with an expiry date and a reason. If it is permanent, the bank restructures: a higher limit sized to the trade, a term loan for the core, or receivables finance where slow debtors are the cause. If the pattern signals trouble, the bank tightens: the account is reviewed, the customer is asked for current figures, and the excesses stop being approved automatically.

For the customer, the cheapest excess is the one requested before it happens. A call on Monday saying a large payment lands before a receipt is a short credit application with a plan attached. The same need, found on Tuesday's excess report, is a question the bank must answer without one.

TEMPORARY OR PERMANENT WORKING CAPITAL → · HOW BANKS ASSESS WORKING CAPITAL REQUESTS →