Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.

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Protective covenants are actually conditions that borrowers agree to follow in order to protect the interests of the lender. These covenants typically include restrictions on the borrower's ability to take on additional debt, make capital expenditures, or pay dividends. The lender may also require the borrower to maintain certain financial ratios or meet other performance benchmarks. If the borrower violates these covenants, the lender may have the right to declare a default and demand repayment of the loan. Protective covenants do not obligate the lender to provide additional loans to the borrower.

Protective Covenants Impose Conditions in Which the Bank Must Provide