Banks act as a bridge between people who need money to be used for investment and those who have spare. As industry and business demand huge investments, private financing is typically not enough for their requirements. Basically, these people are borrowing non-corporate as well as corporate loans from banks and commercial institutions.
In addition to banks, these can extend to retail loans among consumers who are seeking for mortgage, consumer durables and even to farmers who seek for farm credit to keep their agriculture alive. In regards to home loan buyers, buying a house at the start isn’t possible because it demands a significant amount of money and they find it more convenient to pay back the loan for a period of 30 years in lower monthly installments.
As for farmers, they find it more convenient in repaying the loan after making harvest and seeking for another loan or personal loan from Zebra loans for their next crop. Basically, the cycle just continues.
Then again, there are some people who opt to save and earn interests from the extra money that they have. Most of the time, these people are:
- Middle Classes
- Small Savers and;
- Corporate Institutions and Government Deposits
Simply speaking, these are at individual or micro level.
Credit Options of the Economy as a Whole
If we are going to look at these loans from a macro level, then we’ll find that banks are lending their money after statutory liabilities have been met. They are earning profit to keep their operations.
As a matter of fact, even governments are borrowing from RBI in an effort to meet budget deficits.
It is even borrowing from IMF as a way to meet balance of the imbalances of payments. Then again, governments are borrowing from World Bank or WB as well as its associates similar to IDA and ADB or Asian Development Bank for development purposes. Therefore, the credit serves as lubricant in keeping up with the continuous growth of the economy.
In spite of the positive impact it brings, there are elements of bank lending that could adversely affect the economy if it fail to recover. The unpaid bad debt is referred to as Non-Performing Advances which must be regulated to make sure that it is within the tolerable limit. If not, several banks will start to fail and the depositor’s money would be unpaid.