Why Bank Lending Fails to Lead the Higher Investment

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Bank credits reportedly offered a major source of funds to support economic growth. The majority of small and medium-sized firms are completely dependent on the bank for finance. The large size companies can tap bond markets for cheaper funds. But, even if banks lend to companies. The financial doesn’t always translate to higher investments by companies. 

According to the Reserve Bank of India, companies are lending money from less liquid banks that increase capital expenditure. This leads to the current liabilities increase for the firms. The paper title reads that firms channel their credit lines towards meeting current liabilities whereas investments take a back seat. 

Capital expenditure however defines investments in asset creation. Liabilities are the means to current expenses that record as an immediate expense of firms on running the daily operations and meeting near-term expenses.  

Madan Sabnavis, Chief Economist of CARE Rating predicts that the large size banks with maximum revenue can lend for long gestation projects. The smaller banks stick to working capital loans. 

Sabnavis also states that long-term loans have a higher risk of NPAs than short term loans. Bank has less risk involved in the short term. The bottom line of the bank is well-capitalized revenue generation. 

The RBI paper reads that higher bank credit does not mean higher investments in the economy. 

Sabnavis also predicts that there is an increase in credit and has to find maximum investment in the last couple of years. The firms are allowed to use the credit lines to finance their liabilities and undertake capital formation. 

The RBI is considered important in terms of measuring economic contraction in the economy and the low credit flow to various sectors with the reason to demand situation. The RBI has found key demand conditions and a big decisive factor for loan growth that translates capital spending. 

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