Question

What conditions / factors may give an indication of a credit crunch?

Answer 1

Credit crunch in simple terms in sudden decrease in the available loan or increase in stringent requirements to avail the loan. There are several reasons for that :

1. When lending institutes like banks etc. over estimate the credit worthiness of the borrowers or they give loans to borrower who do not have much credit history, this will create a boom in lending. (This is what happens before 2008 crisis). When these borrower default, this creates a domino effect and suddenly these loans are not coming back to banks ever and they have to report losses. Sometime this has also lead to shutdown of the banks.

2. Other reason might be that value of collateral which banks has taken from the borrowers decrease and banks are not able to recover their amount in case of default.

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