Credit crunch is defined as the reduction in the general availability of loans or credit. It may also be defined as the sudden restrictions and tightening of the terms and conditions which are required for obtaining the loans from banks.
Basics of credit crunch
Basically the term of credit crunch involves the reduction in provision of the credit which is independent of the rise in official and administrative interests of the rates prevalent. There are some specific official rates of interest hired on credit but if these rates or the provision of credit is reduced, it is called as credit crunch. In these cases the credit availability and interest rates gets changed. The most prominent impact is observed either on credit that becomes less available or the relationship of the interest rates and credits which becomes diminished.
Additional aspects of credit crunch
It happens many times that the credit crunch phenomenon is accompanied by the fleeing of lenders and investors to quality forums where they can seek a more profitable approach and haven for their investments. Therefore most of the investors want to have more profitable and less risky investments. This is done most of the time at the expanse of medium and small sized enterprises. There are many reasons for sudden approach of the phenomenon of the credit crunch. Some of these are as follows:
Possible reasons for credit crunch
Among the most prominent ad conspicuous reasons for credit crunch include the sudden stoppage or slowing down of the activity of banks and other financial institutions. Sometimes there is inadequate information provided to the concerned individuals on part of the authorities and banks as a result of which many investors turn towards the credit investment schemes. This can lead many banks towards closing or slowing down the money lending activity.
Furthermore if there is a decline in the value of credit which is being mutually used and shared by the banks then the security of their loans is also disturbed. If there is an inappropriate lending of credit exchange for a sustained period of time, then it can be a big factor towards the credit crunch.
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- Return On Capital Employed (ROCE)
- Debt Service Coverage Ratio
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