Explain why national commercial banks prefer lending to state-owned enterprises even though the private enterprises generate...
Explain why national commercial banks prefer lending to state-owned enterprises even though the private enterprises generate higher returns.
Homework Answers
There are several reasons for this behaviour of national commercial banks.
- SOEs(state owned enterprises) are creditworthy. It is because if they can't payback the loan, the government will bail out the SOES. Banks assume so as per the past experience.
- National commercial banks are themselves SOES. SOES are large in size. National banks may be used to work with such large enterprises , they may be less skilled in dealing with small private enterprises.
- Credit rationing and financial obligations may make it possible that national banks provide cheap loan to SOES.
- National commercial banks may be criticised for making bad loans if private enterprises become defaulter.
The above scenario is much visible in socialist countries like China. However in countries like America such behaviour of national commercial banks are rarely visible.
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