Question

What credit crunch? Explain this term max. in 4 sentences.


What credit crunch? Explain this term max. in 4 sentences. 

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Answer #1

Credit crunch refers to an economic condition where there is a negligible credit left with credit institutions, making it difficult for the borrowers to borrow funds from the credit market.

Credit crunch occurs when the banks and other lenders are required to maintain a good amount of liquidity based on risk weighted assets. To make this compliance possible, the lenders will cease to provide funds to the borrowers if the limit of liquidity increases further too.

This results in avoiding expansion of business activities by the business person, and start with cost cutting activities due to paucity of funds.

This is sometimes either be a short term crunch or a long term as well.

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