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1. In your own words, explain via the use of an example, a loan commitment from...

1. In your own words, explain via the use of an example, a loan commitment from a commercial bank’s perspective. (b) How can loan commitments place a strain on commercial bank liquidity?

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Answer #1

loan commitment means a commitment from Financial institutions or commercial banks to the borrower, that it will issue them with loan of such a specified amount.

It is a letter which is promising a loan or credit by the bank to the various borrowing parties.

It can be exampled through Yes Bank which have given to many of loan commitment to DHFL which ultimately lead to it's downfall.

b).loan commitment can place a significant strain on commercial bank liquidity because they are obligated to loan a certain amount of capital to borrowers as they have committed and promise to do such so they will have to give a large amount of loan to them and it will affect the overall liquidity of the bank as these loans are to be offered immediately when demanded so it will affect the liquidity as Bank liquid assets will go down.

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